Craft Brew Alliance (CBA), the 12th largest brewing groups in the United States, might soon be completely sold to Anheuser Busch InBev (ABI), which already holds a 31.4 percent stake in the company. The independent directors of CBA have received on Wednesday a letter by Midwood Capital Management to pursue a sale to ABI or a third party.
David Cohen, portfolio manager and managing member of Midwood, “a significant and increasingly concerned shareholder of Craft Brew Alliance” which currently owns approximately 2.0% of the company’s outstanding primary shares,” claims in the letter that CBA should find a buyer for the company because “CBA lacks the margin structure and scale of its peers to grow sales, profits, and cash flow consistently.”
As of January 2013, ABI owns a 32.2 percent of CBA and is also the company's distribution partner, has two seats on its board of directors, and special status in the company's board committees. In 2016, “CBA’s leadership expended a lot of time and energy in 2016 to codify the relationship with ABI and provide a constructive framework for a potential acquisition,” according to the letter. Following the agreement, ABI has an option to purchase CBA for at least USD 24.50 per share by August 24. If ABI does not choose to buy CBA, the alliance gets to retain the benefits spelled out in the revised distribution agreement with ABI and a USD 20 million incentive payment for international distribution.
“With the clock ticking on the August 2019 deadline for ABI to make a qualifying offer under the 2016 framework,” Cohen says, and “with the current qualifying offer threshold of $24.50 per share, we would argue that it would be difficult to find a shareholder who would hold out for more than that price with the stock currently trading at a far lower price.”
He concludes that “if ABI wishes to make a qualifying offer, we believe CBA’s board should absolutely accept it,” and if not, “the board should immediately announce a strategic alternatives process with a plan to sell the company.”
Cohen also believes that the current stock price does not reflect the fair market price for CBA. “In terms of estimating private market value, we have as of May 9th yet another relevant transaction in which The Boston Beer Company has acquired Dogfish Head Brewery. At the announced transaction price of $300 million, Boston Beer is paying $1,000 per barrel and 2.6x sales based on estimated 2019 volume. In comparison, the public market is valuing all of CBA at $435 per barrel and 1.5x forward sales – a monumental discount in our minds.”
With the growing number of craft breweries in the U.S. and the increased competition, CBA has seen a lot of challenges in the recent years. “The company’s consolidated revenue growth was poor as two major brands – Widmer Brothers and Redhook – experienced significant volume declines,” Cohen states in the letter. “Additionally, the company faced (and continues to face) structural challenges in terms of its profitability due to its scale (as well as business mix with the Pub segment) with gross and EBITDA margins well below peers.”
However, according to Cohen, CBA has a big asset in owning “the Kona brand whose compelling growth in an increasingly challenging beer market was being masked by flagging brands within the CBA portfolio.”
The investor also acknowledges that “CBA’s management has taken many actions to further the objective of increasing shareholder value, and we applaud the team’s efforts over the past several years.”
In order to streamline production, CBA announced in October 2016 to lay off half of its workforce, in Redhooks main brewery in Woodinville, Washington (inside.beer, 19.10.2016) and finally sold in December 2017 the whole underutilized brewing facility and adjacent Forecasters Pub to a real estate firm for USD 24.5 million.
In November 2017, the company also announced to change its strategy to shift focus of its Widmer Brothers brewpubs from food to beer. (inside.beer, 14.11.2017)
In February 2018, CBA dissolved its Emerging Business Division and dismissed John Glick who served as the Vice President of the division. (inside.beer, 6.2.2018)
In October 2018, CBA has taken full control ofAppalachian Mountain Brewery (AMB) in Boone Creek, North Carolina, Cisco Brewers, in Nantucket, Massachusetts and Wynwood Brewing Companyin Miami, Florida, three craft breweries in which CBA held only a minority share before. (inside.beer, 10.10.2018)
Last major activity was in March 2019, when the company launched a new business unit, called the pH Experiment, to explore trends in the drinks market and develop innovative products. (inside.beer, 18.3.2019)
