Like lotsa global cos, including AB InBev, SABMiller’s reported revenue and profit whacked by “strengthening [US] dollar against our operating currencies,” as SABMiller noted in today’s report on fiscal 2016 thru Mar.  Indeed, SABMiller reported revs and pre-tax profits each off double-digits for 12 mos.  That’s even while on “organic, constant currency basis,” net producer revs rose 5% ($24.1 bil), EBITA +8% ($5.8 bil) and EBITA margin increased 0.6.  SABMiller global volumes up 2%, including soft drinks; its lager biz +1% to 212 mil bbls.  AB InBev’s total bev volume was 390 mil bbls (-0.6%) in calendar 2015, its beer volume was 352 mil bbls.  SABMiller booked $160 mil charge linked to pending ABI-SAB transaction and expects to complete deal in 2d half of 2016, tho not before final dividend due to SAB shareholders Aug 12.         

Yet another strong month for beer pricing. Consumer price index for beer increased 2.3% in Apr, per latest gov’t stats.  That’s biggest gain for beer industry since 2.1% increase back in Jan 2014.  CPI for all items was up 1.1% in Apr while spirits prices were up 0.8% and wine prices were flat.  YTD thru Apr, CPI for beer up 2% vs 1.1% gain for all items, while spirits and wine eked out gains of 0.3% and 0.1% respectively.  

Tho basically a normal number of AB distrib deals in 2014-2015 (anywhere from 10 to 15 100% purchases),  early this yr there’s a “significant increase” in number of deals on ABI side that have “either occurred or are in process,” Paragon Bev Advisors managing director Mark Hall said at our Spring Conference.  Mark in position to know as he and partner Randy Jozwiakowski led AB’s wholesaler M&A team for a number of yrs before hanging their own shingle last yr.  He pointed to AB’s anchor wholesaler and voluntary alignment incentive programs as having “potential to encourage consolidation.”  Whether “energy and focus” behind those programs triggering increase in deals or not, “there is certainly more activity than we’ve ever seen in recent memory,” on deals in AB system, said Mark.

10x EBITDA Is “The New Norm” After yrs of multiple expansion from old standard of paying about 6x EBITDA (earnings before interest, taxes, depreciation and amortization), paying 10x EBITDA is “the new norm,” according to managing director Mark Hall.  “Today,” added Mark, sometimes multiples “even north of 10x.”  Main reasons for multiple expansion: “prolonged period of low interest rates,” “return on wholesaler deals much better than alternative investments” and “long period of steady EBITDA growth” for distribs.     

AB Distribs “Jumping” States to Do Deals One of most interesting new “more frequent” patterns that emerged in last couple of yrs, according to Randy: acquiring AB distribs “jump” states to buy distribs, instead of contiguous distribs, “leading to more bidders.”  Why is this happening? “Suppliers encouraging/aiding their preferred buyers to get bigger,” said Randy, i.e. the anchor wholesaler program.  Randy gave many other reasons, including “would be buyers unable to grow contiguously,” “more professional sophisticated wholesalers” an alternative for selling wholesaler to get “the desired or fair market value.” Randy also gave many examples of such “jumping” in AB system from just last couple of yrs: two MO wholesalers moving outside state; Steven Busch acquiring in CO, Jeff Gower acquiring in KS; Fabiano family from MI acquiring in WI; TN’s JR Hand acquiring in IL; FL’s John Saputo acquiring in OH;  FL’s Tim Mitchell acquiring in AR; MS Mitchell family acquiring in MD; AL’s Adams family acquiring in NC.  Newer in AB system, but gotta note too, 3 biggest MC megadistribs, Reyes Bev, HOBO, and Columbia all did same thing in last yr or so.  

“Death, Divorce, Dysfunction” as Deal Triggers  “Most transactions occur because of one of the 3 Ds,” said Randy: 1) “Death in the Family (or planning for that death)”; 2) “Divorce (financial settlement of assets)”;

3) “Dysfunction in the Family (lack of succession or family conflict).”  More from this illuminating speech in Beer Marketer’s INSIGHTS. 

Despite a tuff Apr and slowdown in both craft pace and announced distrib deals, still plenty of strength in high end and lotsa deals percolating on distrib and brewer level, as speakers and buzz at our Spring Conference in Chi this week suggested.  Here are some brief highlights.  Lots more to follow in our letters this week. 

