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 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, 66, a former reporter who
keeps a piece of shrapnel at his desk as a memento from his time in
Beirut, 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 in the neighborhood of $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.
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.
INVESTOR GOLD RUSH
Investors' interest has already become apparent in some of the
prices paid for entry. When Oskar Blues Brewery, the Longmont,
Colorado-based maker of Dale's Pale Ale, was sold to an affiliate of
investment firm Fireman Capital earlier this year, it was valued at
as much as 20 times its 12-month earnings before interest, tax,
depreciation and amortization (EBITDA).
By comparison, beer conglomerates Anheuser-Busch InBev SA and
Heineken NV trade at 13.4 times and 12.5 times EBITDA over the last
12 months, respectively.
"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.
Some of the craft brewers exploring selling part of themselves, in
private placements or initial public offerings, include Lagunitas
Brewing Company of Petaluma, California, Ballast Point Brewing
Company in San Diego and SweetWater Brewing Company in Atlanta,
according to sources who asked not to be identified because these
plans are confidential. Each of them is estimated to be worth
hundreds of millions of dollars. Representatives for these companies
declined to comment.
Still, 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."
IMAGE RISK
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.
Anheuser-Busch InBev, maker of Budweiser and Stella Artois, has made
a string of craft beer company acquisitions in the last 18 months
that include Blue Point Brewing, Elysian Brewing and 10 Barrel
Brewing. Constellation Brands, the distributor of Corona Extra beer
in the U.S., said this week that it was creating a ventures arm to
invest in new and distinctive concepts in alcoholic beverages, which
may include craft beer.
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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.
When Anheuser-Busch InBev bought 10 Barrel Brewing last year, for
example, the deal triggered a social media backlash that included
threats of a boycott and angry Facebook posts.
"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.
An Anheuser-Busch InBev spokesman declined to comment on 10 Barrel's
performance since its acquisition. A source that was not authorized
to publicly discuss financial details said 10 Barrel has seen
revenue grow 20 percent since the acquisition.
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.
GOING PUBLIC
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. The most successful of them was Samuel
Adams maker Boston Beer Co, which now has a $3 billion market
capitalization.
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. Boston Beer
adopted a dual-class share structure so that founders could maintain
control of the company.
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," he said.
(Reporting by Lauren Hirsch in New York; Editing by Greg Roumeliotis
and John Pickering)
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