What is going on with beer values?
What is going on with values for beer brands? Recently in the trade press there has been an on-going discussion of distributor and brand values. If you are a regular reader of Harry’s newsletter (and you should be), you have been reading about this. Let us pull back a little and examine this from a bit more distance.
In order to take advantage of these once-in-a life opportunities, many brand transactions are becoming overvalued (sounds like the sub-prime mortgage debacle). In many cases these consolidations (both vertical AND horizontal) should have been done a long time ago for a variety of economic and supply-side reasons… and yes, supplier strategy has changed significantly in the past 15 years and has sadly left many wholesalers holding the bag. A true statement but the past is just that, past.
However, the affected wholesalers always thought they would be able to go out on their terms. As a result many wholesalers are NOT willing sellers. Because of these extraordinary forced circumstances, the intent of some valuations take on an entirely new meaning. Those wholesalers who are forced to sell hope there is some retribution in the end. And the buying wholesaler “gets” to pay a premium to execute the transaction to remain in good graces with the brewery who reassigns significant earning power to them… or at least for the present owner’s heirs since for many of these deals, only the bank is going to be seeing any increase in profitability for the next 15 or so years.
It is easy for client support professionals engaged in these activities to lose perspective. The focus can easily move to self-serving. For the selling wholesaler, turning a Lose proposition into a Win by receiving extraordinary value justifies the transaction. Additionally, the buyer feels pressure to execute the deal at any cost. As a result the surviving wholesaler is stretched to the financial max by awarding all the economic synergies to the seller through the asset purchase.
In addition, IMHO (that’s in my humble opinion for you none texters) my buddy Andy Christon (and Joe) works aggressively to keep prices high. I might be wrong but it sure seems Andy (and Joe) are almost always on the selling side, and don’t really give a damn about whether the thing actually works for the buyer. I’m both a financial and operational guy and work with many buyers. Whether it works for the purchaser is a big deal for me… I’m not happily whistling to the bank at the end of the deal, I’m in the trenches trying to make certain the planned synergies actually come to fruition.
Let us take a look at some of the issues happening right now in this wave of brand and wholesaler consolidation:
· In many cases brokers get in the way of getting a deal done. Deals are going to arbitration in Colorado and California (and probably more). They set the seller’s sights on some incredibly high number… generally to get the job… and thus poison the deal. I’ll bet in almost every situation, the seller is going to regret going to arbitration and will actually lose money off the deal… What I have found is that in many of these deals, especially with a fairly sophisticated wholesaler, is that they have the in-house expertise to model the deal. They don’t need someone to give them a “value”, they can calculate that. They don’t need a broker to find a buyer, the potential buyers are all easily identified… often being just one distributor. What is needed is a facilitator, someone who works to get a deal done for both sides.
· Golden Cases – God bless Andy for being creative in selling his services but please. ALL cases are golden. This economic theory is completely flawed on closer examination… regardless of where Andy has sold the concept. Fixed costs and even many variable costs go up in stair steps. These steps come in all sizes… from very small to very large.
Think about your business. You don’t get to purchase one tenth of a truck, you have to buy the whole dang thing. Same is true with employees. Thus you get a general stair-step function where volumes (or account base) can increase a certain amount with almost no increased cost, but when a threshold is crossed there is a rather abrupt increase in cost… completely exceeding the relatively small volume which pushed it over the limit… much like the saying of the straw that broke the camel’s back. Some of these costs can be rather steep, like a new warehouse. Should those few extra cases which force you into a warehouse expansion be allocated the entire cost of the new warehouse? If so, you’d be better off decreasing your sales than getting these extra boxes… yes I know, a foolish and quite plainly wrong analysis.
So I guess the pitch for a Golden Case is that as they are magical cases which only reside on the flat side of the stair graph. The riser part of the stair, i.e. the step up in cost, all belong to some other non-magical cases. The golden case theory seems to make sense from an operational view-point... you can add a certain number of cases and have almost no increase in cost… thus these cases can be very valuable, operationally. Or from the opposite view-point, if you subtract a certain number of cases you might have almost no decrease in cost. This is an operational reality which holds true for EVERY CASE YOU SELL. But from a value view-point, ultimately they all can’t be golden cases… Going back to my crusty MBA finance professor, talk about measuring with a rubber yardstick! Sometimes these cases are golden and thus have a tremendous multiple, in other times these exact same cases are not golden and thus have a much lower value. Every freaking case can’t be golden but this flawed analysis sets them up to be.
This golden case analysis takes a relatively simple operational reality which is true in most businesses and attempts to extend it to the value of specific brands. Heck, Andy is now taking this thinking even further and stating that if the removal of a brand makes the company not viable, the value of those brands is the value of the entire distributorship! So if 10,000 cases from a certain supplier is keeping my head above water, the true market value of those brands is the value of my entire company?! Think of this from a supplier perspective… this thinking and attempting to codify it into law may cause tremendous damage to the entire three tier system as incredible values are placed on almost any brand… thus effectively tying the brands to the present distributor forever. This will not bode well for the three tier system.
· Multiple madness… it depends. Again we are getting a very superficial analysis and not very deep thinking. Yes you can pay very high multiples for some craft or import brands… why?
o Growth potential… many of these brands could see 50% to 100% increases in volume. So a 5 or even 7 times multiple in actuality is much less. The infamous pay-back period is much shorter than the GP multiple might imply. Look at Corona numbers; does any one think they are going back to 20% growth days any time soon? What does flat to down volumes (and potentially shrinking margins) mean to the multiple? A freaking lot! Look at Coors versus Miller. In many markets one can reasonably expect Coors to increase in volume, perhaps for some time. Can you say the same about Miller? Of how about A-B? If you’re sitting on 70 share, do you really think this is going to increase? It is much more complicated than pulling some multiple (whether EBITDA or gross profit or whatever) out of some body orifice and saying someone else paid this over there so it must be the value over here. Wrong. Yes, as a broker it will get you the contract but in the end it screws up the deal because it never gets done. Or the broker uses the pie-in-the-sky to get the contract and then actually sells the thing for much less. The seller might not be too happy but the broker is ;-) And of course the seller leaves the industry so they won’t be around to bad mouth the broker regardless!
o The case volume is relatively low. You might not want to, but you can pay a high multiple for a small volume. This is not the case as the volume increases. If Corona is 10% of a deal is much different than if it is 50% of a deal. It simply doesn’t work to pay the same multiples, the deal won’t cash flow. Also from a risk factor, a deal with 50% Corona is MUCH riskier than one with 10%. It’s just the way it is.
There is more at stake than most realize. It was the wine industries inability to deal effectively with these needed transitions that led to a weakening of their wholesaler relationships. We need to reward loyal wholesalers for their commitment while maintaining the ability to improve its business model. Everyone needs to be part of the solution. Take the high road to a successful transaction… hire a facilitator who knows all the implications for both the seller and the buyer. Make your transaction a win/win. Each transaction is unique and has its own personality and idiosyncrasies… applying general rules and values is not in everyone’s best interest.