No reason to think Corona Premier “couldn’t be a 100-million-case brand,” Constellation cfo David Klein told analyst Judy Hong in presentation this morn at Goldman Sachs Global Staples Forum.  That’s quite a leap from our estimate of approx 8 mil cases (shipped) in 2018, and Constellation’s original thought it could match Coronal Light’s 15 mil cases.  And David stuck to 35-40% growth rate for 2019.   But, lotsa room for “more effective distribution” of Premier, he pointed out.  Many retail accounts still have just 1-2 SKUs.  When they get full complement, velocity really takes off.  Over last 12 wks, velocity of “base” Premier (not on promotion) up 22%, David said.  Then too, Constellation has more work to do to educate consumers about functional benefits of Premier. Brand’s health/wellness appeal, lower carbs, “power of Corona” name and demographic tailwinds all work in its favor.  (Not stated, but Constellation’s outsized expectations for Modelo Especial once seemed very ambitious.  Plus, Michelob Ultra already well over 100 mil cases.)  Net-net: “We think Corona Premier can be a massive brand.” 

“Way Too Early” to Assess Refresca  Meanwhile, Refresca just expanded to 50 states on May 1 and had “a bit of a soft launch” since supply chain not fully geared up.  Natl ads start this week.  So, “way too early to tell.”  Will Constellation spend $25 mil on Refresca this yr?  “Not sure,” said David, “but we will invest heavily,” revisit plan as it sees how brand performs after it gets on shelves.  Seltzers “here to stay,” David believes, and retailers “may have to think about seltzer as its own category.”  But Refresca more of “full flavor experience than low-cal alcohol,” aimed at females already familiar with Corona name.  In seltzer, Constellation has repositioned Svedka and “we have to get comfortable” with that before devoting mktg $$ “necessary to break thru.”  Flagship Corona Extra needs to “hold its own” and grow, but doesn’t need to “drive growth” for the family.  Constellation “will be happy,” said David, if Corona family continues mid-high single-digit growth.  On Cinco de Mayo, Constellation confident it “won” the holiday, with “more cases on the floor than ever before” and “weather cooperated” outside of NYC.    

How about Modelo Especial?  “Still a lot of runway,” David assured.  Brand still not at fully effective distribution level, only 5% of households drink it and “a lot of general market consumers are not even aware of the brand,” even while it’s #1 brand in California.  “There are still a lot of people to discover it and we’re working on that.”  

STZ Not Seeing A Lot of Frontline Pricing from Apr Hikes  Echoing comments from MillerCoors ceo Gavin Hattersley on MC’s Q1 conference call, David said Constellation “not seeing much in topline price increases” since Apr 1. Some pricing coming thru on “brand by brand basis” and less discounting, David noted, which makes mkt “healthier.”  On pricing plans/margins, “we don’t want to break our model,” as Constellation doesn’t want to make changes in pricing or mkt spend that would slow down growth.  While Constellation “always tries to expand margins,” would take extra price if it sees oppy and improve operations to cut costs, numerous cost pressures this year from cost of goods, Mexican wage inflation and transportation.  Then too, brands are price sensitive, he reminded.  Constellation “has time,” since it won’t finish pricing analysis until August.  So, Constellation sticking to 1-2% pricing guidance for this yr.   

 “We have to be much faster,” Heineken USA prexy Maggie Timoney told Irish paper the Independent. “The rate of innovation is at a higher pace than in Ireland,” she added.  So for Heineken (and other suppliers) “from ideation to creation has to be a much faster time frame.”  (Other top suppliers like AB and MC made similar remarks so far in 2019.)  “We have to be much braver in trying new things” too, Maggie noted.  And HUSA really is starting to see better #s, especially on Heineken and Dos.  Both brands up in Apr.  Heineken brand up 0.9% and Dos Equis up 3% for 4 weeks thru Apr 27 in Nielsen.  Heineken down 1.3% and Dos down 0.4% yr-to-date.  Total HUSA down just 1.4% for 4 weeks, down 4% YTD.   Meanwhile, Maggie still making organizational changes.  VP of natl sales Bridget Lasda left HUSA and became chief commercial officer of King Juice (Calypso Lemonade).  Her role now split in 2; Alex Boerger becomes natl accounts veep-off premise and Mike Miskiewicz sr director natl accounts-on premise. 

AB InBev will pay a fine of $250 mil levied by European Commission for restricting cross-border sales of its popular Jupiler beer, which has 40 share in Belgium.  Over 8-yr period from 2009 to 2016, AB InBev restricted Dutch retailers and wholesalers from shipping Jupiler into Belgium thru labeling, promotional and pressure tactics.  As result, “consumers in Belgium have been paying more for their favorite beer because of AB InBev’s deliberate strategy to restrict cross border sales between the Netherlands and Belgium,” according to EU’s antitrust commissioner.  “Attempts by dominant companies to carve up the Single Market to maintain higher prices are illegal.  Therefore, we have fined AB InBev €200 million for breaching our antitrust rules.”  AB InBev got a 15% discount for cooperating “beyond its legal obligation to so,” EU noted.  Company also “reinforced our compliance program based on the learnings of this case,” general counsel John Blood told Financial Times.

