Insight - Craft brewers tap down resistance to Wall Street investors

By Lauren Hirsch

NEW YORK (Reuters) - Brooklyn Brewery, the craft beer maker operating from New York City's most populous borough, resisted taking money from investment firms for almost three decades, according to co-founder and Chairman Steve Hindy. Now the brewer of Brooklyn Lager is having second thoughts.

Hindy, who sold control of the brewery three years ago to one of his early backers, the wealthy Ottaway family, said the company needs capital to expand its business and meet rising demand for its beer. So it's considering selling some equity with the help of investment banks, becoming one of more than a dozen U.S. craft brewery companies thinking about accessing the deep pockets of institutional investors.

"We want to stay independent," said Hindy, 66, a former reporter who keeps a piece of shrapnel at his desk as a memento from his time in Beirut, in an interview at his Brooklyn office. "But we are looking at building a very large brewery in New York City, which will probably cost in the neighborhood of $150 million."

The craft beer industry is booming, buoyed by deregulation and the increased buying power of its largely millennial customer base. The $19.6 billion U.S. craft beer market grew by about 18 percent in barrel volume in 2014, according to the Brewers Association. By contrast, the U.S. beer industry as a whole saw volumes rise by only by 0.5 percent in 2014.

"These are fascinating times in U.S. craft beer, and like many of our brethren, we talk to many different people who are interested in participating in this dynamic business," said Robin Ottaway, president of Brooklyn Brewery, who said the new brewery will likely be in Staten Island.

The list of those vying to participate in the business includes private equity firms, family investors and large alcohol brands. Some of these investors are hoping it will include the public market as well.

INVESTOR GOLD RUSH

Investors' interest has already become apparent in some of the prices paid for entry. When Oskar Blues Brewery, the Longmont, Colorado-based maker of Dale's Pale Ale, was sold to an affiliate of investment firm Fireman Capital earlier this year, it was valued at as much as 20 times its 12-month earnings before interest, tax, depreciation and amortization (EBITDA).

By comparison, beer conglomerates Anheuser-Busch InBev SA (ABI.BR) and Heineken NV (HEIN.AS) trade at 13.4 times and 12.5 times EBITDA over the last 12 months, respectively.

"Anyone who does want to sell, should be selling right now," said Hindy, who retains common stock in Brooklyn Brewery. "Valuations are out of this world. There are people swarming all of us wanting to give us money. In a two-week period, I had 17 different private equity firms that called."

Brewers are seeking outside investment as the burgeoning craft beer market heralds an expensive fight for shelf space. To compete, brewers have to invest in new production facilities, distribution systems and styles of beer. "A lot of craft brewers are capacity constrained, selling every drop they can make," said Andy Goeler, CEO of craft for Anheuser-Busch InBev.

Some of the craft brewers exploring selling part of themselves, in private placements or initial public offerings, include Lagunitas Brewing Company of Petaluma, California, Ballast Point Brewing Company in San Diego and SweetWater Brewing Company in Atlanta, according to sources who asked not to be identified because these plans are confidential. Each of them is estimated to be worth hundreds of millions of dollars. Representatives for these companies declined to comment.[ID:nL1N1012IC] [ID:nL1N10F1AP]

Still, these investments are not without risk, and it is not clear what the marriage of institutional money and independent brewer will bring. "The money guys make money and that's a whole different way of looking at the world," said Hindy. "We make beer and the money follows."

IMAGE RISK

Craft beer is defined by the Brewers Association as beer that comes from a company that produces fewer than 6 million barrels a year. Hindy, whose Brooklyn Brewery shipped about 252,000 barrels last year, says the definition of craft beer is in the glass of the drinker.

Anheuser-Busch InBev, maker of Budweiser and Stella Artois, has made a string of craft beer company acquisitions in the last 18 months that include Blue Point Brewing, Elysian Brewing and 10 Barrel Brewing. Constellation Brands (STZ.N), the distributor of Corona Extra beer in the U.S., said this week that it was creating a ventures arm to invest in new and distinctive concepts in alcoholic beverages, which may include craft beer.

While the craft brewers stand to benefit from the access to equipment, raw materials and the bigger distribution network of their larger peers, such deals also pose significant reputational risk to their independent brands.

When Anheuser-Busch InBev bought 10 Barrel Brewing last year, for example, the deal triggered a social media backlash that included threats of a boycott and angry Facebook posts.

"Naturally there was a push back from the local community," Goeler said. Still, he said customers returned when it realized the acquisition would not lead to changes in cost or quality.

An Anheuser-Busch InBev spokesman declined to comment on 10 Barrel's performance since its acquisition. A source that was not authorized to publicly discuss financial details said 10 Barrel has seen revenue grow 20 percent since the acquisition.

Private equity firms have also historically posed risks to the image of craft brewers as community-oriented companies that value their product above profit. Craft brewer owners have sought to address these concerns by offering only minority stakes, allowing founders to keep control of the companies.

Sam Calagione, founder of Dogfish Head Craft Brewery in Milton, Delaware, a craft brewer that is exploring selling a minority stake, said in an interview that many private equity firms will introduce themselves as potential minority investors and then try to negotiate a deal structure that gives them control or quickly takes the company public.

"There is an initial position of only wanting a minority investment, and within the first meeting they talk about a path to majority control or an IPO," Calagione said. He said he's also met some firms that were happy to remain minority investors.

GOING PUBLIC

An IPO is seen by many craft brewing companies as less dilutive to their brand. But companies have to reach a certain size to float in the stock market, and some of them opt for a private investment as a bridge to an IPO. Industry sources said that a $500 million valuation is a rough threshold appropriate for a listing.

After U.S. President Jimmy Carter signed a law in 1978 legalizing the home production of beer, the craft brewing industry saw a major wave of IPOs in the 1990s. The most successful of them was Samuel Adams maker Boston Beer Co (SAM.N), which now has a $3 billion market capitalization.

Several others jumped on the IPO bandwagon but, by 2000, nearly 200 craft breweries had gone out of business as their beers could not keep up with the quality that consumers expected. It was not until the rise of Millennials in the last few years that the industry underwent a renaissance.

Some craft brewer founders such as Hindy and Calagione resist taking their companies public on concern that shareholder pressure to meet quarterly earnings targets can erode their creativity. Boston Beer adopted a dual-class share structure so that founders could maintain control of the company.

For craft brewers like Hindy, the biggest challenge to getting bigger may be in retaining their identity.

"Craft breweries have a soul, and I think the big money coming into the industry is kind of a challenge to that soul," he said.

(Reporting by Lauren Hirsch in New York; Editing by Greg Roumeliotis and John Pickering)