E-Malt.com News article: USA: Craft brewers need capital for expansion but still reluctant to accept offers from Wall Street investors

Brooklyn Brewery, the craft beer maker operating from New York City's most populous area, resisted taking money from investment firms for almost three decades, according to co-founder and Chairman Steve Hindy. Now the brewer of Brooklyn Lager is having second thoughts, Reuters UK reported on August 19.

Hindy, who sold control of the brewery three years ago to one of his early backers, the wealthy Ottaway family, said the company needs capital to expand its business and meet rising demand for its beer. So it's considering selling some equity with the help of investment banks, becoming one of more than a dozen U.S. craft brewery companies thinking about accessing the deep pockets of institutional investors.

"We want to stay independent," said Hindy, in an interview at his Brooklyn office. "But we are looking at building a very large brewery in New York City, which will probably cost around $150 million."

The craft beer industry is booming, buoyed by deregulation and the increased buying power of its largely millennial customer base. The $19.6 billion U.S. craft beer market grew by about 18 percent in barrel volume in 2014, according to the Brewers Association. By contrast, the U.S. beer industry as a whole saw volumes rise by only by 0.5 percent in 2014.

"These are fascinating times in U.S. craft beer, and like many of our brethren, we talk to many different people who are interested in participating in this dynamic business," said Robin Ottaway, president of Brooklyn Brewery, who said the new brewery will likely be in Staten Island, New York City.

The list of those vying to participate in the business includes private equity firms, family investors and large alcohol brands. Some of these investors are hoping it will include the public market as well.

"Anyone who does want to sell, should be selling right now," said Hindy, who retains common stock in Brooklyn Brewery. "Valuations are out of this world. There are people swarming all of us wanting to give us money. In a two-week period, I had 17 different private equity firms that called."

Brewers are seeking outside investment as the burgeoning craft beer market heralds an expensive fight for shelf space. To compete, brewers have to invest in new production facilities, distribution systems and styles of beer. "A lot of craft brewers are capacity constrained, selling every drop they can make," said Andy Goeler, CEO of craft for Anheuser-Busch InBev.

These investments are not without risk, and it is not clear what the marriage of institutional money and independent brewer will bring. "The money guys make money and that's a whole different way of looking at the world," said Hindy. "We make beer and the money follows."

Craft beer is defined by the Brewers Association as beer that comes from a company that produces fewer than 6 million barrels a year. Hindy, whose Brooklyn Brewery shipped about 252,000 barrels last year, says the definition of craft beer is in the glass of the drinker.

While the craft brewers stand to benefit from the access to equipment, raw materials and the bigger distribution network of their larger peers, such deals also pose significant reputational risk to their independent brands.

"Naturally there was a push back from the local community," Goeler said. Still, he said customers returned when it realized the acquisition would not lead to changes in cost or quality.

Private equity firms have also historically posed risks to the image of craft brewers as community-oriented companies that value their product above profit. Craft brewer owners have sought to address these concerns by offering only minority stakes, allowing founders to keep control of the companies.

Sam Calagione, founder of Dogfish Head Craft Brewery in Milton, Delaware, a craft brewer that is exploring selling a minority stake, said in an interview that many private equity firms will introduce themselves as potential minority investors and then try to negotiate a deal structure that gives them control or quickly takes the company public.

"There is an initial position of only wanting a minority investment, and within the first meeting they talk about a path to majority control or an IPO," Calagione said. He said he's also met some firms that were happy to remain minority investors.

An IPO is seen by many craft brewing companies as less dilutive to their brand. But companies have to reach a certain size to float in the stock market, and some of them opt for a private investment as a bridge to an IPO. Industry sources said that a $500 million valuation is a rough threshold appropriate for a listing.

After U.S. President Jimmy Carter signed a law in 1978 legalizing the home production of beer, the craft brewing industry saw a major wave of IPOs in the 1990s.

Several others jumped on the IPO bandwagon but, by 2000, nearly 200 craft breweries had gone out of business as their beers could not keep up with the quality that consumers expected. It was not until the rise of Millennials in the last few years that the industry underwent a renaissance.

Some craft brewer founders such as Hindy and Calagione resist taking their companies public on concern that shareholder pressure to meet quarterly earnings targets can erode their creativity.

For craft brewers like Hindy, the biggest challenge to getting bigger may be in retaining their identity.

"Craft breweries have a soul, and I think the big money coming into the industry is kind of a challenge to that soul," Hindy said.


19 August, 2015