High End Leaders Each Have Expansive Vision of Segment  Wide-ranging discussion with Constellation Beer Chairman Bill Hackett, Boston Beer founder Jim Koch and HUSA prexy Ronald den Elzen showed each view high end with broad lens these days.  Biz needs “bigger definition of what beer is and can be,” Jim suggested, when asked whether FMBs “hasten move away from beer.”  For example, cider defined as wine because it’s made with fermented fruit, but “if it brings people to a product made in a brewery and sold thru a beer distributor, sold on draft in a craft bar…. I’ll take it.”  Ronald believes FMBs attract more consumers to beer and remains “true believer” in cider, which he thinks in long term will get to 3-4 share in US.   Bill noted that to reach CBBD goal of being #1 player in high end meant it “had to get into craft” and has to “play beyond where we are.”  That’s why CBBD exploring FMBs, tho its “hair is not on fire to do anything aggressively.”  Bill and Ronald spoke about importance of focusing on “occasions” to build per capita consumption, recover share from spirits and wine, because consumers are occasion-focused.  Each of these leaders clearly sees continued oppy/growth in high end, possibly getting to 50 share long-term, Jim suggested, if the “high end addresses that need for the majority who want refreshment when they open a beer.” 

Speed of Craft Deals Caught Many “Off Guard”; Lots More in Pipeline  While many industry members and observers figured entry of big beer into craft was “inevitable,” speed with which AB, Heineken, Constellation and to lesser extent MC moved caught many “off guard,” First Bev Group founder Bill Anderson said.  Then too, “diversity of buyers” now broader, including domestic and intl “strategics,” private equity, family offices, etc.  So instead of 1-2 potential buyers, sellers now have 4-6 to “decide on best fit.”  Also, “cycle getting shorter from founding to sale” of biz in craft, and there’s large number of sellers, at least of partial stakes.  As result, Bill even more confident that we’ve got another period of “very robust” M&A ahead of us and we’re still in “early innings” of craft M&A.  How robust?  Bill “wouldn’t be surprised” to see 25-30 deals again this yr, the pace he correctly predicted last yr.

Economists Point to Per Cap Problems, Walking the Wine-ification Line  Panel of beer assn economists had plenty to say about current challenges to expanding total beer volume and get it back to gaining share of per capita consumption of all alc bevs. It “takes a broad spectrum of employed people to keep this beer business moving,” NBWA’s Lester Jones said, pointing out that still about 3.5 mil 25-34 yr old men are out of work. That hasn’t really changed since 2012. Post-recession, economic recovery wasn’t even, Brewers Assn’s Bart Watson reminded, which only fueled high-end growth amid mainstream softness. But pay attention to how you define premiumness, Beer Institute’s Michael Uhrich said. Current above premium brand growth looks to him a lot like the initial rise of brand like Bud or light beers generally, which felt premium to drinkers when launched.  Boston Beer chairman Jim Koch made a similar point the next day. 

Another current challenge: “young people are spending their money on other things as well,” Bart said, like paying off student loans. He showed steady rise of student loan debt as % of GDP from about 3.5% in 2006 to near 7.5% by this Jan. He also questioned execs who “rail against wine-ification,” then “talk about how wine’s gaining share versus beer,” suggesting that the industry as a whole needs to “wrap its head around: how do we keep protecting the brands that we’ve built, while embracing the positive impacts of wine-ification on overall volume.” Some suppliers that “really specialize very strongly in one particular style” could be one strategy to help combat that, Michael offered. Still, as the category keeps “looking for more consumers” and “looking to expand the base,” Lester agrees that “somehow we have to walk that tightrope” of giving consumers what they want and building strong brands.

AB Craft Priority in Growth in Partners’ “Home Markets,” Sez Felipe  AB priority for buildings its biz in high end, including craft, is growth in partners’ home markets, said High End prexy Felipe Szpigel.  AB craft partners growing 40% in IRI multi-channel + convenience so far this yr, so whatever its strategy, AB outpacing craft by lots.  Tho AB certainly “happy,” with current partners and “99%” of Felipe’s time focused on organic growth, if right oppy comes along, “we can probably partner with a few more.”  Felipe also downplayed notion that AB has “retail strategy” to aggressively expand taprooms, so no reason for “angst” about that.  Nor is price discounting “major strategy” at AB, said Felipe, noting fastest-growing craft brands are highest-price brands, that biggest oppy is in trade up, for beer in general, as well as AB and distribs.

