Washington-based craft distiller Heritage Distilling announced this week its plans to merge with Better World Acquisition, a special purpose acquisition company (SPAC), to go public in a transaction that has a pro forma enterprise value of over $122 million. If completed, the merger will make Heritage one of the only publicly traded pure-play craft distilleries, a move that the company’s founders said will allow it to maintain its independence as it expands distribution and creates a unique network of distilleries on tribal land.
What is the Agreement?
The deal, expected to close in Q2 2023, will create a new parent company,Heritage Distilling Group, to be listed on the Nasdaq exchange under the ticker symbol “CASK”.
The combined company will have $44 million in gross cash proceeds from Better World’s trust account, after any redemptions and payment of transactions expenses and other liabilities. Terms call for $77.5 million in shares to be released to Heritage equity holders. The current security holders of Heritage will own approximately 47% of the issued and outstanding shares, assuming no redemptions by Better World’s public stockholders.
The deal comes as interests in SPACs have waned since a spike in popularity at the start of the pandemic, when prominent entities began looking to the investment vehicles— sometimes called “blank check companies”— as a faster and easier way of going public. While market conditions and regulatory scrutiny have cooled the SPAC boom, both parties highlighted the transaction’s Contingent Value Right (CVR) structure—rights stipulating that a shareholder will receive certain benefits if a specific performance event is met in a specified time frame. Heritage and Better World are contributing into a CVR escrow an aggregate of the equivalent of 4 million shares of the merged company’s common stock and RSUs that will settle into shares of common stock, providing Better World’s nonredeeming stockholders with downside protection.
The merger will help drive Heritage’s plans to expand distribution from the Pacific Northwest to nationwide markets. That growth includes developing a network of tribal distilleries in partnership with the Heritage brand. The Tribal Beverage Network, founded by Heritage, works with Native American tribes to build Heritage-branded distilleries and tasting rooms, and advise tribes on developing their own spirit lines.
That mission lined up with Better World’s interest in investing in a differentiated growth business with strong environmental, social and governance (ESG) credentials, according to Rosemary Ripley, chief executive officer of Better World, who will join the company’s board of directors.
“Heritage exemplifies our commitment to support remarkable leaders building a profitable company with a strong social and environmental mission,” she said. “While furthering the economic empowerment of Native American communities, Heritage has developed a unique, capital-light business model with recurring revenue.”
Who is Heritage Distilling?
Founded a decade ago, Heritage Distilling is now one of the largest independent craft distilleries on the West Coast. The company has six tasting rooms in Washington and Oregon, offering whiskey, vodka, gin, rum aquavit, and a line of canned cocktails. The husband and wife team of Justin and Jennifer Stiefel most recently launched a new line of single barrel whiskeys and a flavored vodka in partnership with celebrity chef Danielle Kartes.
The founders have also had a hand in spearheading the legalization of distilled spirits on tribal lands, which up until 2018 was banned. Justin Stiefel, co-founder and chief executive officer of Heritage, worked in collaboration with the Chehalis tribe in Washington to overturn the 184-year-old Federal law. Since then, distilleries have been slowly popping up at reservations around the country.
“The other part of our growth strategy is taking our model and partnering with tribes to work with them to create their own production facilities of different sizes and Heritage-branded tasting rooms with the full customer experience,” he said.
Those partnerships provide tribes with the model for Heritage’s operations, production, retail and cask membership programs. By offering tribes a quick runway into the spirits market, the founders hope it provides an economic channel that can be incorporated into casinos and other entertainment properties. The company currently has five deals in development. Stiefel is also looking towards leveraging the network of distilleries to leverage Heritage’s distribution in new regions.
“The two work together, the distribution and then the partnership with the tribes who are going to capture a tremendous amount of margin, it’s a really beneficial economic model,” he said.
Why Go Public?
With its sights on a robust distillery network and national distribution, Heritage Distillery’s founders highlighted the need for independence and access to capital markets— a combination that wouldn’t necessarily come easy if the craft brand was to partner with a larger spirits company in order to expand.
“What we are building is a complicated widget. Especially with the tribes as part of that partnership plan, if you’re a big global spirits company, you may look at the tribal part of the model and not really appreciate it,” said Stiefel.
Stiefel, who prior to spirits worked as a lawyer, engineer, and held several positions in the U.S. Senate, is bullish on tribes’ potential as economic engines.
“More of corporate America should be partnering with tribes, they should be thinking about how to reposition their company to partner with the tribes in any way possible,” he said.
The transparency as a publicly traded company gives the distillery more credibility when approaching tribes, he added.
The merger will also bring Ripley of Better World into the fold, who will provide expertise from companies such as Kraft Foods, Miller Brewing, Philip Morris, Heineken NV, as well as private equity and M&A experience.
A New Model?
With craft spirits set to outperform the mainstream market in the next few years, Heritage Distillery is the first craft spirit company to go public via a SPAC transaction, but Stiefel thinks it may be setting an example. With craft distillers riding the overall category’s rise in market share, Stiefel predicts that other craft distillers are going to look at new options to take their companies to the next level.
As of August 2022, the number of active U.S. craft distillers was up to 2,687, growing by 17% annually. By 2025, craft spirits are forecasted to increase their volume market share to nearly 10%, and over 13% in market share value, according to IWSR data. Acquisitions by larger groups may help drive that growth as they expand craft brands’ distribution.
“But I think more companies will have to look at the public market as their way to get to the next stage of growth and get that capital,” said Stiefel.
Much of the draw for Ripley, however, was the differentiated model in which distillation hubs will be financed by tribes who can take advantage of tax incentives and create new retail channels.
“Heritage has strong potential to be able to become a national craft spirits producer,” she said. “But by virtue of having hubs it will also still be distilled locally.”