Meanwhile, odd antitrust case brought in US Dist Ct by small Wisconsin brewer Minhas over alleged AB InBev and Molson Coors activity across the border in Canada is still on appeal.  US District Ct tossed charges that ABI and Molson Coors illegally conspired with Canadian govt to restrict Minhas’ sales in Ontario’s retail stores, basically agreeing with the brewers that they couldn’t be sued under US/state antitrust laws for an agreement they made with a foreign govt.  Minhas appealed and US Dept of Justice recently weighed in, NBWA’s Alcohol Law Review just noted.  DOJ agrees that US Dist Ct correctly tossed charges regarding specific agreement between Ontario govt and the brewers to restrict package sizes sold at retail.  But DOJ also suggested the case go back to the US Dist Ct “for more fact-finding” on some of Minhas’ other allegations that the brewers conspired to hurt smaller competitors, including litigation threats vs Ontario government if it “undid the six pack restrictions.” 

ABI Needs “New Growth Strategy,” Sez Economist Mag  Elsewhere, current edition of The Economist looks at the challenges that today’s ABI faces.  Analysis concludes, as most other analyses do, that days of ABI getting growth via “serial acquisition and cost cutting” are over, that ABI “needs a new growth strategy, having squeezed its historic one dry.”  Outside of acquisitions, Economist reports, ABI “has not increased beer volumes in over a decade,” and has gotten avg 4.7% $$ growth via “revenue management initiatives,” in ceo Brito’s parlance, “or, in plain English, selling ABI’s existing beers at higher prices.”  Meanwhile, “the competitive intensity has gone up a notch in recent years” in global beer, Bernstein’s Trevor Stirling pointed out.  Countries that previously had beer monopolies or duopolies are “being besieged by outsiders,” Economist noted, citing stepped-up efforts by Heineken vs ABI in Brazil, Colombia and China (add Mexico too). Future growth oppys include, mag also suggests, non-alcs and beyond beer, again, like others and ABI itself acknowledge.

As expected, AB InBev announced it filed application in Hong Kong to list a minority stake in its Asia biz, Budweiser Brewing Co APAC Ltd.  Financial press cites sources that estimated value of Asian biz in very broad range: between $40 bil and $70 bil.  So, depending on how much ABI intends to float, could raise between “at least $5 billion” (Bloomberg) to “about $7 billion” (WSJ) and “close to $10 billion” (“one person close to the deal” told Financial Times).  Dollars expected to both “reduce a $102.5 billion debt pile” following SABMiller purchase and, as ABI said in filing, fund potential deals in region.  “We believe our business is an attractive platform to pursue select, potential M&A in Asia Pacific,” ABI said, adding that the IPO “could be a catalyst for our ability to explore such inorganic expansion opportunities.” 

Verdict is in. Mkt liked Boston Beer deal to buy Dogfish Head.  Stock popped another $14, 4% today.  Very near 52-week high.  And Boston Beer stock mkt cap at $4 bill. 

It’s just a wild coincidence that Dogfish Head volume in 2018 and Ballast Point volume in 2015 almost exactly the same. Dogfish Head just shy of 275 K bbls last yr and Ballast Point 277K bbls in 2015. But these 2 deals do appear to mark two distinct turning points in craft M&A.  Primarily because they commanded such very different valuations.  Recall, Ballast Point sold for $1 billion in Nov 2015.  Now Dogfish Head sells for $300 million in May 2019. Same volume  (Ballast earnings somewhat higher) but $700 mil difference in valuation.  A lot changed in 3.5 years.  What happened?  

Back in 2015, craft in its 6^th straight yr of double digit growth.  Now it’s far more crowded and competitive and growth slowed. In 2015, Constellation, already biggest growth co in beer with its Mexican imports, wanted in to other growing high end segments like craft.  But now most of the larger strategics (AB, MC, STZ, Heineken) seemingly have had their fill, at least for now.  So it’s a very different set of circumstances.  But when Ballast Point got $1 bil, many craft brewers thought the sky’s the limit. And they developed vastly inflated conceptions of their own valuation.  They were wrong.

