Sam Holloway, Ph.D. with commentary from Kevin O’Brien, Principal Zepponi&Co.

During the “frothy” period of the craft beer boom (2014-2017) when large strategic buyers like Heineken, AB InBev, and Molson Coors gobbled up several of America’s craft beer darlings, it was common for scholars and investors alike to refer to the acquisition price paid per barrel of beer produced ($/Bbl) as a good measuring stick for the deal. Way back in 2011, AB paid $305/Bbl for Goose Island and at the height of craziness, Constellation Brands paid $3,600/Bbl for Ballast Point. Just last week in our own newsletter, I ran through some other recent multiples to try and discern whether Aphria, Inc.’s (APHA) $1150/Bbl purchase of Sweetwater Brewing Company was too much, too little, or just right.

I spent some time last week talking with my friend and beverage alcohol M&A advisor, Kevin O’Brien. Kevin is a longtime contributor to the CAS knowledge base, authoring blogs about contribution margins (publicly available) and giving a very informative podcast (members only) on valuation strategies. I reached out to Kevin to get his take on the sale of Sweetwater Brewing Company. Below are my questions and his answers.

Overall, at $1150/Barrel, did Aphria, Inc. overpay? If not, why do you think they are in a good position to benefit from this strategic acquisition?

I believe this was a unique transaction due to the nature of the brand that was acquired. Sweetwater carved a niche in the cannabis community due to its branding and reference to cannabis in their product names and marketing. APHA is a large Canadian cannabis producer that has growth aspirations in the U.S. market. I think it is difficult to compare this acquisition with prior transactions by large strategic breweries. The per barrel metric from the “frothy period” (2014-2017) may be dated at this point. The $/Bbl metric was appropriate at that time, but less appropriate now. There are just too many variables in place now, whereas before it was about a large multinational manufacturer adding more beer to an already strong beer portfolio. Moving forward, the metric that should really be evaluated is either revenue or profitability. The multiple on EBITDA was reported at ~12.5x, that is a reasonable valuation for a consumer packaged goods (CPG) business that is growing and profitable.

Kevin and I had a subsequent discussion about the quality of the management team at Sweetwater and how that may figure into Aphria’s strategy. There is much speculation as to why Aphria, Inc. would enter the market prior to federal legalization, but gaining expertise in consumer packaged goods (CPG) is a major bonus. Also key was that Sweetwater was profitable. Kevin and I discussed how TSG Consumer Partners’ private equity investment into Sweetwater in 2014 and their subsequent strengthening of the Sweetwater management team also played a key role in motivating APHA’s acquisition. Sweetwater was scalable, profitable, and had product lines well positioned to cannabis. APHA has the cash on their balance sheet to spend the next two years learning as much as they can about Sweetwater’s customers and also about how they can leverage Sweetwater’s drinks manufacturing expertise into future cannabis drinks. Kevin’s explains:

APHA is banking on cannabis being legalized in the U.S. in the near term (2022?) and wants to be able to capitalize on the market with an established footprint in place. Cannabis drinks is projected to be a large market but there are only a few recognized brands in the market at this point. By acquiring a large, well-known brand in the U.S. they should be able to leverage the brand goodwill to “hit the ground running” once legalization occurs. Additionally, this deal provides them with production infrastructure and a professional management team. These are invaluable assets to have in place when looking to expand into new markets.

Next, I asked Kevin if small breweries could leverage the seemingly high price per barrel multiple APHA paid for Sweetwater in their discussions with investors, bankers, landlords or employees. Kevin basically said “no” and that there isn’t a lot a small brewery can take from this sale:

I don’t think small breweries can draw a lot of correlation with this deal and future deals. This was a unique, very strategic deal that was completed for more than just adding more beers to a portfolio. We know that a lot of breweries are struggling and have “for sale” signs listed. Due to the large number of sellers, and limited buyers, valuation multiples have declined. The market is so fragmented at this point that I don’t think small breweries should take this as a sign of another wave of deals happening in the near-term. Buyers may be opportunistic if the right brand, or production assets, hits the market but otherwise they are content to sit on the sidelines and ride out the COVID wave and see what’s left standing.

Next, I asked Kevin if he thought a craft brewery aligning themselves with the cannabis industry was a good strategic move. In other words, could a growing regional brewery follow Sweetwater’s lead in developing and branding products with strong cannabis ties and (perhaps) enjoy a similar result:

The cannabis drinks business has the makings of being a very large market. With this, strong brands in the brewing space may be attractive for other cannabis companies in that they can leverage the goodwill of the brand to help accelerate growth. That being said, the Sweetwater branding had a long history of connecting with consumers. Perhaps a brewery could launch some beers in the same vein and see if they gain traction, but it certainly doesn’t guarantee a cannabis company will have the same strategy as APHA in finding a platform to build on. Let’s not forget that Sweetwater is a large, regional brewery that has a scalable infrastructure to build on - the same can’t be said about the majority of craft breweries in the U.S.

Finally, since this transaction may not provide much “juice” for craft breweries looking to sell, I asked Kevin for some best practices for breweries looking to sell, in terms of getting the highest possible valuation:

Focus on your financials. The better you understand your numbers the better your business will do and the more likely an interested party is going to be confident about what they may be acquiring. Additionally, spend the money on securing trademarks. The brand is what someone is buying, if you don’t have legal control of that brand then the deal is off, simple as that.

About Zepponi & Company - ZEPPONI & COMPANY is a merger and acquisition advisory firm that provides corporate finance and transaction advisory services to the global beverage alcohol industry. From sourcing and securing growth capital to advising on partial and full liquidity events, Zepponi & Company designs and executes effective transaction processes that result in exceptional outcomes for business owners. The firm serves a wide range of clients from family-owned businesses to global, publicly-traded beverage companies.

About Kevin O’Brien - Kevin O’Brien has experience advising businesses in the beverage, consumer packaged goods and manufacturing sectors. His beverage experience has been focused in the wine, beer and distilled spirits industries. Kevin has presented on various accounting and finance related topics at the Wine & Spirits Daily Summit, American Craft Spirits Association Convention, Craft Brewers Conference, and Oregon Wine Symposium. He is also a lecturer for Sonoma State University’s Global Executive MBA in Wine Business. Kevin earned his bachelor’s degree in Accounting from the University of Portland and holds a certified public accountant (CPA) license.