No Tears In M&A's Beer
June 30, 2009
Consumers may be cutting back on their spending, but Joe Six-pack, as his name implies, isn't about to give up his Yuengling lager.
Campari's $575 million deal to buy Wild Turkey from Pernod Ricard underscores how little consumers have cut back on their booze, but it takes a look at the company's recent sales growth to believe it. Wild Turkey, one of the more recognizable and inexpensive bourbon brands, retails for around $20 a bottle. Perhaps its cost is the reason that, as the global economy teetered last year, the brand watched its sales grow 6% to about $155 million.
The fact that recognizable, inexpensive brands can still sell has the potential to drive M&A in the beverage and spirits industries, industry watchers say.
"Consumers are trading down," said Perry DeLuca, spirits and beverage banker with Key Banc Capital Markets. But sin industries being what they are, DeLuca adds that even if they're choosing cheaper alternatives, "People continue to consume alcoholic beverages."
In fact, DeLuca cites that from 2001 to 2003—a significant albeit milder recession—consumption of alcoholic beverages actually rose.
The decision to sell, meanwhile, can be driven by factors other than performance, such as antitrust concerns or balance sheet issues. Pernod Ricard, following the Wild Turkey sale, is more than half way through its divestiture program, which is designed to pay down debt. Shortly following the deal, the company also arranged a rights offering to raise €1.03 billion of proceeds to secure redemption maturities and guarantee covenants.
Pernod's sale also reflects the relatively strong demand for name brands in the spirits market, as the company was able to fetch almost 12x Ebitda, according to analysts at research firm Banca IMI. It's not the 21.5x Ebitda multiple Pernod paid for Absolut maker V&S Wine & Spirits last year, an $8.9 billion deal, but it certainly represents a rich valuation for today's market.
Anheuser Busch-InBev, meanwhile, was forced to divest its Labatt brands as a condition to meet antitrust requirements, and in the last week of April, AB-InBev divested a 19.9% stake in Tsingtao Brewery, selling the minority stake to rival Japanese brewer Asahi Breweries for $667 million. As of press time, the company was also reportedly weighing a sale of Rolling Rock.
When it comes to beer, private equity seems to have taken the upper hand. Kohlberg Kravis Roberts, for instance, acquired InBev's South Korean beer assets, while KPS Capital Partners was the buyer of the Labatt USA assets. For KPS, the Labatt purchase was part of a bigger play. The firm created North American Breweries this past winter to house Dundee ales maker High Falls Brewery and the rights to Seagram's Cooler Escapes and Smooth brands, acquired from Pernod Ricard.
"Almost every seller is a distressed seller," KPS Capital Partner Raquel Palmer said, alluding to the need for some of the bigger players to sell due to balance sheet concerns.
Palmer adds that KPS would not be likely to integrate liquor or wine brands alongside its growing brewery stable. Her rationale is that, at least in the U.S., "Beer will always be an affordable luxury."
The smaller players in the domestic market may also benefit from the consolidation at the top of the food chain. The AB InBev merger, for instance, resulted in a more-than $50 billion debt load, which will weigh on the company, while Molson Coors has passed along price increases while it cuts costs.
According to Palmer, microbreweries enjoy relatively little overhead in contrast. The play for investors, however, will be to work with the companies' distribution chains to make them more efficient.
Strategics, meanwhile, seem to be less of a factor. While Campari's acquisition of Wild Turkey might serve as an exception, many of the same spirit companies and brewers that were active acquirers in recent memory have since shifted gears to take a far more conservative approach. LOTTE Group, for instance, had initially pursued the AB InBev North Korean assets, Oriental Brewery, but the conglomerate couldn't keep pace with the PE bidders and ultimately dropped out of the bidding.The company had paid $383 million for Doosan Corp.'s liquor business earlier this year.
Alternatively, the trend among strategics is to sell, as evidenced by the sale efforts of AB InBev and Pernod Ricard.
Meanwhile, it's not just the beer and spirits market that is marked by assets changing hands. DeLuca notes that in the US, the winemaking industry is seeing some M&A action as well. "It's not a flood," he said, "but people are considering strategic options."
Overseas, the markets were abuzz in April about a rumored effort by Diageo to make a bid for LVMH's Moet Hennessy arm. However, the deals that are actually taking place are being driven primarily by generational changes, and industry pros anticipate distress—as winemaking is a very capital intensive business—could drive future deals.
Private equity has already made plays to buy wineries. GESD Capital, a San Francisco PE shop, bought Ascentia Wine Estates and GI Partners, another private investment firm, bought Duckhorn Winery.
This is not to say that PE has been able to elbow aside strategics with the ease they have enjoyed as of late at the keg taps. Foley Wine Group, which holds a portfolio of vineyards, bought Sebastiani Vineyards and Winery and Chateau St. Michelle, the Washington-based winery, recently bought Stag's Leap Wine Cellars.
"The reasons for each of these deals were different," DeLuca said, noting that none were distressed transactions. "Larger strategic buyers are looking to make opportunistic acquisitions. We still have not seen too many distressed sales, though that may change over the next few months."
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