The Gist: Constellation Brands, a global wine supplier and owner of U.S. distribution rights for brands like Corona, Modelo, and Pacifico, has agreed to purchase craft beer & spirit supplier Ballast Point. The deal is reported at a price of $1 billion and is expected to close by year end (pending regulatory approvals).
[Editor's note: Nate Micklos was the brand manager for Pacifico during the ABI/Grupo Modelo deal, and will use that scenario as a benchmark for many of the implications and potential consequences here. — Michael Kiser]
Why It Matters: In a recent stretch where Lagunitas struck a $500 Million deal with Heineken, AB-InBev and SABMiller agreed to an extraordinary global merger, and Ballast Point filed for an IPO, more news shook the industry today with Constellation’s announcement that it will purchase Ballast Point for $1 Billion. This announcement is significant, not only because of the unprecedented price tag in this segment, but because it introduces another major player into the craft segment. It could serve as the strongest catalyst yet for US beer M&A activity.
We recently covered the potential AB-InBev/SABMiller merger in great detail through the lens of a complicated deal between AB-InBev/Grupo Modelo/Constellation Brands that I experienced from the inside. That feature highlighted the dynamics of monopolies, divestitures, distribution, and DOJ impacts. In this Sightlines feature, we focus on a different set of considerations and potential implications.
To start, there is minimal risk of DOJ barriers given Ballast Point’s limited size within the context of American beer. Ballast Point isn’t even one of the largest craft breweries, let alone a player on the macro stage. The implications come less from the size (volume) of this acquisition, and more from who is purchasing (Constellation) and what it could mean to other players, from macro (MolsonCoors, Newco, etc) to larger craft (Deschutes, Stone, Sweetwater, Brooklyn, Founders, etc). By jumping head first into the craft segment with Ballast Point, coupled with the best-performing high end beer portfolio lead by Mexican imports, and a recent announcement to launch a craft beer with celebrity chef Rick Bayless, Constellation has loudly announced its growth ambitions. This gesture will undoubtedly be felt by other major players, and could lead to a proverbial “arms race” of sorts. No one on either end of the deals wants to get left out. Macro players have fully recognized the necessity to participate in the industry’s fastest growing segment, while many mid-size craft breweries have been (and will be) actively and aggressively pitching the value of their businesses in an effort to get ‘chosen’, before they get left behind.
It’s worth noting that several – if not most – craft breweries are not interested in external acquisition. Less than 1% of the nearly 4,000 breweries have been acquired or taken on private equity. Many have strong passions and values that will keep them from, as many call it, “selling out”. And that doesn’t mean they lack ambition or are ineffectively running their business; rather, it means they place more value on other aspects of their business, or that they think their long-term prospects are better without external involvement. But for many mid-sized breweries that stand on the brink of explosive growth at a national scale, the recent activity will certainly make them stop and think about the best and fastest way to get to the next level. And for smaller breweries just starting up, the dream end-goal may look much different now than it did for their predecessors. It’s possible this deal places a new sense of urgency on all players involved because it both raises their potential valuation, and increases their competition’s ability to win.
How did Ballast Point just file for an IPO, yet was bought so quickly thereafter? Ballast Point was likely evaluating a variety of options for their future. They could stay the course and grow “organically” through their internal cash flow, which as we reported in our recent feature on the brewery, was confidently in place. They could sell their business, or at least part of it, to a larger alc-bev manufacturer or private investment group. They could focus on striking a distribution agreement to help expand their footprint. Or they could launch the first craft IPO in recent times, which was their previously chosen path.
But it was likely the filing for an IPO that signaled Ballast Point's desire to secure new capital to drive growth. This demonstrated not only their ambition but also their confidence. It also triggered various investors to assess Ballast Point’s current/future financial position and place a valuation on the company. Large players like Constellation Brands are perpetually searching for new growth opportunities – wineries, breweries, international expansion, operational improvements, distributor contracts, and more. In this instance, Constellation’s valuation led them to conclude that Ballast Point’s growth potential was worth the eventual $1 billion price tag. And the diversity of their offerings — craft beer, spirits, and the upcoming ready-to-drink cocktails in a can — was likely attractive to Constellation specifically. Anyone watching the recent IRI data on Not Your Father’s Root Beer, which outsold Boston Lager in larger retail this year, is working hard to size up the massive opportunities adjacent to beer.
Although Ballast Point must have initially felt the IPO filing was their best option, they likely recognized the inherent risk in doing so. IPO risk is exponentially greater in a fast-moving acquisition environment because of the resulting market volatility. External forces can negatively impact the stock price, thereby halting future investment due to reduced cash flow. Unfavorable stock performance can also force companies to take reactionary measures such as pricing adjustments, formula/ingredient modifications, and distribution decisions. Regardless of how the market would have responded to Ballast Point over the next few years, it’s fair to speculate that they have de-risked their business by attaching to a larger, more established public corporation in Constellation. The bottom line is that IPO’s are risky, and the unanimous excitement we see around the craft beer industry would not have always translated to stock performance on the street.
