Takeaways
- The coronavirus’ devastating impact on craft brewery taproom sales could be a factor driving uncertainty in Anheuser-Busch InBev SA’s, or ABI’s, acquisition of Craft Brew Alliance, or CBA.
- Whether ABI still views CBA’s craft brew business as attractive in the changed macro environment caused by the coronavirus crisis is a factor likely to affect the deal’s spread.
- The delay in the completion of CBA's new brewing facility in Hawaii also adds to the growing uncertainty surrounding the transaction. CBA would likely try to be cautious not to violate the merger agreement’s construction-related covenants as such violation could provide ABI legal grounds to walk away from the transaction.
- On questions related to antitrust, the DOJ is likely studying the impact, if any, of this transaction on CBA’s main on-island competitor, Maui Brewing Co., and other smaller Hawaiian craft breweries. However, the transaction per se does not lead to any new competitive risks.
The coronavirus’ devastating impact on craft brewery taproom sales could be a factor driving uncertainty in Anheuser-Busch InBev SA’s, or ABI’s, acquisition of Craft Brew Alliance, or CBA.
According to
surveys conducted by the Brewers Association, the coronavirus pandemic has resulted in the closure of taprooms across the country, and craft brewers have lost an average 65% of their onsite sales. Another
data point from the National Beer Wholesaler Association, or NBWA, reveals that craft sales plummeted in the month of April with the NBWA craft index at an all-time low of 14.
According to the company’s most recent
SEC filing, CBA began seeing the pandemic’s impact on its business in early March. “The impact was primarily visible in significantly reduced demand from the on-premise channel and the closure of our brewpubs for on-premise business,” the filing stated. The company has suspended investor conference calls and stopped providing forward-looking guidance pending the acquisition.
In this context, whether ABI still views CBA’s craft brew business as attractive in the changed macro environment post coronavirus is a factor likely to affect deal spread. It is worth noting that ABI dithered in acquiring the remaining 68.7% stake in CBA in August 2019 when ABI was faced with an Aug. 23 deadline to make an exclusive offer. The situation once again changed when ABI finally made a formal bid to acquire CBA in November.
CBA’s obligation to construct a new brewing facility in Hawaii under the merger agreement - and the delay in its construction - is another significant factor that could affect the deal closing. CBA’s brand new facility is being constructed in Kailua-Kona, Hawaii, and will bring on board an additional annual capacity of about 100,000 barrels.
According to section 6.1 (xvi) of the
merger agreement, CBA has covenanted “to use commercially reasonable efforts to complete the construction of the Kona Brewery” based on a schedule the company provided to ABI prior to the merger announcement.
However, according to Brett Jacobson, founder and CEO of Ola Brewing Co., which is also in Kailua-Kona, the brewery’s construction has not made much progress in recent months. In a conversation with Reorg, Jacobson said he doubted whether the brewery would be completed by summer. CBA still
maintains that it remains focused on “completing key initiatives such as the new Kona brewery.”
Since construction activity has slowed due to coronavirus-related shutdowns and shelter-at-home orders in place, the pace at which construction activity resumes after these orders are lifted will be an important factor in determining how well CBA is meeting its obligations under the merger agreement. CBA would likely try to be cautious not to violate the merger agreement’s construction-related covenants as such violation could provide ABI legal grounds to walk away from the transaction.
Although the coronavirus has devastated the craft brew industry and introduced an element of corporate risk to the transaction, the evolving industry picture for craft brewers may encourage ABI to continue to pursue the transaction.
For instance, there appears to be unanimity among craft brew industry players that the coronavirus crisis could leave a lasting impact on beer consumption patterns. Even after lockdown measures are lifted, taproom and on-site sales may not recover to levels seen prior to the crisis.
Such a development is expected to increase the industry’s focus, at least in the near-to-medium term, on packaging, distribution and off-premises sales channels to sustain and expand revenue streams. For ABI, CBA’s flagship Kona brand, along with the dozen craft brew brands that it already controls, positions the company well to navigate the new business environment. This could be especially true as smaller breweries, which lack the distribution and packaging scale that players like ABI possess, shut down in the face of taproom and on-site channels losing their relevance from a revenue standpoint. CBA
reported yesterday, Wednesday, May 6, that Kona shipments in the off-premises channel year-to-date were up 9%. The company also noted that despite industrywide on-premise closures, it was able to create value through distribution and retail partners as consumer behavior begins to shift to brands in larger pack sizes.
In addition to the business risks related to the merger, Reorg
reported previously that the DOJ could be closely studying the Hawaiian market for any anticompetitive issues. In the context of capacity and distribution channels, the DOJ’s investigation could focus on CBA’s flagship Hawaiian brand, Kona, and its competitor, Maui Brewing Co., a craft brewery based on Maui and Hawaii's largest craft brewer.
According to data from the Brewers Association, total beer production in Hawaii stood at 79,309 barrels in 2018. CBA’s Kona Brewing Co. accounted for about 10,000 to 12,000 barrels, whereas the state’s current leading producer, Maui Brewing Co., produced roughly 56,723 barrels in 2018.
For companies like Maui Brewing and other smaller craft brewers in Hawaii, CBA’s new brewery combined with ABI’s distribution strength poses a challenge to smaller competitors, especially when market players are looking to shift revenue streams from on-premises to off-premises channels.
However, the fact that CBA already has extensive
agreements with ABI for distribution of its craft beer on the U.S. mainland means the transaction per se creates no new competition issues. Merger-specific issues are likely to remain restricted to horizontal impacts on the Hawaiian market, if any, as ABI’s own craft brew brands combine with CBA’s Kona brand to compete against other local breweries.
Reorg’s previous coverage of this transaction can be found
HERE.
--Shrey Verma and Kathryn Haake