Random Thoughts From Littleton
For those who haven’t read ABI’s “Wholesaler Family 2011 Consolidation Guide”, I recommend you do so, even non-ABI distribs if you can get your hands on it. It is certainly an interesting read and clearly shows they plan to be actively involved in driving and controlling consolidation. Although consolidation remains “voluntary” (how could it be otherwise?) their desires are pretty obvious… fewer ABI wholesalers and more corporate control over those who remain.
ABI sure looks like they plan to be VERY active in controlling the consolidation process. In fact they put themselves first in line for EVERY transaction which occurs… they get the first right of refusal on every deal in the country. Right now I’d be a little surprised if they allowed any transaction to occur in a major market without taking the thing for themselves… you know how important those branches are for territories which are unprofitable ;-) The only thing which may prevent this is ABI’s top-dog bonus program… they may not want to accumulate any additional debt until their big payday. Just a guess on my part… for some reason Brito and Dave don’t call me with regular updates… but I will accept the call when it comes.
What does this first right of refusal mean to values? Nothing good if you’re a seller. A first right of refusal on any property generally makes the property less saleable. A potential purchaser has to rightly ask themselves whether it is worth the cost in dollars and time to go through the entire purchase process with the knowledge that some other party only has to match the offer to get the prize… their cost is zero… the wannabe purchaser’s cost could easily be in the hundreds of thousands dollars, weeks (if not months) of time. Just lining up financing is more than a small task and it isn’t free. You only move forward if you are fairly certain the holder of the first right of refusal doesn’t plan to execute their right. Does ABI plan to execute their rights? If they did on just a few deals, what impact would it have on ALL future ones? I’d hazard a guess the impact could be substantial. If I were a wholesaler in ANY state, I’d be racing to take this “right” away from them… in whatever manner I could. But then again, I’m a trouble-maker.
This “right” gives ABI tremendous power over wholesalers. You want to make an acquisition? First question, are you an “anchor” wholesaler for ABI? For those who haven’t read the consolidation guide, a major factor in being ‘allowed” to grow your territory is your alignment with ABI. i.e. do you carry other brands or are you on the 100% share of mind ranch? This is an incredible club to have over the distributor’s head… play the game as we tell you (who’s your daddy again?) or you ain’t going to be making any stinken’ ABI acquisitions. This isn’t a game of tiddlywinks… this is power, pure and simple. Distributors need to do something to change this equation, otherwise the brewery (your daddy) has the power… you don’t… and that’s that.
A recent ABI transaction illustrates this power and its effect on transactions… Mr. Seller decided to exit. He struck a deal with Mr. Buyer. Mr. Buyer was an adjacent ABI distributor, in good standing, etc. But for whatever reason, ABI decided Mr. Buyer isn’t who they desire so they “redirect” the transaction to another purchaser. So, Mr. Original Buyer forfeited all the time, effort, and $$ it took to get the deal done and is shown in none-to-subtle terms that he has no long-term future in the ABI network. Mr. Redirected Buyer got the transaction (for almost no effort) but probably owes his soul to the company store (there’s that song again). “Who’s his daddy?” is now not in doubt.
Short-term it was good for Mr. Redirected Buyer but long-term? It gets even worse… for whatever reason (whether ABI or Mr. Redirected Buyer) someone didn’t want to pay the price Mr. Original Buyer was willing to pay, so Mr. Seller took a haircut and sold to Mr. Redirected Buyer at a LOWER price than originally negotiated. Both Mr. Original Buyer and Mr. Seller took it in the shorts. This was a true shocker since Mr. Seller accepted this lower price.
Why would Mr. Seller accept this? Suppliers generally retain the right for a redirection as long as it is under the same price and terms as the original deal… the seller isn’t damaged and Mr. Original Buyer has no standing to sue since he never owned the thing. Did Mr. Seller simply roll over and accept the haircut just to get the deal done? Or was there more? Did ABI flex their legal & financial muscle and force the thing?
ABI has attorneys on staff… lawsuits don’t really have an out-of-pocket expense for them (at least in the beginning). Not so for a distributor… business lawsuits are REALLY expensive (you’ll spend a couple hundred thousand so fast it will make your head spin). Litigation also could take a great deal of time, longer if appealed (and they very often are).
Mr. Seller faced a couple less-than-preferred options.
1. Accept the haircut, curse and walk away (I do not know the amount of the haircut but was told it was a pretty big haircut relative to the deal).
2. Fight ABI… suing and being tied up in the courts for YEARS? Probably spend at least a million dollars (very likely more). And what does he fight for? He has already agreed to sell his business (see the consolidation guide) so for all those years he has no distributorship to fund the fight… they just might stop shipping to him. He would then have no distributorship AND no money because he never consummated a sale. Sure he might “win” in the end but at what cost? Don’t think it can happen to you? Think again.
I have noted in the past that I had the unpleasant experience of dealing with venture capitalists… I received more than my fair share of kicks in the groin but I did learn a few lessons… one being contracts quite often can be close to worthless. You also must have the desire AND the financial means to enforce the contract… I have noted in the past that for 99% of beer wholesalers, you can take their handshake to the bank. Unfortunately that’s not the way it is in a lot of the world out there. In the world of pure power business, those inches and inches of contract might in effect be worthless firewood. How long will it take to win? How much will it cost to win? What are the odds of not winning? Do I have the financial and emotional resources to fight for years and years? And what does “winning” look like? (sorry Charlie Sheen) Are you going to spend years (decades?), a million or two in real out-of-pocket $$, probably lose the income from your business during this time all in the hope of enforcing a contract which might gain you a million or two? Even if you might win double or triple that? Is it worth it? Yeah we all know about Maris (but how many years did that go on?).
One of my learning groin kicks was that people sign contracts all the time which they have no intention of honoring. It may shock naïve school girls like myself, but that is the way many play the game. Welcome to that world.
In summary, I must take this opportunity to pass along my own spanking to far too many wholesalers out there. I’ve been telling distributors FOR YEARS if they wanted to get out of the business, sooner was better than later. I believe my direct quote was… either take your chips off the table and run to the door or prepare your business (and your industry) for long-term survival. Either one is acceptable… nothing else is. I noted there was little if any upside in staying (unless you planned to realistically stay for the long-haul… and market dynamics would allow it) and TREMENDOUS downside… were the odds more that good things would happen or bad things? Well that future is now staring you in the face. It’s not too late to exit at a great multiple but I have no idea how long this will be true. And no, that’s not just a ploy to get you to engage our brokerage services - although if you are selling you should ;-)… it’s the truth and worthy of your consideration!!
It might be that the door has already closed… it is obvious it is beginning to close. Wake up! I have no idea how ABI plans to proceed on their control of transactions but the evidence isn’t good. And MillerCoors distributors are potentially far from immune for this reduction in value. And that’s just the risk from your suppliers… what about the Costco’s of the world? Do you think chain grocery and c-stores have had an epiphany and forever abandoned their desires for central warehousing and shipping direct? Is the world poised for a change where the protection of the three tier system is now everyone’s goal? Is the world going to race back to 1980 and allow beer distributors to go about their business as they always have? So where’s the upside anywhere one looks?
Right now, either find a willing buyer or prepare your business and perhaps even more importantly your industry for long-term survival. For you larger distributorships, don’t be lulled into the false comfort that you can position yourself to be the last one in the line walking into the Slaughterhouse, and they’ll close the door before you get there… that is a pretty big bet and the implications of losing it are not very comforting. Fight for your industry… it is under assault! When you’re in an existential fight (that’s a fight for your very existence), take the directive from a past world leader…
"Not One Step Back"