BELLAIRE — After months of speculation and rumors, Short’s Brewing Co. said today that it plans to sell a 20-percent equity stake to an affiliate of Dutch brewer Heineken International.
The deal with Petaluma, Calif.-based Lagunitas Brewing Co., a wholly-owned subsidiary of Heineken, will allow the Bellaire-based brewery to alleviate capacity constraints and continue to grow its business, Scott Newman-Bale, a partner at Short’s, said in an exclusive interview with MiBiz. The transaction, which has not yet closed, hinges on state regulatory approval.
“Right now, we’re running at 100-percent capacity, 24 hours a day, seven days a week,” Newman-Bale told MiBiz. “We’re at a point where we need to do an expansion and we’re doing expansions, but we’re kind of at a dangerous point where we are at capacity.
“Beer is going from production line to shelf within a week. We have two or three days of inventory at our distributor. We know we need to make some investments and the market is going to be challenging.”
Newman-Bale cited the fierce competition that regional breweries face as the rationale Short’s used in deciding to take an opportunity to secure an injection of capital in the business going forward.
Namely, Short’s and other regional brewers are up against large conglomerate brewers that have more resources and smaller local breweries that resonate in their individual markets. That’s translated into market challenges for regional brewers, which grew less than 1 percent year-over-year, according to data on the overall $23.5 billion craft brewing industry presented by the Brewers Association earlier this year.
“I think you have to look at the market reality where you’ve got large brewers squeezing from the top and you have, in Michigan, over 400 breweries squeezing from the bottom,” Newman-Bale said.
Nationwide, 5,301 breweries operated during 2016, of which 5,234 were independently owned craft breweries as defined by the Brewers Association. That’s up from 4,225 craft breweries in 2015.
Importantly, the investment will allow Short’s to take more risks with new projects and programs, without as much fear that it will jeopardize its business, he added.
“We have almost 200 employees now and a lot of families relying on us,” Newman-Bale said. “I think (the investment) allows us to basically go outside the box, like we’ve always done, but it allows us to push those boundaries without any fear of failure because if it fails, so what — it’s OK. We can push the limits. We’re not going to go insane, but there’s a risk-reward in everything and we want to take big risks. Obviously, having a little insurance behind that is very nice.”
The brewery is on track to brew between 52,000 and 55,000 barrels of beer in 2017. The company sold 34,457 barrels of beer in its home state in 2016, according to Michigan Liquor Control Commission data.
HOT DEAL CLIMATE
Under the terms of the agreement, Lagunitas will not have a say in day-to-day operations or dictate which suppliers and distributors the brewery uses, Newman-Bale said. Lagunitas will have one voting member on Short’s five-person board, but that member will not have veto power.
Newman-Bale declined to disclose further specifics of the deal, including the purchase price. He did reveal that the Lagunitas offer fell on the lower end of offers Short’s received from other companies, including large breweries and other investment firms.
However, he acknowledged the brewery sold the equity stake for a multiple equivalent to other deals in the industry.
Industry multiples have hovered between 10 times to 15 times earnings before interest, taxes, depreciation and amortization (EBITDA), but have reached as high as 20 times EBITDA in recent years, according to Brandon Finnie, managing director of Hungerford Valuation, a Grand Rapids-based firm that advises brewery owners on financial transactions and other matters.
“These premium multiples are influenced by the brewery’s existing infrastructure and distribution footprint, and most importantly, the prospects for future growth,” Finnie wrote in an email to MiBiz, noting he was speaking in generalities, not specifically to any one deal.
For Joe Infante, the head of the alcoholic beverage regulation team at Grand Rapids-based Miller, Canfield, Paddock and Stone PLC, the Short’s deal represents one of many more deals to come in 2017.
“2017 is the year of the deal,” Infante said of the craft beverage industry. “I said it in January that this is going to be the biggest year in deals we’ve seen in the craft beer industry.”
Earlier this year, multinational brewer Anheuser-Busch InBev acquired Asheville, N.C.-based Wicked Weed Brewing in a transaction that drew criticism from many independent craft brewers and craft-minded consumers.
