Investment company Premier Diversified Holdings’ June bid to buy a controlling interest in Russell Brewing Co. is part of a private equity companies’ trend of buying stakes in craft breweries.
Though the trend has so far largely been constrained to the U.S., B.C. craft brewery executives say they are being approached more frequently by deep-pocketed investors who are attracted to the sector for its fast growth, high profit margins and tendency to have lots of free cash flow and a high return on equity.
Premier (CSE:PDH) wants to increase its 16.7% stake in the Surrey-based brewer (TSX-V:RB) to 51%. It’s offering Russell shareholders one Premier share in exchange for 2.5 Russell shares – equivalent to a 37% premium on Russell’s $0.06 share price before trading was halted June 25.
Shareholders have until August 4 to accept the offer.
“The cat is out of the bag about private equity craft beer transactions,” Penfund associate Chris Cruickshank said in Vancouver June 25, while on a Deloitte panel on the craft beer sector.
He added that craft breweries not only are growing extremely fast, but are also relatively recession-proof.
“In 2009, the U.S. economy contracted by about 3%, but the craft beer sector grew 9%,” he said, citing Brewers Association data.
Partnerships between private equity investors and craft brewers last year included Utah-based Unita Brewing selling an undisclosed stake to Riverside Co. in August, Southern Tier Brewing Co. of Lakewood, New York, selling an undisclosed stake to Ulysses Management LLC in September and Atlanta’s SweetWater Brewing selling a minority stake to TSG Consumer Partners in September.
Then, in May, Fireman Capital Partners bought an undisclosed but majority stake in Oskar Blues Brewery, which was founded in Colorado and is the 30th-largest brewer in the U.S.
“We’re approached frequently by private equity firms – probably three times last year,” Surrey-based Central City Brewing president Darryll Frost told Business in Vancouver.
“This year it was Fairfax [Financial Holdings Ltd.] out of Toronto, but we couldn’t get a deal because they couldn’t see past the rearview mirror.”
Central City’s revenue quadrupled last year, and Frost expects it to double this year to about $13 million.
Private equity firms, however, have valued the company on past performance without factoring in future growth, thereby scuttling potential transactions, Frost explained.
“We’re not inviting anyone to come and bid,” said Frost, who has a minority stake in the venture that is also owned by six other families.
“If [private equity firms] come, I have to entertain them, but that doesn’t mean that I have to sell out.”
The piqued interest among large investors in the craft brewery market has also changed the kind of work that advisory firms perform for their clients.
Five years ago, companies such as Deloitte would assess craft beer clients’ viability in terms of the sector’s success and then help them set up shop.
“Today, the issue is increasingly what is your point of differentiation either with product packaging, taste or how you connect with your consumers,” said Deloitte partner David Lam.
British Columbia Liquor Distribution Branch (BCLDB) statistics show flat sales for the big brewers and soaring sales growth for craft brewers.
Packaged beer sales in B.C. from breweries that produce more than 16 million litres rose 0.73% in the three months that ended December 31, 2014, compared with the same quarter a year earlier. In contrast, sales for breweries that produced less than 15 million litres surged 57.92%.
More recent data is not available because the BCLDB has stopped providing quarterly sales statistics. •
