Glenboden M & A Originations

Boston Beer as next globalisation of ambassador brand ?

Priority Rating priority rating 4
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Origination Status proprietory origination, August 2009
Asset Boston Beer Company Inc (USA), no.1 domestic craft beer producer
Buyer candidates include SABMiller, Heineken
Seller founder Jim Koch and public shareholders of Boston Beer
Buyer Rationale to commercialise globally the Samuel Adams brand, portfolio expansion
Seller Rationale competition, volume decline, margin pressures
NBs Samuel Adams has only 0,5% market share in the US
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A pattern in beer industry M&A has been the acquisition of brands that are relatively small, with low market shares even in their home markets, but that have an 'ambassadorial' quality, representing a key beer ethnicity, that a major buyer believes can be commercialised globally. A good example of that was SABMiller's purchase of Grolsch in 2007. We think that Boston Beer also fits into that space, and that the timing might be right for a deal.

Boston Beer has strong ethnic authenticity ...Having provenance from the 19th century, Boston Beer was founded by Jim Koch in 1984, as a hand-crafted full-flavoured beer, positioned at a premium to the mainstream light beers in the US. By the mid -90s, Samuel Adams had become the flagship of the American craft brewery movement. It remains the no.1 craft beer brand in the US, and has won numerous awards both at home and abroad.

... but sales of Samuel Adams have levelled off ...However, growth of its core Samuel Adams brand has levelled off, and even declined. The company still exhibits a healthy growth rate (see chart), but that's largely thanks to line extensions (there are about 20 varieties of Samuel Adams), as well as new products like cider and flavoured malt beverage.

.... owing to competition and economicsThe problem is intense competition in what Koch calls the 'better beer' category in the US. Covering craft, specialty and imported beers, that category is subject to fragmentation, regionalisation and big gains by imported beers in recent years, especially Corona and Heineken

There's also the current problem of the consumer trading down, or moreover not trading up, to better beers whilst there's a recession, which has caused the category as a whole to be in decline.

The company's financials have been hit ...Boston Beer's problems were exacerbated in 2008 by a product recall, on suspicion of glass fragments in a certain batch of bottles, that hit the company's core sales and operating profit that year.

The volume decline of the core Samuel Adams varieties seems to have got worse in H1 2009, and cannot be fully off-set by price increases, which have been below 5% since 2008.

.... and profitibility is fundamentally low ...Boston Beer's EBITDA multiple was very low by beer standards, in 2008 (see chart); but even in more regular years, like 2007 and 2009F, it's below 15%.

.... at a time when marketing and capex need fundingBoston Beer's other issues include the need to fund promised increases in marketing (on which spending actually declined in H1 2009), as well as completing a capex programme, at its new Pennsylvania brewery, that already absorbed US$ 100 mln in 2008, but needs another US$ 25 mln if efficiency targets are to be met.

Then there's the problem of filling the capacity in the new brewery. This is made harder by the termination, in 2009, of a co-packing agreement with Diageo, which had constituted about 15% of Boston Beer's total volume sales in 2008.

So far, Boston Beer has a healthy cash balance and no debt. This could all change however, because of the above adverse factors and needs. Koch also has a major share buy-back programme for publicly -held A shares, which needs to be funded if it's to continue.

Distribution problems underline the need for being acquiredIf that wasn't enough, the company is constantly fighting with the independent distributors in the US, on whom it depends, but who also carry competitors' brands. This factor, more than any of the others, shows that the time has come for Boston Beer to enter the distribution network of a major global brewer.

Samuel Adams is a strong ambassador brand candidate ...The Samuel Adams brand, whose international sales are so far very small, could fill the ethnic -authentic space in the portfolio of a global brewer, representing the east coast US tradition, in the same way that Grolsch filled the Dutch space in SABMiller's portfolio.

On top of the benefits of growth, access to capital and higher profitability, such a move could drastically reduce Boston Beer's manufacturing complexity; the international focus would be on a small number of the more mainstream varieties of Samuel Adams.

.... with Heineken the best placed buyer ...But who are the potential buyers, other than SABMIller ? InBev, with its focus on the Americas after the acquisition of Anheuser-Busch, is unlikely, since much of Samuel Adams' potential is in Europe.

Heineken is our tip. That brand is already the no.1 'better beer' brand in the US, with Samuel Adams as the no.3. By acquiring Boston Beer, Heineken would not only be able to commercialise Sam Adams through its vast network in Europe; it would also strengthen its market position in the US, where 'better beer' in total has 20% market share.

... but it's up to the founder to decideOn the sell-side, Jim Koch is the decision-maker; the publicly -held A shares are non -voting, and Mr Koch owns all of the B shares.

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THIS LEAD'S VALUATION
Size (€ mln) 290
Sector brewing
Asset Quality US no.1 craft
Seller mid-cap plc
Buyer large plc
P/S 1,0
P/Ebitda 16,0
Type ent. value estimate (2008A)
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