Several big craft beer deals have gone down in 2022, from the sale of Stone Brewing to Sapporo, to Tilray’s recent acquisition of Montauk Brewing. Those transactions have one thing in common: investment bank Arlington Capital Advisors.
Arlington director Ryan Lake broke down the state of beverage alcohol M&A during the Brewbound Live business conference in Santa Monica, California.
Lake described beer distributor and spirits M&A as both “very active,” ready-to-drink (RTD) as “getting very active,” craft beer as “not dormant” but “not as active as it was four, five, six years ago,” and non-alcoholic beverages as picking up activity.
Zeroing in on craft beer, Lake said the market is more of a buyer’s market than before but “not fully a buyer’s market.”
“It’s still all about how does the buyer’s need fit the seller’s need,” he said. “Now more than ever, it’s really about what is the strategic fit between what the buyer is looking for in terms of scale or focus or geography or style or price point and how does that match what the seller needs to do for an exit for their shareholders or future growth, whatever their objective is.”
New buyers entering the bev-alc space, such as energy drink maker Monster acquiring CANarchy, and cannabis firm Tilray’s purchases of SweetWater, Green Flash, Alpine and now Montauk, only “validates the strength of this industry,” Lake said.
“Everyone’s looking to that next leg of revenue profit to add to their business, if you’re a strategic buyer,” he said. “Some of them, they have more runway in non-alc or cannabis, but they also feel like if they can add alcoholic beverage brands to their portfolio, it’s more growth than they would have otherwise.”
The scale and pedigree that a craft brewery would need to draw interest depends on a potential buyer’s needs, Lake said.
“The two deals that we did this year, both of the buyers had very different needs,” he said. “Sapporo was looking for scale. They were looking for production capabilities for their own brands as well as the brands that they were acquiring. And if you look at Montauk, they had a buyer that is looking to keep adding to their beverage platform in the U.S.”
Buyers are typically seeking growth and profitability, although the latter can depend on a potential acquirer’s specific needs, Lake continued.
“The best deals are the ones where you find that strategic, cultural fit, where the buyer needs what the seller has and vice versa,” he said. “And where the management teams also work together, where the employee culture works together. That’s when you get the win-win outcomes.”
Meanwhile, beer distribution is historically a business with stable cash flows although not high margins, Lake said. Those traits have a lot of buyers and investors wanting in, although demand outstrips supply.
“It’s a very investor-friendly segment and I think you’re going to see larger financial players get involved, you’re going to continue to see large existing distributors do cross-border deals in other states as these deals continue to get more sizable,” he said.
Reasons sellers are putting their businesses on the market include founders without generational successors, investors with a defined time horizon and sometimes opportunistic reasons, Lake said.
Lake said everyone is learning about strategics’ interest in acquiring fourth category producers versus creating their own brands in “real time.” Strategics across beer, spirits, wine and non-alcoholic beverages are “all weighing their options in regards to fourth category producers, deciding whether they acquire, invest, partner via a joint venture or licensing deal or extend their existing brands into fourth category offerings, Lake said.
“The [RTD] category itself, especially on the spirits-based side, is still so new, at least in the U.S., that a lot of the buyers are navigating how they feel about that,” he said. “Obviously, there’s risk and upside to doing M&A. There’s risk and upside and potentially downside to doing brand extensions to brands that you already own. You can overextend those brands and dilute the equity over time. So they’re all trying to navigate that dilemma now.”
Lake also shares his expectations for deal activity in 2023, as well as his thoughts on major soda and CPG firms’ interest in the bev-alc space, how Arlington’s partnership with Bump Williams Consulting for middle-tier M&A is developing, where EBITDA multiples are now, and much more in the video above.