“The Wicked Weed deal started it all,” Infante said. “That was an earthquake in the industry and Short’s is going to be the same thing.”
FINDING A PARTNER
Lagunitas was one of many suitors for Short’s, which has fended off a constant stream of offers for years, Newman-Bale said.
While many of the brewery’s other suitors were obviously concerned about money, Lagunitas was the only company to fully embrace Short’s eccentricities and collaborate with it in creative ways, according to Newman-Bale.
For example, many other companies offering to invest in Short’s challenged its affinity for displays, which can often cost upwards of $20,000 in labor to build. They also didn’t buy into Short’s rationale in deciding to bottle and ship its Psychedelic Cat Grass beer to customers on the same day — a move which ultimately cost the company money.
“Everyone else was talking about how stupid things like that are, and they (the executives at Lagunitas) were saying this is fantastic, tell us how you do this. (They) kind of got their hands dirty,” Newman-Bale said. “They embraced our creative side, whereas everyone else was just like, ‘That’s stupid, you need to stop doing that because it costs money.’”
In Lagunitas, Short’s found a partner that’s known for its share of creativity and off-the-wall philosophies, many of which stem back to eccentric founder Tony Magee, a Chicago native, avowed marijuana enthusiast and musician.
After touting Lagunitas’ independent status for years, Magee sold 50 percent of the brewery to Amsterdam-based Heineken in 2015 in a deal that valued the company at $1 billion, according to a report at the time by the Santa Rosa Press Democrat. The partnership accelerated Lagunitas’ global market expansion.
After the transaction, Lagunitas in 2016 announced an affiliate — Lagunitas U.S. Holdings (LUSH) — had acquired stakes in Santa Rosa, Calif.-based Moonlight Brewing Co., Austin, Texas-based Independence Brewing Co. and Southend Brewery and Smokehouse in Charleston, S.C. At the time, the company said it made the investments separate from its deal with Heineken.
In May of this year, Heineken International acquired the remaining half of the company, with Magee staying on as executive chairman and serving in an advisory capacity to the Dutch company’s executive team on its global and local craft strategy.
Joe Short started Short’s Brewing in 2004 in the Antrim County town of Bellaire, located about 40 miles northeast of Traverse City. In 2009, the company added a second production facility in Elk Rapids, where it also opened a taproom earlier this year. Additionally, Short’s expanded into cider production in 2015 with the launch of its Starcut Cider brand.
Throughout the bulk of its existence, the company sold its products entirely within the state of Michigan, with its philosophy outlined as “Michigan only. Michigan forever.” on its packaging.
That all changed in January 2016 when the brewery expanded to out-of-state markets, including Pennsylvania, Illinois, Indiana, Ohio and Wisconsin. (Starcut also distributes ciders in Colorado.)
Although the shift to distributing outside of Michigan rattled some longtime customers, the company “owned” the change in philosophy, chalking it up to a necessary move to grow, Newman-Bale said.
In that way, Newman-Bale is prepared to deal with the inevitable wave of questions and backlash once news spreads about the looming deal with Lagunitas.
“I think at first you’re going to see a lot of (people saying) ‘sellout,’ but you can never judge anything until you see what happens and you see what people do,” Newman-Bale said. “I’m confident that people will see that and see the intentions of what we’re going to do. Hopefully, we’ll make it so people will understand why we did it.”
The structure of the Lagunitas deal also would allow Short’s to adhere to the influential Brewers Association’s definition of a “craft brewery,” which mandates that companies must be independent, meaning that less than 25 percent of the producer can be owned by another alcoholic beverage company “that is not itself a craft brewer.”
In the meantime, Newman-Bale and the rest of the brewery executive team intend to answer questions from customers and remain as transparent as possible.
“Me and Joe are still going to be here running the show and doing stupid things and talking to anyone who wants to talk about it,” Newman-Bale said. “I get texts and messages and I respond to them all and that won’t change. … I’m expecting some heated texts, and that’s fine. I’ll happily take them because I think this is good for everyone.”
— MiBiz Editor Joe Boomgaard contributed to this report.