Alc Sodas Not Your Avg Beer Drinker; Higher Ceiling Turns out hard soda consumers aren’t quite your average beer drinkers.  They skew “fairly equal” male vs female and range anywhere from 21-90 yrs old, both Small Town prexy Greig DeBow and MC sr director of mktg/innovation, Bryan Ferschinger shared.  Alc sodas are also “bringing back some share versus wine & spirits,” Bryan noted.  For Not Your Father’s, “we’ve seen 81% of volume has come from brand shifting” with “roughly 60%” coming from wine & spirits.  And there is an appeal to Hispanic consumers as well, Bryan added.  All in, still “fairly low level of awareness” among consumers across the board and there’s now a “broader scope” of innovation/flavors that can “appeal more widely.”   So both panelists optimistic that hard sodas yet to hit their “ceiling,” and Bryan thought it could be “much higher than it is today.” 

Molson put together some pro forma figures for 2015 to show impact of pending purchase of SABMiller’s stake in MillerCoors.  Data does not include Miller’s Intl biz, as Molson Coors has “very limited information’ about that biz, but it did say Miller intl portfolio is “insignificant to overall pending Acquisition.” Based on 2015 data, Molson Coors pegs net sales at $11.2 bil, with 69% of that from MC, gross profit of 4.6 bil (70% from MC), and operating income of $1.1 bil.  Change there is MC oper inc was $1.2 bil in 2015 and Molson Coors booked $522 mil in oper inc.  But Molson Coors put in $619 mil adjustment “driven by accelerated depreciation on Eden and other non-core charges,” according to investor relations. That adjustment brings total oper income down to $1.1 bil, for operating margin of 10.1%, 4-5 pts lower than Molson Coors and MC’s current levels.   

In response to Pabst suit against MC over their contract brewing agreement, MC proposes what’s both a “reasonable solution” and what it sez is actually required by that agreement: mediation. Original brewing agreement signed in 2007, sez MC, expressly includes “dispute resolution” process that requires notification of dispute, good faith effort to resolve among mgmt of both companies and then mediation.  “Here, Pabst has skipped all of these steps” and jumped to litigation even while “sole exception” that allows Pabst to do that does not apply here, according to MC. That exception is “early termination,” but issue here is “potential extension.”  So Pabst filed suit with “complete disregard” for contract provisions. MC could seek to simply dismiss suit “for improper venue” since proper venue is mediation.  But MC “proposes more moderate solution: a judicial stay” of lawsuit, including all discovery, while “the parties engage in mediation as Pabst agreed to do,” with litigation to follow if they can’t resolve issues.  MC believes it has acted in good faith all along and thinks it would prevail in any lawsuit, but “neutral mediator at this stage of the process may well avoid the need for a legal determination.”  What’s more, a “neutral review” of MC’s “sufficient capacity determination may help reassure Pabst” that MC’s “anticipated capacity constraints are real, and may promote creative business solutions that the parties have not considered to date.” In a separate, lengthy specific answer MC does ask court to dismiss Pabst’s original claims.  

Pabst “Hinted” at $100-Mil Offer for Eden, Worth “Many Multiples” of That, Sez MC  After MC told Pabst  last fall that it determined it would not have capacity to fulfill requirements after 2020,  parties discussed, but did not agree on “reasonable resolution.”  At that point Pabst had option for 2-yr “wind down period” that would have covered production thru 2022.  MC sez it has not “abandoned” Pabst, but continued to seek solutions, tho it’s not obliged to “use its breweries to brew Pabst brands in perpetuity.”  During talks last fall

MC told Pabst that leasing or selling brewery not a “solution” under agreement as written, but would be a separate transaction.  “Moreover, Pabst’s proposals relating to the Eden facility were commercially unreasonable at best.  Pabst hinted (but never formally proposed) paying $100 million over an indeterminate number of years for a facility worth many multiples of that amount -- and then only subject to a procurement requirement extending through 2030.”  Pabst also threatened litigation during this period, MC alleges. 

While Pabst alleges MC originally contemplated raising fixed charge by 10% to $20/bbl after 2020, MC denies this.  Pabst also charged MC later wanted to jack this up, tripling original fee to $45. MC doesn’t comment on specific $45 figure but sez it did propose “possible solution that contemplated Pabst’s financial participation commensurate with MillerCoors’ level of return on its own brands.”  MC also offered to “reduce its proposed per-barrel increase to $22” (which looks like it would have put it in $40 range, up from $16.45 in 2015, $18.30 in 2020.  Pabst refused.

