What's Up With Values?
Before we start a brief discussion of values I want to give the Kentucky ABI distributors a tip of the hat for their great hospitality recently in Nashville. As you might know, Nashville is Music City USA and that point was driven home late one night by a couple stirring karaoke renditions by industry pundit Harry. First was a gut wrenching version of “Chasing Cars” by Snow Patrol… not a dry eye in the place. For an encore Harry went with the King’s classic “In the Ghetto”… and just like the King, that stage was littered with women’s undergarments by the time he strutted off the stage ;-) Gotta love this industry.
Now to values. Some out there like to say values have declined and sellers simply have to lower their expectations. We believe this is incorrect. Beer distributors are rare and precious assets and this has not changed. In pretty tough economic times this industry has fared quite well. However, today’s environment has become more strategic and regional. Wholesalers relying on local economics have become financially more vulnerable while regional consolidators and larger multi-brand operators appear to be well-positioned to move forward.
It is a classic case of “Where you stand depends on where you sit.” We have worked with several wholesalers who continue to move forward by redefining themselves to meet ever changing industry and customer needs. Progressive wholesalers are continuing to leverage their resources by incrementally expanding operations into other categories of beverage products and combining with more one-dimensional wholesalers within the region.
Although deal flow has slowed considerably it was somewhat to be expected. First, most who wanted to race to the door have already done so. Second, there is so much uncertainty from the government that some potential acquirers and sellers have become somewhat frozen in place. This will probably remain the case until the political situation becomes a little clearer… who knows, in 2012 – 2013 we could see even lower capital gains tax rates – depending on who wins.
But the most fundamental reason for values remaining strong is simple economics. As with any financial asset, why would the present owner accept a selling price which leaves them in a worse financial position? Unless they predict coming significant negative events, why would they? The answer is they won’t.
As a simple example, if the financial asset provides $1,000 in annual economic value why would one sell it if after-tax proceeds only provide $600 in annual economic value? Not going to happen.
However, there are situations which can have an effect on value. For some distributors there are more than a few family and extended family members in the business. What happens to them after a sale? Unless it is a very large distributor there may not be enough value to allow everyone to walk away with retirement money; grid-lock sets in among the ownership group. For some smaller operators there could be significant financial risk based potential sales erosion within your current brand portfolio.… These are real issues which have to be addressed. In some of these situations there is almost no price which works for all interested parties. Thus the asset isn’t sold… and most assuredly isn’t sold for some declining amount - a lose-lose situation.
We recommend that for potential purchasers and sellers of brands and companies, you think strategic value. How many of you have made a brand purchase at a price which at the time might have seemed a far too high from an economic perspective? And how many of you later found out that it was a great deal… the price seemed high but the VALUE to you far exceeded this price, whether you saw it at the time or not. Think about InBev’s purchase of Anheuser-Busch. Many thought InBev was paying far too high of a price… but look at the results of this acquisition… InBev knew the value to them far exceeded the price. And they were right. The future goes to those who are audacious enough to shape it to their liking… driven by a clear strategic vision. Don’t simply look at price… look at value to you. Not the value to the guy down the street, not the value to some abstract “beer distributor”, but look at the strategic value to you. Whether you like it or not, this is the reality you face if you want to be in this business 30 years from now.
I’m not saying the consolidation wave is over, it isn’t. I’m not saying now isn’t the time to sell, it might be. I’m not saying there is a magical number of annual cases you need to distribute to remain long-term viable, there isn’t (if you have little to no debt you can last A LONG TIME in this industry… that might not be the wisest financial move but it can be done). What I am saying is that unless we see significant reductions in the profitability of beer distributors, regardless of what some others might tell you, you’re not going to see the STRATEGIC VALUES of distributors fall.
Depending on which side of the fence you are on this may make you happy or sad… but since when did ones desires affect reality? Start the evaluation process by thinking strategically!
Give us a call if you would like to discuss in confidence your unique situation and needs. These considerations and many other issues are what Steve Cook and I deal with when representing our potential sellers or buyers… we search for a win-win scenario on value, develop the best deal structure, assist with financing, and work with you on family and key employees issues... to name a few.