Despite a long career in the beer distribution business, Keith Klopcic lacked expertise in making the beverages he sold to bars and retailers around the state of Michigan.
So when the opportunity arose to buy Comstock Park-based Perrin Brewing Co. last year, he tapped a partner with extensive craft brewing resources who had the know-how to help him continue scaling up the business.
Buying out founder Randy Perrin last March helped “infuse some passion” back into the team at Perrin Brewing, which had been in a “holding pattern” as the former owner explored an exit, said Klopcic, who worked with Oskar Blues Brewery LLC of Longmont, Colo. and Waltham, Mass.-based Fireman Capital on the deal.
The team got more excited as the brewery quickly scaled up its canning line and started distributing canned beers such as Perrin Black, Perrin Gold and 98 Problems IPA, first in the greater Grand Rapids area and then across West Michigan, Klopcic said.
With a new distribution deal in place as of Jan. 18, the company’s cans are now sold across the entire Lower Peninsula.
“People ask me quite often, if I could do it again, would I do it on my own. That’s what the original plan was,” said Klopcic, who previously owned a stake in West Side Beer Distributing with his brother, Don. “But the answer is no. It worked so much better because of the expertise they brought to the table.”
The deal for Perrin Brewing was a local example of the dealmaking in the frothy $19.6 billion craft beverage sector last year. Industry watchers expect the pace of deals to persist as international breweries continue to bolt on smaller producers and as private equity firms chase prospects in a sexy, high-margin industry.
Nationwide, 2015 was a year for mega-deals involving craft breweries, with Petaluma, Calif.-based Lagunitas Brewing Co. selling 50 percent of the business to Dutch brewery Heineken N.V. in a transaction that reportedly valued the company at $1 billion. Coincidentally, $1 billion was the price that international alcoholic beverage producer and marketer Constellation Brands Inc. (NYSE: STZ) of Victor, N.Y. paid to acquire San Diego-based Ballast Point Brewing & Spirits Co.
Macro-brewer conglomerate Anheuser Busch-InBev SA/NV also continued its craft brewery buying spree in 2015, gobbling up Colorado-based Breckenridge Brewery LLC, Arizona-based Four Peaks Brewing Co., Golden Road Brewing of Los Angeles and Seattle-based Elysian Brewing Co.
The first craft brewery AB InBev ever purchased back in 2011, Goose Island Beer Co. of Chicago, also got in on the dealmaking last year with the acquisition of the struggling Virtue Cider Co. of Fennville, Mich. For Virtue founder Greg Hall, Goose Island was a familiar operator: It was his family who sold the brewery to Anheuser Busch four years earlier for a reported $38 million.
MORE MICHIGAN DEALS AHEAD?
The Perrin and Virtue Cider deals signal a growing interest in Michigan’s craft beverage scene, according to industry watchers.
“I’m sure everyone is looking at Michigan,” said Joe Infante, principal at Miller, Canfield, Paddock and Stone PLC in Grand Rapids and chair of the firm’s alcoholic beverage regulation team. “It will be another interesting year for acquisitions — and there are some out there.”
In particular, Infante expects to see more deals this year that are similar in structure to the 2014 Founders Brewing Co. sale of a 30-percent stake to Mahou-San Miguel Group, a family-owned Spanish brewer. He thinks those minority acquisitions could involve other breweries or private equity firms, as was the case with Milton, Del.-based Dogfish Head Craft Brewery, which sold a 15-percent stake to LNK Partners of New York City in September.
“For the breweries, they can say, ‘We’re not selling out, and it gives us money to grow our business,’” he said.
For its part, Mahou-San Miguel could be looking to increase its holdings in the ––U.S. craft beer market, according to a December report in Bloomberg Business. The company was said to be considering investing as much as $300 million to buy a minority stake in San Francisco-based Anchor Brewers & Distillers.
Other international brewers are also active in seeking opportunities among U.S. craft breweries. For example, Belgium-based brewer Duvel Mortgaat NV acquired Firestone Walker Brewing Co. of Paso Robles, Calif. for a reported $250 million. Duvel already owned Kansas City, Mo.-based Boulevard Brewing Co. and Brewery Ommegang of Cooperstown, N.Y.
In the short term, attorney Infante expects the deals to remain focused on allowing larger breweries to pick up craft producers that fill geographic gaps in their brand portfolios.
“It’s going to stay (geographically) focused for a while, and then all bets are off,” Infante said. “The numbers they’re paying are astronomical. How does Ballast Point go for $1 billion? With people paying that kind of money, of course they’re going to sell.”
