Glenboden M & A Originations

Sapporo's US brand target could be 'Samuel Adams'

Priority Rating priority rating 4
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Origination Status proprietory origination, July 2010
Asset Boston Beer Company Inc (USA), no.1 domestic craft beer producer
Buyer potentially Sapporo Holdings Limited (Japan), no.4 domestic beer producer
Seller founder Jim Koch and public shareholders of Boston Beer
Buyer Rationale platform for expansion in the US beer market, capacity for own brands
Seller Rationale financial backing for breakthrough expansion
NBs Sapporo's acquired Sleeman's Brewery, no.3 in Canada, in 2006
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Sapporo of Japan, with its famed acquisition warchest, is reportedly in talks with at least two beer brand owners in the US market. Boston Beer's market share in that country may be only 0,9%, and its founder not a willing seller, but with a cash injection for a minority stake, Asian -style, the maker of Samuel Adams could potentially fly into the mainstream arena.

Boston Beer has strong provenance and authenticity ...Having provenance from the 19th century, Boston 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 like 'Budweiser' or 'Miller'.

By the mid -90s, its core brand '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 underperforming given its status On the face of it, Boston's sales growth is impressive, with a mid -term CAGR of 17% to end 2009.

However, that's largely thanks to line extensions (there are about 20 varieties of Samuel Adams, and every year brings new ones); plus in recent years the growth has slowed, to only 4% in 2009.

Given the strong recognition of Samuel Adams, Boston's sales growth and market share could be much higher. So where does the problem lie, and could an alliance with the likes of Sapporo provide a solution ?

Need for portfolio adaptation ...One possible issue is Boston's insistence on 'full -flavoured' traditional craft beer; arguably that's now out-of-date, given consumer trends towards lighter beer, as well as the broadening of the category in which Samuel Adams sits.

By its founder's own definition, Boston now competes in a 'better beers' category in the US, that includes not only domestic craft beers, but also premium imported, lighter beer brands, notably 'Heineken' and 'Corona'.

Possibly Boston should adapt, by stretching Samuel Adams into the lighter beers segment of 'better beers', to try to achieve the higher growth rates enjoyed by the imported brands.

An alliance with one of those imported brand owners could help with that adaptation.

... scale needed in marketing and distribution ... Another possible issue for Boston is that, in spite of achieving an EBITDA margin of 17% in 2009 (see chart), its advertising, promotion and selling costs are as high as 30% of sales revenue.

The classic way for any drinks company, with such a cost structure, to turbo-charge growth is to invest a slug of extra money in marketing and distribution; sales growth being leveraged as a result..

... capital required to increase growth rate ...Arguably a problem is that Boston, as an independent brewer, is too small to implement the turbo -charge mechanism described above.

Although the company has a net cash position, as at the end of Q1 2010, of nearly US$ 40 mln, it's in the tail -end of a capex programme, at its Pennsylvania factory, that still requires up to US$ 20 mln if efficiency targets are to be fully met.

At the same time, Boston's founder Jim Koch is in the middle of a share buy-back programme, concerning the A-shares held by the company's public shareholders; that also requires funding.

An obvious option for Boston, to fund accelerated growth, is debt capital. The company has an unused facility of US$ 50 mln at its disposal, and possible could raise a significantly larger amount.

... strategic alliance with bigger group an alternative ... Another route, that could provide not only capital but also extra volume on day 1 and a broader portfolio development approach, would be to form an alliance with a premium imported beer player.

... Sapporo a candidate ...Arguably Sapporo is best placed to be that partner. Not only does it have a stated strategy of making an M&A move in the US, but also its current annual growth rate in that market is over 10%, so far higher than that of Boston.

In addition, given that the group's current market share is still only 0,1% in the US (source: Euromonitor), Boston's Jim Koch is likely to be in the driving seat in any tie-up with Sapporo.

Arguably that wouldn't be the case in an alliance with e.g. Heineken, which is larger than Samuel Adams in the US market.

Also it appears that Sapporo has limited ambitions, at least now, in its M&A in the US. The group's international head has ruled out the acquisition of a 'top brand' like Budweiser or Miller. So the scale of Boston might provide an ample fit.

... capacity needs might swing itThe ample fit could also apply to old-fashioned manufacturing capacity. Sapporo aims to double output in north America.

However its only factory in that region, Sleeman’s Brewery, Canada's no.3 brewer bought by the group in 2006, is running at almost full capacity.

Meanwhile Boston has two breweries, in Cincinnati and Pennsylvania. The latter, acquired by the company in 2008, has since absorbed over US$ 100 mln in capex, to improve efficiencies.

It's likely to be thirsting for a lot more capacity utilisation going forward.

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THIS LEAD'S VALUATION
Size (€ mln) 950
Sector brewing
Asset Quality US no.1 craft brand
Seller mid -cap plc
Buyer large plc
P/S 2,9
P/Ebitda 16,8
Type value estimate incl. net cash
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