Where have all the deals gone?
Where have all the deals gone?... for those of a musical persuasion you can sing that to the old Peter, Paul, and Mary song, Where Have All the Flowers Gone? Just an interesting tidbit ;-)
But here it is mid-August and many thought that we would be seeing a flood of deals happening as people exited the industry one step ahead of the tax man. With the upcoming January 1 increase in the capital gains tax rate, a 33% hike, most thought we’d see a rush to the exits… myself included. Throw in an overall fear of the Obama administration (clearly well founded… but where can one hide?) and major brewery concerns and one would have thought that if you were considering getting out, now would be the time to do it.
But we were clearly wrong. Sure there are deals happening, I’m working on a couple as we speak, but nowhere near the deal flow one would have expected. So what’s up? Since you asked, here is my 2 cents worth…
First, a lot of the “easy” deals have already happened in the past few years. A motivated seller (for whatever reason) and a purchaser(s) who was willing to step to the plate and pay what the asset was worth… those who wanted to take their money and run have already done so.
In addition, right now the pool of motivated sellers seems to be pretty small… this is a primary factor in the lack of deals. I’ve got quite a few willing buyers – money in hand - just waiting to find a seller. But I think a lot of folks have looked in the mirror and asked themselves whether they are in or out… and they have decided they are beer distributors… they’re in… period. And they aren’t headed out the door unless someone steps to the plate with “stupid money”… and that doesn’t generally happen.
Also, selling a family business is much like selling a child… it is not an easy thing to do ;-) There are a lot of non-financial and emotional reasons for not selling. As I’ve been told more than once by a wholesaler… “Look John, I’ve got more money than I could ever spend now. My family is taken care of regardless of what happens. Sure values might drop but so what? I can live with that. If my business became worthless tomorrow I’d still be OK. I like this business. My family likes this business. And I’m not going anywhere regardless.”
How can I argue with that? If I were in their shoes I might think the same thing. But I always remind these folks, just remember there’s no whining then regardless of what comes down the pike.
And some of these family issues strike to the bone… “there is no way this business is going to be sold as long as the old man is alive.” That’s kind of hard to argue with too.
Many of the fence sitting potential sellers also look to the financial aspects of a sale and don’t like what they see… re-investment opportunities are downright crappy right now. Where do you put the money once you sell and get even a halfway decent return? Not a lot of options there. This is hopefully just a short-term situation… but it still weighs on many minds.
I think a lot of distributors have looked at the landscape and discovered that sticking with the beer distribution business might just be the best financial choice one can make, even if values and profitability drops… this reality is driving a lot of the merger discussions out there right now. And I’ve been burned once by predicting values will drop… I’ve learned my lesson. I don’t see values dropping significantly in the near-term. If this creates a gap between what buyers can (or will) pay and a number that makes financial sense for the seller, so what? In those situations deals don’t happen. Pretty simple.
Consolidation is not a forgone conclusion like many seem to believe. It has to work for all parties or it doesn’t happen. Right now it’s not “working” so neither is significant consolidation.
And speaking of buyers, what about them? A lot of potential buyers have done deals in the recent past and are sitting on a pile of debt (can you say bank covenants)… a lot of these folks have pulled in their horns quite a bit. To say they are bottom-fishing might be extreme but their enthusiasm has cooled.
The lending situation is improving but it is still pretty tough. For the past couple years the federal government has the “let’s make banks a ton of money for doing nothing” program, and that doesn’t seem to be ending… all while the Obama administration cajoles the banks to lend money to small businesses… wink wink, nudge nudge. Why should a bank take a risk and loan you (or anyone) money right now when they can borrow it from the Fed at 0% and loan it back to the feds for 3.5%? It’s like printing money just for the banks. Can you say crony capitalism? Don’t worry, I’ll stay off of my political soap-box for now ;-)… but why would a bank take some risk to make an additional point or two by lending you money? Until this changes, borrowing money will be tough… don’t get me wrong, it’s out there but it certainly isn’t easy. And for larger deals many banks are looking to syndicate the loan and spread the risk… which again makes the process that much more difficult.
Banks are also getting much more aggressive with their covenants… and many simply don’t understand a business where the bulk of the value is in intangible assets… too many are stuck in a mind-set of hard assets and a beer distributor simply doesn’t “work” in that model.
My associate Steve Cook thinks the uncertainty of the future of domestic beer, not acquisition pricing, is causing potential purchasers to flinch and is a contributing factor that is causing a longer than expected turnaround despite the presence of motivated sellers. He notes, domestic beer pricing has become more inelastic, namely making more profit despite lower case volume, which puts more emphasis on a company’s financial performance criteria for both buyer and seller which complicates their decision model. Additionally, Steve has seen money drying up for the small to medium wholesaler transactions as well due to associated risk factors for both investors and operators alike.
All in all, those who are hoping for or predicting a significant wave of consolidation are going to be wrong for at least the near-future. Suppliers who are hoping to share in the benefits of significant distributor consolidation are going to be sadly mistaken. Unless something significant changes… like these same suppliers going after wholesaler profitability in a big way… there simply isn’t going to be a huge move towards consolidation in this industry anytime soon… baring some Armageddon-type occurrence.
Most of the folks still in this business plan to remain in this business and many are tucked into their territories like a badger in a hole and it will take A LOT of effort and blood to get them out. Those who know badgers know what I’m talking about.
What do I think about this reality? Well this business is still a giant game of chess and those who control the real estate will be the ones who succeed in the long-term… and the prize generally goes to those who take the chance. If I’m a buyer I have to execute my real estate plan. If this forces me to pay more than I want… so be it. I wouldn’t go so far as to put my business at risk but moves made, or not made now will forever change the course of the future. There generally is no going back and getting something once you’ve passed.
If I’m a possible seller, I think you will regret getting out later rather than sooner. The lack of investment opportunities right now is a short-term situation and in tough times, those with cash rule. Many a fortune was made (and multiplied) by taking advantage of tough times… IF you’ve got the cash to do so. As long as I could find a buyer who will pay my price, I’d be out the door. Although the clock is ticking, a motivated buyer and seller can still get a deal done this year if they hurry.
In summary, my recommendation is exactly opposite of what I predict will happen. How’s that for honesty? ;-) I guess we can finish this with the final words of that Peter, Paul, and Mary song… “Oh, when will they ever learn, Oh, when will they ever learn.” Heck if I know…. myself included ;-)
For those who don’t want to leave but still see the need to get bigger… tax-free mergers. More on those later.