Glenboden M & A Originations

Brick Brewing is better left off the craft beer M&A radar

Priority Rating priority rating 4
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Origination Status proprietory origination, April 2014
Asset Brick Brewing Co. Limited (Canada), no.1 independent regional brewer in Ontario
Buyer candidates include MillerCoors (Tenth and Blake subsidiary)
Seller founders and public shareholders of Brick Brewing
Buyer Rationale build stable of regional brands, growth of craft beer segment
Seller Rationale acceptable valuation
NBs only 5% of Brick's volume sales are currently in the premium craft segment ('Waterloo' brand)
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Fast-growing craft regional is the big story in developed world beer M&A these days, as Glenboden amongst others predicted. However a player like Brick Brewing demonstrates that, when you scratch beneath the surface, there's a key difference between M&A -good craft, and M&A -doubtful regional, in the beer industry.

Financial performance is misleading ...Brick is a company that's consistently delivered sales growth above the level of the Canadian beer market in total, as well as a double-digit EBITDA margin (see profile). That's rarely the case with craft beer producers in developed markets.

So in strict financial terms Brick might be an attractive acquisition candidate. However a closer look at the numbers shows that only 5% of sales volume is genuine premium craft beer (relatively new 'Wellington' brand). 60% is 'Laker' beer, which is in the value segment; another 30% is co-packing sales.

Brick's profitability formula? Most of its sales are in its local, Ontario region. Thanks to that its selling, marketing and admin costs are relatively low, at about 20% of sales revenue. So it's a regional, not a craft, player.

... it's about having a differentiated craft product ...Brick's model is based on sponsorship of local events, community organisations, festivals; on small-batch production and seasonal specialties; on having its own shop and sampling lounge.

The question is, how attractive is a regional beer producer, with Brick's model, from an M&A perspective ? That model is hard to sustain or replicate within large brewing groups, which most of all want a product whose sales they can multiply.

So, a beer major should be looking for a differentiated product, when assessing a 'craft' candidate, not for regionality. Take AB InBev's recent purchase of Blue Point Brewing. It's also regional, based in Long Island, but at least 50% of its sales are genuinely craft, under its 'Toasted Lager' brand.

... unless you're constructing a patchwork of regional brandsAn alternative M&A strategy is to build a network of regional brands. That involves a de-centralised model in terms of product development and marketing, to retain what's good in companies like Brick, but with centralisation of financial control and of course distribution.

That M&A model is however hard to execute, even at the transaction level let alone integration one, because of differences in valuation that plague 'marriage of equals' -type M&A situations. The seller claims to offer craft, but the buyer is paying for less-valuable regional (see valuation).

Glenboden has experience in this type of 'regional play' in its own back-yard of Poland - Ciechan and Gontyniec are both pursuing that route, with mixed success so far. Another example, which might be a buyer for Brick, is Tenth and Blake, the craft & import division of MillerCoors in the US.

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Size (€ mln) 35
Sector brewing
Asset Quality Canada craft regional
Seller small plc
Buyer division of large plc
P/S 1,4
P/Ebitda 12,0
Type enterprise value estimate
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