Now valuations are coming back to earth.  Some recent craft deals reportedly barely got their founders out of debt.  Here comes Dogfish Head selling to Boston for a far more realistic valuation, a more normal business  multiple.  Ballast Point sold for 25-30x EBITDA, as INSIGHTS recalls. But Dogfish Head sold for 10-13x EBITDA, estimates Consumer Edge’s Brett Cooper in interesting analysis. “Will this deal reframe craft M&A,” Brett asks, intriguingly.  Perhaps this deal does mark a new shift in landscape in craft m&a? Certainly, several sizable craft brewers look to do something to avoid their own day of reckoning.  Some deals simply have to happen. If this does mark a turn towards more realistic valuation, it will probably be in part because, like Ballast in other direction, this transaction is so public, so visible.

It’s just a wild coincidence that Dogfish Head volume in 2018 and Ballast Point volume in 2015 almost exactly the same. Dogfish Head just shy of 275 K bbls last yr and Ballast Point 277K bbls in 2015. But these 2 deals do appear to mark two distinct turning points in craft M&A.  Primarily because they commanded such very different valuations.  Recall, Ballast Point sold for $1 billion in Nov 2015.  Now Dogfish Head sells for $300 million in May 2019. Same volume  (Ballast earnings somewhat higher) but $700 mil difference in valuation.  A lot changed in 3.5 years.  What happened?  

Back in 2015, craft in its 6^th straight yr of double digit growth.  Now it’s far more crowded and competitive and growth slowed. In 2015, Constellation, already biggest growth co in beer with its Mexican imports, wanted in to other growing high end segments like craft.  But now most of the larger strategics (AB, MC, STZ, Heineken) seemingly have had their fill, at least for now.  So it’s a very different set of circumstances.  But when Ballast Point got $1 bil, many craft brewers thought the sky’s the limit. And they developed vastly inflated conceptions of their own valuation.  They were wrong.

Now valuations are coming back to earth.  Some recent craft deals reportedly barely got their founders out of debt.  Here comes Dogfish Head selling to Boston for a far more realistic valuation, a more normal business  multiple.  Ballast Point sold for 25-30x EBITDA, as INSIGHTS recalls. But Dogfish Head sold for 10-13x EBITDA, estimates Consumer Edge’s Brett Cooper in interesting analysis. “Will this deal reframe craft M&A,” Brett asks, intriguingly.  Perhaps this deal does mark a new shift in landscape in craft m&a? Certainly, several sizable craft brewers look to do something to avoid their own day of reckoning.  Some deals simply have to happen. If this does mark a turn towards more realistic valuation, it will probably be in part because, like Ballast in other direction, this transaction is so public, so visible.

Following 5 straight mos of declines, import shipments finally bounced back with 331K-bbl, 10.9% increase in Mar, reports Beer Inst economist Michael Uhrich based on Commerce Dept data.  Even with Mar gain, Q1 imports -40K bbls,        -0.5%.  (That includes 30K-bbl pop from NAs, mostly Heineken 0.0.)  Decline in Q1 follows similar drop in Q4 2018.  So, imports down 148K bbls, 0.9% for 6 mos.  On top of estimated 0.5% decline in domestic brewers’ shipments, total US shipments off approx 185K bbls, 0.5% in Q1, and down about same pace for 12 mos.

In Mar, Mexican shipments posted 259K-bbl, 12% gain.  But that brought Mexican shipments to up just 0.4% for 3 mos.  Big Mar gains in Belgian and Irish shipments too.  Dutch biz flattish including NAs in Mar.  In Q1, Dutch shipments down 83K bbls, 8%.  Belgian-German combo up 35K bbls, 5.4%.  Irish shipments up 2%; Canadian shipments down 2%.  Italian shipments jumped nearly 50%.  UK and Jamaican biz way off.  Finally, exports hit hard in Q1: -275K bbls, -19%.

Tuff start for Craft Brew Alliance: depletions down 5% in Q1 despite 2.4% shipment gain. Kona shipments +10% and now right at 2/3 of CBA total.  Acquired regional brands – Cisco, Appalachian Mtn and Wynwood – collectively up 13%.  Widmer “improved” to -7%, Redhook down 20% and Omission slipped 12%. Yet Kona depletions up just 1% as Kona Big Wave lapped big promo activity in FL chain last yr.  Since then, Kona rebounded and behind natl mktg campaign for NCAA basketball tourney.  CBA depletions grew 8% in Apr led by Kona’s +16% gain, co shared.

Financial numbers were nastier. CBA took a net loss of $7.4 mil in Q1, due to 70%+ hike in SG&A (sales, gen and admin) spend to $25.6 mil driven by natl campaign behind Kona; also includes $4.7-mil pre-tax expense to settle Kona class-action lawsuit. (Suit claimed labels mislead consumers into thinking beer brewed in HI.)  Net revs down 1%, tho core beer revs +3%, driven by shipments gain and 1.6% rev/bbl increase. Beer gross margin up 250 bps to 38%.  Despite Q1 $$ hit, “we believe the investments behind Kona and understanding today’s changing consumer landscape will drive meaningful topline growth and remain focused on sustaining CBA’s strong underlying financials,” said chief financial/strategy officer, Christine Perich.  CBA still expects 5-8% volume gain in 2019.

