It’s old news by now that established macrobreweries have been guzzling up craft breweries to get a piece of the exploding craft brewery market in the face of shrinking market share. One of the more prominent buys was beloved Goose Island from Chicago by Anheuser Busch InBev (AB InBev). AB InBev later slurped up breweries from around the nation: Blue Point Brewing in New York state, 10 Barrel Brewing in Oregon, and Elysian in Washington. A lot more are surely on the way.
Then, there are the stories where the macro only sipped up a share of the micro. AB InBev holds a 49% stake in Old Dominion and Fordham and a 32.2% stake in the publicly traded Craft Brew Alliance. Terrapin Beer Company at one point sold a less than quarter interest to Miller Coors. The largest craft deal in recent memory is Heineken snapping up a 50% stake in Lagunitas.
The multi-million dollar question, literally, is: what exactly is a brewery worth?
One could be forgiven for thinking that the craft beer industry as a whole right now looks a lot like the internet boom in the late 1990’s. Back then anyone and everyone was starting an internet company. Anyone remember Boo or eXcite? Many of these companies were valued at stratospheric levels. @Home paid $7.2 billion for eXcite in 1999 and it was bankrupt by 2001.
Today, it seems anyone and everyone is starting a craft brewery, and some of the breweries are valued at comparatively stratospheric levels as well. There is a key difference. Silicon Valley startups, then and now, can be companies bleeding money. They may not have a product. But the technology they possess could be a disruptor and a lot of users, even if they’re paying zilch, make the startup a more attractive acquisition target. Silicon Valley math can assess if a company has a 1% chance at eventually becoming a $100 billion operation, it should be valued at $1 billion in a buyout. See Instagram.
A brewery can’t sell itself or a stake in itself for just having a great idea. Or a lot of people who drink its products for free. It must be brewing beers people critically praise, consume, and pay for. A craft brewery must already be profitable and successful before anyone will buy it.
Silicon Valley startups boast how much they’re acquired for. Previously purchased breweries, on the other hand, seem to have it written into their deals that the exact terms can’t be disclosed. Just prior to Blue Point being sipped through AB InBev’s straw, they were brewing approximately 60,000 barrels. Analysts guess the brewery was sold for $24-25m. 10 Barrel was producing 24,000 barrels prior to its digestion, with the expectation they were going to hit 40,000 barrels in the following year. This is a third less capacity than Blue Point and yet their estimated sale value was double Blue Point’s at $50m. Lagunitas was brewing 500,000 barrels and expected to ramp up to 800,000 barrels. Forbes estimates that Heineken’s 50% stake values Lagunitas at $1 billion.
A look at some publicly traded craft breweries tells a very different numerical story. The market capitalization of Craft Brew Alliance, producer of 725,000 barrels, just 10% less than Lagunitas’expected capacity, is only $161m, 14% of Lagunitas’ suggested market value. The Boston Beer Company, makers of the Samuel Adams line of beers and considered one of the great granddaddies of the American craft beer revolution, presently has a market cap of $2.75 billion – with a production output of 4.1m barrels, more than five times Lagunitas’ output.
A publicly traded company has its stock value assessed by its current earnings and its expected future opportunities and profits. If the market somehow discovered that Craft Brew Alliance had secret breweries in the works all over Africa and analysts felt that African craft brew sales were projected to explode, Craft Brew Alliance could see its share price quintuple in a matter of weeks based on possibly overhyped future expectations.
Private companies are different. There is not a marketplace of buyers and sellers acting on the advice of analysts to set a market price for the company’s stock value. A private company’s value need not be based on its present sales at all, but by how it easy it is to integrate and sell its products by the buyer. When Heineken decided to take an estimated $500m stake in Lagunitas, they could have been overpaying by publicly traded metrics just to get a significant foot in the door in the craft brewing world. Plenty of the well known private craft breweries (Dogfish Head, Deschutes, Stone) claim they never intend to sell out to the big boys. Never is a long, long word, but for the present, if there are a shortage of Top 50 craft breweries offering themselves up for sale in whole or in part, the ones that do can command a premium, one well worth getting themselves kicked out of the Brewer’s Association for.
When the Molson Coors CEO, Peter Swinburn, was asked what he thought about Molson Coors snatching up its own share of microbreweries, he said the current prices of American craft breweries were massively overvalued.
Swinburn’s definitely right based on the traditional assessment of brewery values. AB InBev has an operating margin of over 32%. Molson Coors is over 12%. Small indie craft breweries get by with margins of 2-3%. A beer conglomerate would be slayed in the public stock markets if it had operating margins that low. A craft brewery is valued by the marketplace (and by potential suitors) by how exotic and tasty its brews are; a behemoth by how efficient it is at churning out predictable product with mundane ingredients.
No one can actually agree on the value of breweries that haven’t agreed to be bought. In 2011, when Dogfish Head had gross revenues of about $50m, beer drinkers debated its market value. All agreed that its value would be based on its gross revenues times some kind of multiplier. One guessed that multiplier to be 7-8 based on Dogfish’s year on year revenue gains and business size, putting the brewery’s value at $350-400m with an output of 175,000 barrels. This sounds about right if Dogfish Head were being bought by Heineken for the same premium they paid Lagunitas. Based on the multiplier enjoyed by the publicly traded operators like Boston Beer (2.7), Craft Brew Alliance (1.3), and Canadian micro Big Rock Brewery (1.3), Dogfish would be worth a third of that.
Think of a typical brewery like the typical wife. To the public – that is, most men — your wife is not worth any more than any woman of similar age, talents, looks, and so on. She’s assessed at the typical market price. But to you, if you chose wisely, she is worth so much more because you can see all the synergies, the benefits, the happiness. A brewery, like a woman, is most highly valued when several eager suitors are privately chasing behind.