MC Never “Assured” Eugene Kashper of Sufficient Capacity After 2020  Tho Pabst alleges MC gave Pabst owner Eugene Kashper “assurances” in 2014 that MC would have sufficient capacity after 2020, MC sez that’s not true.  MC sez it proposed “several commercially reasonable offers” to resolve issue, but Pabst rejected them all and responded with threats to sue and demand of “$250 million dollar payout” to end agreement early.  MC did not “threaten to terminate” agreement early.

Net-net: MC insists it has fulfilled its obligations in good faith, followed its agreement with Pabst down the line, proposed several reasonable solutions, and offered to have independent auditor review its determination about sufficient capacity, an offer Pabst refused.  MC’s actions, it insists, don’t add up to what Pabst called “premature termination of the agreement.”  In fact, timeline in agreement gives Pabst 7 years to “make other brewing arrangements,” MC points out.   What’s more, MC sez several times, it is not obliged to “maintain or create capacity solely for the benefit of Pabst.”    

Brooklyn Brewery will build a new 50K bbl brewery, headquarters and roof-top restaurant and beer garden at the Brooklyn Navy Yard’s Building 77,” to be completed by early 2018, co announced today.  Recall, Brooklyn is already lookin' to build a 1 mil bbl production facility in Staten Island.  But ceo Eric Ottaway explained: there is likely no chance for Brooklyn to renew 2/3 of its lease at its current hq in Williamsburg, which is up in 2025.  So when this oppy came up, co “just moved on it,” Eric said.  It signed a long term 40 year lease with the Brooklyn Navy Yard for part of a 16 story building with 1 mil sq-ft of “underutilized storage space” that’s going under a $185 mil redevelopment.  Brooklyn will have production facility and brewpub on the ground floor, office space on the 9th floor, and a 16K sq-ft rooftop beer garden and restaurant that’ll overlook downtown Brooklyn and Manhattan skyline.  All in, “the brewery will employ 124 people at the Yard, with long-term goal of creating an additional 100 jobs,” per release.  And Brooklyn hopes it can at least keep retail operation in Williamsburg to maintain a presence in its original neighborhood, Eric added.  (More in today's issue of CBN).   

Antitrust newsletter Capitol Forum dug deep into potential Dept of Justice moves if it sees competitive issues with proposed ABI-SAB deal and Molson Coors purchase of SAB’s stake in MillerCoors. Overview weighs familiar concerns brought up by distribs, craft brewers and American Antitrust Inst and their proposed remedies, ponders how “aggressive” DoJ might be, but doesn’t take strong stand about where DoJ will come down.  For example, CF’s “sources indicate superficial DoJ investigation, which would make sweeping remedies improbable.” At same time, “sources have observed signs that” DoJ staff is “wrapping up its investigation and preparing its recommendation.  What remains unclear is whether the DoJ has succeeded in extracting additional concessions or has instead decided not to use the merger as an opportunity to deal with the various anticompetitive issues in the beer industry.”  Not likely AB would acquiesce “so easily” with concessions, CF opines, and “it may be telling” that DoJ “does not appear to have used deal timing to pressure ABI into additional concessions.”  Still, CF goes on at length about what DoJ could do.

One new tweak we hadn’t seen.  Recall, DoJ has concurrent investigation in Calif looking into branch/ distribution concerns.  Some of same investigators may be working on both Calif and ABI-SAB.  Calif investigation “might inform” DoJ “considerations of appropriate remedies to the proposed merger.”  But at same time, DoJ “may prefer to keep the distribution issues separate from the merger,” especially given the Calif investigation, which CF reminds “could result in its own remedies.”  Then too, even if DoJ got “more aggressive” and pushed for wholesaler cap (AB has said it will only keep about 10% of its volume in branches), DoJ “unlikely to push the envelope further,” CF believes.  “Improbable” that AB would agree to divest all branches and DoJ “may not be prepared to argue the distribution issue in court until it has completed” Calif investigation.  But there’s another but: “But by offering to close the distribution investigations, DoJ might be able to pressure ABI into divesting its wholesalers as a condition to merger clearance.”  Yet again, given that DoJ has brought few cases to court recently, “ABI would be rightfully skeptical” that the investigation would lead to a “challenge” to it owning branches. 

Is VAIP Safe?  Maybe, Maybe Not  At same time, sources tell CF that DoJ interest in AB incentive plan “may be limited,” and reminds that DoJ investigated previous AB incentive plans and took no action. And yet, DoJ could also come up with provisions “modifying” the incentive program, if it “could isolate specific terms” that “artificially manipulate the distributors’ incentives as a result of AB’s market power,” a concern voiced by BA and NBWA. 