In stunning move, Boston Beer will undertake first significant M&A in its 35 yr history to buy top 20 craft brewer Dogfish Head for $300 mil in cash and stock.  (Boston has done several smaller deals in past.)  Founders Sam Calagione and family will get 406,000 shares of  Boston based on share price of $314.60.  That’s a value of approx $128 mil, tho some of it will be paid out over time.  Sam and Mariah “will collectively become the largest non-institutional shareholders after Jim Koch” following close of transaction, anticipated in Q2. Sam will get a seat on Boston’s board of directors and continue to run Dogfish Head.   

Meanwhile, “Dogfish Head shareholders will also receive $173 million in cash, most all of which is for the benefit of Dogfish Head’s financial investors, with the exception of certain transaction-related expenses.” Recall, private equity co LNK bought 15% stake in Dogfish Head in 2015.  That stake now represents majority of value of co. Undoubtedly ballooning value of its stake a major motivator for Sam to combine with SAM. 

Boston Beer sez its “current cash on hand and available line of credit will be more than sufficient to fund the cash component of the transaction.” Boston had $103 mil in cash at end of qtr, far more than usual as it was apparently getting ready for deal. It also had $150 mil line of  credit.   

This deal is huge departure for Boston Beer.  Why now? Why Dogfish Head?  “The first thing is the relationship with Sam,” Boston Beer chairman Jim Koch told INSIGHTS.  He characterized deal as the two of them “holding hands and jumping into the icy water together” a reference perhaps to some of more challenging waters craft has entered.  “The synergies are cultural, creativity, passion, leadership” added Jim, not “spreadsheet synergies.”  Dogfish Head has 400 employees.  While Boston “hasn’t made a specific decision,” Jim said, he expects Boston will “need almost all of them.”

Another departure: often in past, Jim has used issues with distribution footprints as rationale for not doing deals.  But here “majority” of volume goes thru Boston network.  But there will be “some work to get as much Dogfish Head volume into Boston Beer” network as “legally possible,” while treating Dogfish Head distribs “fairly.” Tho Jim would like to “do it as quickly as possible,” he acknowledges that “it’s going to take time.” 

Dogfish Head “on pace to sell nearly” 300K bbls in 2019, sez Boston, up high singles.  Net sales expected to be between $110-$120 million.  In past, INSIGHTS has been told that good sized craft cos can get to 25% EBITDA margins.  If Dogfish Head EBITDA somewhere between $20-30 mil, suggests that Boston Beer paid much lower multiple than in deal-crazy times a few yrs ago, when many cos traded for over 20x EBITDA. Deal will be “neutral to slightly accretive” to Boston earnings in 2019, the co said. 

This deal will bolster Boston Beer in craft.  Sam Adams franchise sagged in recent yrs, even as Boston Beer returned to growth in 2018-2019. Its beers dropped to estimated 1.8 mil bbls in 2018. That’s down about 750,000 bbls from their peak and Sam Adams franchise down another 14% yr-to-date in IRI multi-outlet + convenience.  Yet Boston Beer still up double digits this yr, led by explosive growth of Truly Spiked and Sparkling.  Its FMB biz up 52% and represented 55% of Boston Beer off premise volume in IRI MULC yr-to-date thru Apr 21.

Now Boston’s salesforce will add Dogfish Head to its arsenal. Their skills could boost sales for some of Dogfish’s recent more sessionable brews like SeaQuench and Slightly Mighty IPA. Indeed, Dogfish Head’s line of IPAs fills in stylistic gap in Sam Adams portfolio.  Dogfish Head founder Sam Calagione began typically selling bigger beers with famous slogan “off-centered ales for off centered people.” But he pivoted more recently. Highly sessionable SeaQuench quickly rose to become the #1 selling sour beer and its new lo-cal IPA, dubbed Slightly Mighty, holds promise too.    

Jim concluded: “I’m looking forward to working with Sam and Mariah” who are “unique talents.”  They are a “big part of the deal.”  Significant component of the pay out is to keep them around for at least 10 years as they “add value.”  About Sam: “After 20 years I know the guy.  We went through some of the battles” on craft definition, creation of BA, craft brewer seal, etc. “He always had my back and I always had his back.” Craft beer is “at the heart and soul of both our companies.”   

Sometimes the most obvious answer is in fact the right one.  When word first surfaced that Dogfish Head founder Sam Calagione was pushing hard to get Delaware law changed so that a Delaware brewer could retain its state rights if it sold part or all of its co as long as parent co sold less than 6 mil bbls (up from 2 mil bbls), widespread speculation that Sam doing a deal, as INSIGHTS first reported Apr 29.  And Boston most perfectly fits Sam’s desire to continue as part of indy craft.