Good Beer Hunting

Up and to the Right — Is an IPO the Future for CANarchy?


By today’s standards, acquisitions are nothing new in the beer industry, with companies in the U.S. and UK taking large cash buyouts on the way to bigger things. Anheuser-Busch InBev got a lot of attention early on and Heineken has been busy lately, but investment from private equity (PE) continues to exist in an odd space where beer enthusiasts seemingly don’t care about transactions in any way like ones by multinational brewing conglomerates. Even the Brewers Association has taken an official stance, saying PE is OK because it’s “more a form of banking.”

But barring mismanagement and collapse, taking out a loan doesn’t end up in a business being flipped for a higher price, which is the script for PE. “Private equity companies aren’t in it for the passion, they are in it for the money,” Brewers Association director Paul Gatza said in a 2016 speech.

Purely by definition, so too are the business owners running a brewery. However, an evolving relationship between breweries and private equity may offer an exciting future for members of the CANarchy Craft Brewery Collective, a roster of companies held under Fireman Capital’s investment arm that focuses on craft beer.

Started back in 2012, the group most recently bought into Texas’ Deep Ellum Brewing Co. and California’s Three Weavers Brewing Co., amassing seven total businesses. In announcing their last two acquisitions, a new pattern emerged from brewery owners.

“With CANarchy comes a pretty big equity rollover, so I am in this thing pretty deep and for the long haul,” Deep Ellum founder John Reardon told Brewbound in June after announcing the sale, the first of CANarchy’s members to mention the company could consider an initial public offering in the future.

“I don’t know what will ultimately happen, but what is so attractive is that there is no time limit that is set,” echoed Three Weavers co-founder Lynne Weaver a month later, telling Brewbound she was excited by “a lot of different options” for long-term planning under CANarchy.

Fireman Capital and those that raised the idea have remained mum on the concept (the firm, Deep Ellum, and Three Weavers didn’t respond to GBH requests for comment), but the idea of a private equity-backed IPO isn’t out of the ordinary in the world of business. In foreign markets such as the UK and Poland, research has shown an IPO to be successful and generally preferred by PE fund managers. Success in the U.S. has been a bit different, mostly because of ramifications from the Great Recession, but IPOs tied to the housing market have shown improvements.

When considering what an IPO could be for Fireman and its CANarchy arm, two things could be of consideration: the holding period of a business—the timeframe between PE purchase and resale—and what the overall market bears for such a move.

When talking about private equity and the time frame associated with investors cashing in, beer lovers often cite a short turnover rate. And for a long time, that was certainly the case. Over the last decade, the median holding period ranged from a low of about three years (2008) to just more than six years (2014). There’s an indication this may be changing, however.

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In a paper published earlier this year, researchers found that a decline of initial public offerings in recent years has been met with increased action by private investors. Findings are based on venture capital-backed startups, not breweries, but are mentioned here to show general trends for consideration. It could be of note to beer lovers as the companies receiving this form of cash infusion over a 20-year span of study remained private for longer periods of time. In this case, private investment also shifted toward "late-stage startups," companies that had already existed for four or more years.

This is worth consideration when another recent analysis by consulting firm Bain & Company showed a growing preference toward longer holding periods of up to 15 years. Again, this isn't specific to beer, but the report indicated a definite financial benefit of holding onto businesses as a long-term strategy, suggesting that such a move would continue to multiply in value until around year 22 or 23.

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These broad trends matter because the long game discussed by recent acquisitions around Fireman Capital deals may follow more recent swings in investment, especially when considering investment specifically into the beer industry.

An IPO wouldn’t entirely be out of line. Large, publicly-sold conglomerates such as Anheuser-Busch InBev or MillerCoors have long been tracked on the stock market, but other brewery groups like Boston Beer and Craft Brew Alliance have seen success, especially in the past year as they honed brand and marketing strategies. Many beer lovers forget, but just before Ballast Point was bought for a reported $1 billion by Constellation Brands, the California brewery was about to hold its own IPO, expecting to raise $172.5 million by selling stakes in ownership.

These moves are rare in an industry mostly made up of “small and independent” companies, roughly three-quarters of which produce less than 1,000 barrels of beer every year, but the geographically-diverse portfolio under CANarchy doesn’t seem out of line for something that may be attractive to investors. The now seven-brewery collection of Fireman Capital grew barrel production by about 30,000 (8.5% YTY) in 2016 and almost 24,000 (6.1% YTY) in 2017. According to estimates reported by Brewbound, 2018 could eclipse them both as CANarchy may add another 40,000 barrels across all its brands, good for a growth rate of almost 10%. That’s three-straight years above the rate for the U.S. craft beer segment.

There’s always reason to be cautious when investing in any business, but with CANarchy strategically located in states that produce and consume some of the highest rates of craft beer in the country, along with a strong position of Cigar City as maker of fast-growing brands in one of the prime growth regions of the country, you could certainly do worse.

Even more so, the investments Fireman Capital has made in breweries have already outpaced several of their other lucrative deals. Four of their six “realized” partnerships have been covered by news media lasting between 18 months (Evolution Fresh juices, sold to Starbucks) to almost four years (Hudson Jeans, sold to Joe’s Jeans). Fireman has been in craft beer since 2012, when it first invested in Squatters Craft Beer and Wasatch Brewery, collectively known as the Utah Brewers Cooperative.

In six years since the September 2012 announcement, Fireman, then CANarchy, invested an initial $132.5 million into Oskar Blues and another $60 million into Cigar City as their most expensive craft beer deals. With other business investments, Fireman was oddly specific in selling companies for prices approximately three times what they paid, yet the continued growth of CANarchy, as well as Fireman’s spending spree on beer, suggests this round of financial commitments could be different. Results in 2018 continue to show promise as the CANarchy collective has easily outpaced overall craft growth.

Common sense—and history—may suggest that CANarchy’s holdings should be on the block for sale, but current trends and Fireman Capital’s behavior suggests a bigger payday could be in the future. If the investment firm acts soon, they could even take advantage of a rare opportunity: “CAN” is still available on the New York Stock Exchange.

—Bryan Roth