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As RTD wine & spirits remain the main growth game in alc bevs, it's become "a classic seller's market" for indie RTD cos, Arlington Capital Advisers managing director Townsend Ziebold said alongside JP Morgan managing director Ryan Lake at BMI's Spring Conference in Chicago last wk. There are now "an abundance of strategic buyers that have a need for growth," and "a shortage of independent RTDs of scale. And so it's just a supply-demand imbalance." It's "an optimal time if you're a scaled RTD brand to think about exiting," he said. Beer/malt cos have been the main buyers in the recent wave of RTD deals. But traditional spirit cos "have now realized they have to buy into the RTD space," as bourbon went from "boom" to "glut," tequila trends slowed with "significant down trading," and legacy spirit brand extensions into RTDs broadly flopped. So there's "an abundance of traditional spirits companies that have now approached us with interest in RTDs." But it's quickly becoming "an M&A kind of musical chair game," since "there's not going to be enough targets relative to buyers.""It's the only sizable high growth category in beverage alcohol," Ryan agreed. But "spirits companies right now" have "a lot on their plates beyond M&A," managing some "pretty severe, if not critical issues with their own portfolios, a lot of management changes, a lot of distribution changes obviously recently, and probably more to come." "Absent those factors, you would see a lot more activity from spirits buyers for RTDs." And as those changes settle in, could see more deals involving spirits buyers "in the next one or two years," Ryan figures. Ultimately, middle-tier convergence "will give those buyers more ability to go buy some things."Wine's Lack of Interest in RTDs is "Kind of Mystifying" Outside of Gallo, "it's frankly kind of mystifying" and "I don't understand why they haven't made more moves," Ryan commented when asked about wine suppliers' general lack of interest in RTD M&A. Tho "I think part of it has been the distribution network issue until recently, where they felt like we could acquire an RTD brand, but then we don't have the same sales team, we don't have the infrastructure, the relationships to properly manage a beer network." It's "unfortunate" since they "could have and probably still could make a lot of moves to fix some of the issues they have." Wine "is in a secular decline because they haven't innovated in so long and they've missed that younger consumer," so M&A "could be a good way to fix that." Indeed, "one would think that by necessity they should diversify," Townsend agreed. But wine "largely" consists of privately held cos that are typically "not well-capitalized," and they're "sort of tied to their traditional wine and spirits wholesaler network." So "buying an RTD&hellip;has been a challenge." Editor's note: The Wine Group has been the most active acquirer of other wine brands including big deal to scoop up Constellation mainstream portfolio last yr. It also has partnership with AB for high-ABV MD 2020 Spiked FMBs, which continue to consistently grow double digits in scans.Never Say Never but Big Supplier M&A Across Bev Segments Not Likely Near-Term Asked about the prospect of larger transformational M&A across alc bev segments, Townsend's "gut feel" is there won't be "a significant combination of a beer company with a spirits company." But he did call out Gallo as "a really interesting name" as a leader in wine and RTD spirits, with a sizable traditional spirits portfolio that's "increasingly" shown interest in malt bevs. "I would never say never," Ryan added, but "it seems unlikely today" or in "six months." Pretty much "everyone is trying to evaluate, whether you're a medium-sized or large company, how you fit in this new world, given what" retailers, consumers and distributors "are demanding." Townsend agreed, pondering how "rapid consolidation" in the middle tier could change these dynamics. "When that plays itself out, will that afford more consolidation at the brand level?"Total Bev Distribution "Feels to Me Like It's Got to Happen," Sez Ryan; "More Creative" Structures for Non-Franchise Protected Products Middle-tier convergence is "obviously not going away" and while it's "more prevalent in certain markets than others," it's "going everywhere." So "next question for me is what happens with total beverage distribution?" asked Ryan. "I think that's a little further off," he figures, "but it also feels to me like it's got to happen." And "pace of change is not going to slow down." Already costly investments in automation, AI, and infrastructure are "just going to increase," and rising costs of fuel, health insurance and other bottom line expenses "are going to keep driving the need for consolidation."Then too, as deals with non-franchise protected products across spirits, wine and non-alc become more prevalent, "you have to get&hellip;more creative on structure," said Ryan. "Maybe you put some risk and reward on the buyer and the seller to bridge evaluation gaps." Or "think more about things that are more JVs or partnerships, or something that's maybe leading to a transaction, but it's not an acquisition today, if a seller's not ready to take a price that the market will bear."RTD Cos Generally Not Interested in Owning Capacity While RTD cos are growing enough to fill some excess capacity across the country, they're unlikely to be the ones that scoop up and solve for that ongoing industry issue, Townsend contended. "I think they should stay asset light because one of the most significant synergy unlocks will be moving the brand into the production capabilities of the buyer," he laid out. That's been the case across total beverage growth categories, Ryan added, pointing to energy bevs, hydration, water and RTDs all typically co-packed by "highly efficient" facilities. Unless a company is planning to stay indie for "thirty to fifty years," then "I don't think it would make sense," Ryan thought. And even then, it's still "unlikely" for longstanding cos like Gallo and Sazerac to go hunting for capacity, in his view. Tho lack of production synergies remain an added barrier for traditional spirits (or wine) cos vs beer cos looking to buy RTDs, Townsend pointed out separately.BuzzBallz was an anomaly due to its unique packaging setup, Ryan thought. Tho on the flip side, a company like Mark Anthony raced to build 3 facilities of its own in short order, and now is finding synergies thru acquisitions like Long Drink, Townsend noted. "If a private equity firm could get behind some form of brand roll-up, I think there could be some logic to buying some type of centralized capacity," he said. But not much else came to mind among potential interested parties taking on excess capacity outside of "unique" cases.

"Abundance" of Traditional Spirits Cos Interested in Buying RTDs; As Routes to Mkt Converge, Will More M&A Doors Open Across Aisles

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