What About Eden?  Capitol Forum also took notice of Pabst lawsuit vs MC over contract production agreement and its alleged offer to buy Eden brewery.  “Added pressure from the Pabst lawsuit coupled with North Carolina AG’s ongoing investigation may compel DoJ to consider sale of Eden as a merger remedy.”  But you’d have to find a buyer and get a “sign-off by Molson Coors.”  And even if ABI agreed to a sale of Eden to close deal, “Molson may not share the same incentives.”  CF also weighs unlikely possibility suggested by American Antitrust Inst that DoJ require a break-up of the JV.  As noted, CF did deep dive but ain’t predicting outcome.  In any case, lotsa moving pieces, lotsa considerations and lotsa possibilities, from DoJ simply clearing deal since it agrees with ABI that no competitive impact in US, to insisting on one or more from long menu of possible “remedies.” 

Did someone say ABI-SAB is a complex deal?  Latest tweak: AB InBev announced yesterday that if/when deal closes ABI will transfer SABMiller’s Panamanian biz to ABI’s Ambev subsidiary in Brazil.  At same time, Ambev will transfer its biz in Colombia, Peru and Ecuador to ABI.  “This will allow AB Inev to focus on countries where the SABMiller business it acquires are well established and allow Ambev” to grow its biz in Central America, ABI said.  Net-net: move “provides clarity on the planned structure of AB InBev’s Latin American operations,” wrote Redburn’s Chris Pitcher, tho he does not expect it to have “meaningful impact” on the numbers. One aspect of deal does show (again) just how complex this deal is.  Panama “has been a very successful market for Miller Lite,” Chris points out.  Together with Miller Genuine Draft, brands sell about 1.3 mil bbls there.  Since global rights to Miller brands going to Molson Coors, “there is risk Molson Coors could take Miller Lite back and move from local production to imported when Ambev takes over the operations,” tho that’s not clear.  If not, An ABI subsidiary would be producing and selling Miller Lite in Panama.  These strange things do happen.      

Elsewhere, South African Competition Comm got yet another extension for further consideration of ABI-SAB, Business Day reports.  Looks like trade union “concerns” will get more discussion.   Finally, ABI CFO Felipe Dutra answered CLSA analyst Caroline Levy’s question about why it would divest most of the rest of SABMiller’s Euro beer biz when there seemed to be no competition concerns.  Felipe framed it as a choice between “certainty and uncertainty,” Caroline wrote.  “Even though the combination would not greatly increase the concentration of any one market, ABI did not want to risk a long review in a region that was less central to the deal than LatAm/Africa.”   

Two beer bills took steps in state legislatures this week, each following fiery debates, lengthy processes or both. In Mo, brewers will be able to lease branded, refrigerated coolers to retailers, after AB-backed bill passed and headed to Gov Nixon.  Small brewers and some distribs (split on issue) fought against bill. They argued small suppliers can’t afford to compete on this level, so measure likely to add imbalance to mkt. But AB clearly still has sway in Mo legislature. It argued all along that neither branding of coolers nor lease agreement with retailers forces them to stock fridges any certain way and simply expands retail space available to beer overall. 

More surprisingly, a Colo bill passed both state houses this wk, initially heralded as “compromise” after yrs of battles over grocery stores selling beer and wine (now limited to 3.2 beer – indie liquor stores sell strong beer).  Grocers tryin’ to get ballot initiative to open up sales.  But bill that passed lays out 20-yr timeline, during which beer, wine and liquor sales at grocery stores phased in. Whether or not grocers can pick up a license varies depending on existence of current liquor stores nearby and sizes of communities where they operate.  Distilled Spirits Council took bow in helping get bill passed, also supported by other tier members, it said.  But still lotsa opposition, from liquor stores and craft brewers especially.  Then too, not clear that Gov Hickenlooper will even sign the bill.  He supports status quo. Grocers insist they’ll keep pushing ahead with ballot measures, though some believe those won’t matter if bill becomes law. And largest state grocers, King Soopers and Safeway, told local CBS affiliate that the bill “doesn’t go far enough” and threatened to sue. So some new twists amid lotsa noise and no change yet.  Finally, Sunday sales of liquor, another Distilled Spirits Council priority, failed annual attempt to pass in Minn, reports KARE, NBC affiliate in Minneapolis.