Boston Beer is the benchmark for craft beer IPOs. Trading as a public company, the pressure is on to explore massive new growth potential to return value for stockholders. And similar to Ballast Point’s recent venture into spirits and RTDs, Boston Beer’s growth has come from Twisted Tea, Angry Orchard Cider, and a more recent focus on IPAs, even as their flagship Boston Lager flat-lines. With Constellation, the pressure to perform won’t necessarily be felt less, but the options for breaking off parts of the business to work independently, or hand over certain elements for production and distribution elsewhere become more flexible options, enabling Ballast Point to maintain its core brewing business with integrity.
As big as these deals are, they happen crazy fast. So why do Ballast Point and Constellation think this is a good match? On Ballast Point’s side, they first and foremost wanted access to capital, in addition to some of the following goals: To align with a company that was growing rapidly itself. To find a partner who understood the entire alc-bev industry beyond just beer. To gain assurances that they could continue running their business as they deemed fit. Constellation appears to check those boxes – their financial position has been quite strong since acquiring the Crown Imports portfolio, they have shown impressive above-industry growth for several consecutive quarters, they have a portfolio that spans wine/spirits/beer, and they understand the importance of building strong brands. All of this since nearly being written out of the business a few years ago with the buyout bid from Ab-Inbev.
On Constellation’s side, they first and foremost recognize the importance of entering the craft segment. Their patience to do so indicates they were waiting for the right time and right company, at (what they deemed to be) an agreeable price. Constellation’s focus was on adding a premium brand that would complement their strategy to win at the higher end of the beer segment. [NOTE: Within the industry, Corona, Modelo, Victoria, and Pacifico are considered high-end beers given their above-average price points]. Adding a craft beer to advance their grasp on the premium segment was attractive because high prices lead to high margins, which leads to strong financials, which pave the way for continued investment and growth.
But brands can only fetch a premium price point if they have the right “value proposition” in the minds of the consumer. Corona achieves this through brilliant marketing, a consistent message, and delivering on specific attributes consumers seek when they drink beer. Ballast Point is achieving this through superior quality, a strong brand presence, and clever innovation like their canned craft cocktails. Constellation will likely push the Ballast Point team to double down on innovation and reinforce their core brand, thereby strengthening their value proposition. Or they may do it for them by spinning off parts of the portfolio that they can scale up faster themselves.
Another likely consideration on Constellation’s side was geographical. Beer, even at the macro level, is a highly regional and local industry. Miller Lite, Bud Light, and Coors Light each have their own pockets of strength in light beer around the country. For example, Constellation’s Mexican portfolio has substantial strength in California while Heineken proves stronger in some other urban markets. The explosion of California craft beer was taking hold in Corona and Modelo’s backyard, with Ballast Point leading a movement that undoubtedly impacted Constellation’s performance, distribution, and market strategy. By adding one of the region’s strongest brands in Ballast Point, it gets Constellation at (or back to) the table of many retailers and outlets they may have lost. On the flip side, Constellation can provide Ballast Point new distribution opportunities including the obvious expansion to all 50 states and placement in high-volume chains and venues like music halls, sports stadiums, and airports. Ballast Point was already hard at work across the country opening doors like these.
In addition to complementing its existing strengths, Constellation likely sees big upside in the international market. Constellation’s wine portfolio has a global footprint, but distribution rights for their Mexican beer portfolio are limited to the U.S. marketplace. Ballast Point has already dipped its toe into international markets with distribution currently reaching as far as Asia. This acquisition offers Constellation a chance to develop global reach in the premium beer space and capitalize on the international thirst for American craft beer. Heineken identified a similar upside in its decision to purchase 50% of Lagunitas, with international expansion being widely cited by both parties as a key component of the agreement, and at a recent Beer Marketer’s Insights conference, founder Tony Magee explicitly stated that Heineken has a path to control. "They have an option to buy a bit more of the company down the road. If I want to step aside, they would need to come in and buy more.” Ultimately capitalizing on opportunities of that size tend to require control, not partnerships. As the US market inevitably gets more crowded, international expansion will become more attractive and control of the brands more necessarily to reach their potential.
The points above outline some of the “synergies” and the future growth potential associated with the deal. But they are just a fraction of the many contributing factors in how a valuation can reach an astronomical number like $1 Billion. Starting with Goose Island’s then-crazy purchase price of $38.8 Million in 2011, the industry has come a long way to arrive at Ballast Point’s purchase price today. It seems impossible for the numbers to keep growing; but with craft beer showing no signs of fatigue or complacency, and big beer showing no signs of staying on the sidelines, it seems equally impossible for the numbers to stand still.