Published in Manufacturing
FINDING AN ENTRANCE: PE searches for craft brewers to buy as M&A activity cools for industry Infographic by Rachel Harper

FINDING AN ENTRANCE: PE searches for craft brewers to buy as M&A activity cools for industry

BY Sunday, September 17, 2017 07:00pm

After a frenzied period of M&A activity for craft breweries, industry insiders and investors expect the pace of deals to moderate in the near future.

While high-profile deals such as Lagunitas U.S. Holdings’ acquisition in July of a 20-percent stake in Bellaire-based Short’s Brewing Co. at a multiple exceeding 15 times EBITDA (earnings before interest, taxes, depreciation and amortization) made splashy headlines, there’s evidence the dealmaking activity is slowing as the market matures.

Any slowdown could prove beneficial to the number of private equity firms interested in entering the craft beverage market. Although private equity buyers have found success in the industry, lower multiples could make further deals a more realistic and attractive venture moving forward. The timing also coincides with the early wave of craft brewery entrepreneurs beginning to contemplate succession planning in their business.

“I think some of the reasons PE has shied away from (craft beer) has been the premium multiples,” said Brandon Finnie, managing director of Grand Rapids-based Hungerford Valuations, who works with clients in the craft beer industry. “But what has been attractive about it is the growth potential and strong margins from a profitability standpoint.”

For private equity firms, acquiring craft brewers represents an opportunity to gain a foothold in a high-growth and high-margin business in the $23.5 billion craft beer industry.

“The margins are higher than they are for a typical manufacturing business,” Finnie said, noting he was generalizing. “But I think there’s the profitability component and I think the attractiveness has been the ability to grow the topline revenue.”

It’s likely that private equity firms could find more prospects in the craft beer sector as a number of first-generation and second-generation brewery owners transition into the next phase of their careers, according to a number of panelists at this year’s Great Lakes Capital Connection event, hosted for the first time in Grand Rapids by ACG West Michigan.

“You have to realize that these craft brewers are entrepreneurs and they come into this space under capitalized,” Shawn Gary, president of Grand Rapids-based Alliance Beverage Distributing LLC, said during the panel discussion. “They have to work that brewery, brew beer in the day and work across the bar at night. Some of these guys have been doing it for 25 or 30 years now. It’s tiring. They’re burned out. With multiples as high as they were, I think from a craft brewer’s standpoint, there’s some motivation there.”

For brewers, taking on a private equity partner can also help a smaller, regional producer to scale up more rapidly than if they operated on their own.

That dynamic played out firsthand for Comstock Park-based Perrin Brewing Co., which was acquired by Longmont, Colo.-based Oskar Blues Brewery Holdings LLC and local partner Keith Klopcic in a deal backed by Waltham, Mass.-based Fireman Capital Partners in 2015. Fireman Capital, which acquired a majority position in Oskar Blues and previously invested in Salt Lake City Brewing Co., appears poised to leverage the Oskar Blues platform to make further deals in the industry. To that end, the company also added Tampa-based Cigar City Brewing to its portfolio last year.

Shortly after its deal, Perrin quickly ramped up brewing and distribution efforts, nearly doubling production, according to a previous MiBiz report. Perrin went from producing 14,000 barrels in 2014 to more than 23,500 barrels in 2016 and expanded its market presence into Colorado, Indiana, Ohio, Florida and the Chicago area.

“We’re so much farther ahead this way,” President and Partner Keith Klopcic said at that the time regarding the acquisition. “We’re light years ahead of where we would have been versus if I had to do it on my own. Their level of expertise is invaluable.”


Although private equity investors may have a larger pool of craft brewers to draw from for future deals, firms will still likely encounter a negative perception from many in the industry.

“The struggle we had with PE, I’ll be honest with you, is the model of the firm is such that you flip it,” Mike Stevens, co-founder and CEO of Grand Rapids-based Founders Brewing Co., said during the ACG panel discussion. “It’s not as appealing, (but) I will say that we met with some (firms) that were happy to take minority positions, which puts you in a better spot. I think there are ways that private equity can play in this space, but there is a give or take.”

In 2014, Stevens piloted the sale of a 30-percent stake in Founders to Mahou San Miguel Group, a large family brewing operation based in Spain.

Despite any negative perception associated with private equity firms, those investors may present a more attractive option for craft brewers than selling to a large conglomerate such as Anheuser-Busch InBev, a move that has historically drawn criticism from within the industry.

For Founders, accepting money from an outside investor allowed the brewery to access additional resources it did not have before the deal, Stevens said. The company recently opened a second production brewery in Grand Rapids, and plans to open a small brewery and taproom in Detroit later this winter.

“Now that we have a partnership with folks that, frankly, have a big wallet, we have opportunities we never thought of before,” he said.


One challenge private equity firms could face as they look to enter the craft brewing industry is their ability to identify larger operations that are positioned to grow.

In 2016, growth in the craft brewing industry slowed to rates not seen since 2011. While the craft segment still expanded 6 percent amid a stagnant overall beer market, most of the growth stemmed from small local brewpubs and microbreweries, as MiBiz previously reported. By comparison, regional breweries grew less than 1 percent year-over-year, according to data presented by the Brewers Association at an industry conference earlier this year.

“I think PE does have an opportunity (in the industry), but the scariest part is where this growth is coming from,” said Gary of Alliance Beverage. “In the second half of 2016 and first half of 2017, this whole craft world has changed. The biggest growth area happens to be in what I call the nanobrew area. Those guys are small and that’s where the growth is happening.”

Sources noted that private equity firms looking to cut deals for smaller breweries may also face operational challenges.

“I would caution at the real localized level, that’s probably a scary place to play (for private equity) because (the breweries) haven’t matured enough and they might be stuck in the mud indefinitely,” Stevens of Founders said.

That said, Founders is considering its options when it comes to acquiring another craft brewery.  Stevens said if the right deal came along, Founders would consider buying a regional operation with more than 50,000 barrels of annual production that’s growing 20 percent or more per year.

“There are a handful of breweries out there and they are willing to talk,” he said. “That whole package has to be presented properly, and as a buyer you have to bring more than just money.”

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