However, Infante believes the deals do have a certain size threshold on the lower end because buyers want to see a strong brand and a regional distribution footprint.
“The small, local breweries are not going to get bought up,” he said, adding the “sweet spot” for an international brewer to consider a deal seems to be in the 20,000-barrel to 40,000-barrel range.
The Fireman Capital-backed deal for Perrin Brewing marked the first time a private equity firm publicly got involved in the craft brewing industry in Michigan, although the sector has been active in deals nationwide.
Full Sail Brewing Co. of Hood River, Ore. and Louisiana-based Abita Brewing Co. were among the other craft beer producers involved in private equity-backed deals last year.
“We’ve heard of some PE firms looking,” said Ian Kennedy, partner at Warner Norcross & Judd LLP in Kalamazoo who heads the firm’s craft beverage group. “I think we could get some PE firms (buying breweries in Michigan) because of their own desire to enter the industry.”
It’s an option that Klopcic says has worked out well for Perrin, particularly because it was coupled with an experienced brewery operator in Oskar Blues.
Perrin Brewing continues to be an autonomous operation run by Klopcic and the team in Comstock Park, but the relationship with Oskar Blues helped the company purchase its canning line and get it running immediately after the deal.
“We’re so much farther ahead this way. We’re light years ahead of where we would have been versus if I had to do it on my own,” Klopcic said. “Their level of expertise is invaluable.”
In a November interview with MarketWatch, Oskar Blues founder Dale Katechis called the Perrin deal “a f***in’ grand slam.” By helping Perrin move into canning — it previously had only sold its products on draft — the partners expected they could double the cash flow and the business within the first 12 months, but the performance to date has outpaced their expectations.
“The day we closed, we turned the can line on and we already doubled cash flow in the first three months. On a trailing 12 months, it looks like we can triple cash flow on a business that’s growing exponentially and is operating as its own thing,” Katechis told MarketWatch. “It doesn’t feel like Oskar Blues; it’s its own thing. Keith runs it, and he and I have a great partnership. It’s fulfilling to see that happen and be an arm of what we’re doing.”
Perrin Brewing forecasts production to reach 27,000 barrels in 2016, up from actual production of 14,000 barrels last year, and expects growth to continue ramping up as its canned beer gains more of a presence statewide. However, Klopcic said he doesn’t worry about finding capital to expand any time soon.
“We’re in great shape between my investment and Oskar Blues and Fireman as our bank,” Klopcic said. “I don’t want to say (our access to capital) is unlimited, but we should be good for the next four to five years.”
For those breweries that lack ample financial backing, many have to take on investors willing to provide debt financing to fund their growth, particularly as traditional lenders remain wary of producers without a track record of success, said Infante of Miller Canfield, who noted a few companies are also doing equity deals.
“Debt is much easier, but sometimes you need to do a combination of both (debt and equity),” he said. “For some of the banks, they say if you bring on $200,000 in investors, then we’ll give you $300,000 on top of that.”
M&A AS SUCCESSION PLANNING?
Whether because of the challenges in accessing capital or the need to realize some return on investment for the current crop of craft brewery owners and investors, the elevated level of acquisitions could continue in the coming years, according to industry observers.
Succession planning also comes into play, as it did in the Founders Brewing deal.
“The primary priority for us was legacy,” Founders CEO Mike Stevens told MiBiz in an October interview reflecting on the deal with Mahou-San Miguel. “For us it was legacy, synergy and liquidity in that order. With legacy, we were driven by this concern to protect our brand. We do want our brand to outlive us. We would love to see our kids work at the brewery some day and create this multigenerational brewery.
“I knew if we timed it right and played it right, we would be in charge of designing our brands’ future, whereas if we waited and those opportunities were gone, we could have still done a deal, but we wouldn’t have been in charge of designing it — someone else would have done it.”
And after struggling for years and skirting bankruptcy twice, Stevens said he and co-founder Dave Engbers welcomed the ability to take some chips off the table and pay back their patient investors.
“It felt good to know that we crossed over some type of finish line and it was OK to take some money off the table and say thanks to all the investors and especially to our families,” Stevens said.
The need for succession planning as brewery owners age and approach retirement has attorney Kennedy wondering when a wave of acquisitions among like-sized craft beer companies could take shape.
“It seems logical,” Kennedy said. “But that being said, there is a strong independent streak in this industry.”