in a large number of transactions
across a wide spectrum of industries
Michigan-based Short’s Brewing said today it would sell a 20 percent equity stake to Lagunitas U.S. Holdings (LUSH), a wholly owned subsidiary of Heineken International.
A sale price was not disclosed, but brewery partner Scott Newman-Bale, who spoke to Brewbound following the announcement, said the multiple exceeded 15X EBITDA (earnings before interest, taxes, debt and amortization).
The transaction is subject to state regulatory approvals, and Newman-Bale said he expects it to close this quarter.
Short’s, which is ranked by industry trade group the Brewers Association (BA) as the 65th largest regional brewing company in the U.S., produced more than 45,000 barrels of beer in 2016. The company generated $17 million in revenue last year, according to Newman-Bale, who added that 25 percent of the company’s business occurs at its 400-plus seat Bellaire brewpub.
Speculation about a possible deal with Lagunitas began brewing in March, when a Reddit user posted the following thread on the online message board: “Heineken to purchase craft brewer Short’s Brewing.”
At the time, Newman-Bale told Michigan Live that Short’s had “not agreed” to a deal, despite being approached by numerous buyers.
Newman-Bale told Brewbound that conversations with Lagunitas actually began last summer, when the Petaluma, Calif.-based brewery was only 50 percent owned by Heineken. In May, when Lagunitas announced that Heineken would purchase the remaining 50 percent stake, the deal was briefly put on hold, he added.
“We wanted to be sure that we wouldn’t be controlled by Heineken, so we took some time to become comfortable with the new reality,” he said.
Once it became clear to Short’s partners that a minority sale would still allow the company to “control their own destiny,” and be free of “control from outside parties, including Heineken,” Short’s agreed to partner with Lagunitas, Newman-Bale told Brewbound.
Under the terms of the deal, Lagunitas will receive a seat on the Michigan brewery’s five-person board of directors. In addition to Newman-Bale, the other three board members include Short’s Brewing founder Joe Short, brewmaster Tony Hansen and director of quality Tyler Glaze.
Short, Newman-Bale, Hansen and Glaze will remain part owners in the business. Prior to the sale, Short owned about 74 percent of the company while Newman-Bale owned 18 percent.
Newman-Bale said he now owns 15 percent of the company. The other partners’ current equity positions were not disclosed, however, a portion of the proceeds from the sale will be used for liquidity, Newman-Bale added.
Lagunitas’ investment will also be used to fund future expansion projects.
“We are struggling to make enough beer for our existing markets,” Newman-Bale said. “We only have two or three days of inventory in our distribution channel.”
That wasn’t always the case, however. Last January, citing a desire to fill excess capacity, Short’s, which also makes and markets the Starcut Cider brand, expanded distribution outside of its home state for the first time in 12 years.
Now, in an effort to fulfill increased demand for its products outside of Michigan, Short’s is considering the purchase of a larger brewhouse and new fermentation tanks, Newman-Bale said.
That extra capacity will be critical, as Short’s has agreed to achieve “modest” growth requirements, according to Newman-Bale, who noted that Lagunitas could eventually acquire an additional stake in the company.
“There are certain things that would have to happen,” he explained. “The intent is that if everything goes according to plan, it is a perpetual minority stake. They are not looking to take us over, and we are not looking to sell.”
Short’s is currently operating at 100 percent capacity and expects to produce as much as 55,000 barrels of beer this year. With various equipment and infrastructure improvements, the company could expand capacity to about 75,000 barrels.
In explaining what drove Short’s to consider selling a minority stake, Newman-Bale pointed to changes within an industry that has become increasingly more competitive at a time when growth has slowed to single digits. In Michigan alone, there were 338 active microbrewery, brewpub and brewery licenses as of July 3, according to the Michigan Department of Licensing and Regulatory Affairs.
“We know the industry is changing,” Newman-Bale said. “We are seeing increased brewery closures and we’ve seen a number of breweries – including relatively large breweries, like Speakeasy – go bankrupt. They owed their bank a lot of money, and when banks get burned, they start to pay more attention to the category since the perceived risk for all of their loans is higher.”
In an interview with Brewbound, Craig Farlie, the managing director at Farlie Turner & Co. — which recently advised The Bruery on its sale to Castanea Partners and has worked with Storied Craft Breweries as well Fireman Capital Partners on their purchases of Deep Ellum and Cigar City Brewing — characterized the current craft climate as “nuanced” and said a “rising tide is not lifting all boats anymore.”
“There are more potential sellers than buyers,” he said. “There are not hundreds of buyers, and not every brand is going to find a partner.”
Nevertheless, five other craft-focused companies based in Michigan have struck deals with strategic and private equity investors in the last three years. Most notably, Founders Brewing sold a 30 percent stake to Mahou San Miguel at the end of 2014, and Perrin Brewing sold to Oskar Blues Holding Company in March 2015. Other Michigan-based deals include New Holland’s marketing and distribution agreement with Pabst in 2016 and Arbor Brewing’s sale to Farm + Ferment earlier this year. Also in 2015, HopCat, a chain of craft-centric bars and brewpubs, secured $25 million from Congruent Investment Partners and Main Street Capital Corporation.
“The buyers are being much more selective now, and they are really looking for quality growth opportunities in a market where growth has become unevenly distributed,” Farlie said.
Much of the growth within the craft segment has gone to smaller players, such as Short’s Brewing, which will retain its status as an independent craft brewer despite Lagunitas’ ties to Heineken.
According to the BA, Lagunitas is not technically considered to be a craft brewer because it is more than 25 percent owned by an alcohol industry group that produces more than 6 million barrels of beer annually. Short’s, however, is still considered to be a craft brewer because it has not exceeded the BA’s arbitrary 25 percent threshold.
“We had plenty of suitors, but none that we felt great about, and our final deliberations really came down to the only one [Lagunitas] that we thought would allow us to continue doing what we were doing as an independent brewer,” Newman-Bale said. “We took less money and did a very small deal to make sure that we didn’t lose that.”
Lagunitas, via LUSH, also has investments in Santa Rosa, Calif.-based Moonlight Brewing Co., Austin, Texas-based Independence Brewing Co. and Southend Brewery and Smokehouse in Charleston, S.C.
Arlington Capital acted as the advisor to Short’s Brewing. The firm has also represented Stone Brewing, BrewDog, Dogfish Head, Victory Brewing, Sweetwater Brewing, Cigar City and Abita in transactions with various private equity groups.