I attended the Marcum Microcap conference last week in NYC for the first time. I often follow pre-revenue and emerging Microcap companies, so this conference was a good chance to check out prospective investment opportunities.
I gained a close up understanding of why OTCBB companies often have a negative stigma associated with them. At the end of the day, most OTC companies will never be in position to uplist to the NASDAQ or NYSE, but if you uncover a name that's in position to do so, it could turn out to be a very fruitful investment. If you can find an unknown OTC company that is profitable and just acquired a company more than 12 times its size without wrecking the capital structure you have my full attention.
One OTC company I have been tracking recently is American Brewing Company (ABRW), which has recently changes its name to Bucha, Inc. American Brewing, as its name indicates, was formerly a craft beer company that was competing against thousands of breweries across the country.
Source Bucha Website
In April 2015 American Brewery acquired the Búcha Live Kombucha business and brand through an acquisition from B&R Liquid Adventure. The newly acquired Bucha Live asset presented American Brewery shareholders with an opportunity at a second chance after the initial craft beer business failed to take off. At the time, Búcha Live Kombucha was generating revenues of approximately $3m a year and battling to grow market share. Winning precious shelf space was going to be an uphill battle.
In October 2015, American Brewing abandoned the craft beer product line and sold off its brewery assets to focus its time, cash and efforts on the fast-growing and emerging kombucha beverage market.
Fast-forward six months to March 2016, when American Brewing named Brent Willis as Interim CEO. Willis was not a household name to me since I typically follow technology upstarts. However, it turns out he is a well-accomplished beverage industry leader that has served in a senior leadership position for multiple large, global companies including three beverage companies. Prior to joining the corporate, world Willis spent his collegiate years at West Point where he developed an affinity for health and fitness, followed by a five-year tour in the US Armed forces.
Willis began his career at Kraft where he quickly moved up from brand assistant to Vice President in charge of 1,500 employees and 3 manufacturing plants. He left Kraft for Coca-Cola where he served as the President of Coca-Cola's North Latin America Division responsible for 20,000 employees and 35 manufacturing plants that produced $1.5 billion in sales.
Willis took his talents to Anheuser-Busch InBev where he served as Chief Commercial Officer and helped transform Interbrew into the world's largest beer company. In 2006 Willis took over as the CEO of Cott Beverage based in Canada where he was responsible for 21 manufacturing facilities and 4,000 employees that produced $1.8 billion in sales.
Brent saw the decline of sugary beverages sales on the horizon and attempted to revamp private label Cott Beverage (NYSE:COT) (now Cott Corporation) into teas and other healthier beverages and change the culture. The end result was not as expected as the pace and cultural shift was too fast for such a large organization, and the company and Willis split ways in '08 after two years.
Willis took the helm at American Brewing Company to complete his vision of developing a global beverage player that focuses on markets outside of sugary drinks. And on May 23, ABRW announced a deal that puts Willis on a path to execute on this vision: Willis announced that his recently renamed company, Bucha Inc., would be acquiring New Age Beverage/Xing Tea group for a total purchase price of $19.95 million.
The scale of the acquisition is fairly rare and I don't recall any other acquisitions that featured a company producing >$5m a year in revenues buying another company with sales north of $50 million. I will explain the structure of the deal below, but the acquisition price in comparison to the purchased asset look very favorable for ABRW shareholders.
The deal is expected to be paid for with $8.5m of cash at closing, issuance of $6.995m in common stock, along with a promissory note totaling $4.5m, payable 6 months after closing that bears a 1% interest rate until paid in full. In return, Bucha Inc. will receive an underlying asset that is profitable, cash flow positive and produced over $50m of revenue in 2015 while serving almost 15,000 retail outlets, over 4,500 of which are controlled with their own DSD distribution system in Colorado and surrounding markets.
Willis is securing favorable terms on bank debt to borrow the money due at closing, and the ~$7m portion of the acquisition payable in stock is dependent on the VWAP value for the month of June.
The volume weighted average price (VWAP) is a trading benchmark calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day.
In other words, if the average volume weighted share price is $2.00 in June, American Brewing would issue roughly 3.5 million shares. Conversely, if the VWAP is $1.00 then ABRW would issue ~7m million shares to complete the transaction. The final June VWAP will determine the final expected outstanding share amount following the closing of the transactions on June 30th.
The combined company is expected to produce over $50m of revenue end generate $3+ million of EBITDA. Beyond the headline purchase price of the acquisition, what really gets me excited from a valuation standpoint are the cost synergies and new product distribution channels.
These distribution channels represent an opportunity for Bucha to leverage the 15,000 plus retail outlets and expand the distribution of the Búcha Live Kombucha tea product. Based on the projected sales of $2,000 per store there is significant opportunity to increase revenues simply by increasing the number of stores where it's available.
Over the last few weeks Bucha has run up from $0.65 to over $1.80 per share. For bargain hunters the real question is what is ABRW worth right now and what could it be worth a year from now. The key valuation metrics to consider include price to sales and valuations based on EPS.
In terms of EPS the current company is expected to generate over $3m of EBITDA and if I assume the WVAP stays at $1.80 it would result in the issuance of 4 million shares and bringing up the total of shares outstanding to 21 million. With $3m of earnings spread over 21 million shares ABRW could generate $0.14 per share over the next 12 months.
The wild card in determining the EPS is going to be the synergies between Bucha and New Age Beverage/Xing Tea group. Willis has a military background and is very focused on stream lining processes and cost containment. Any synergies that result in cost avoidance will flow directly to the bottom line and this may provide potential upside to my estimates.
In terms of price to sales the combined company will produce $50 to $55m of revenue over the next 12 months. Consistent with the EPS analysis above I will assume 4 million shares are issued and the total shares outstanding will be 21 million. With 21 million shares and a current share price of $1.88 the resulting market cap is $39.48 or 0.75x my mid-point estimate of $52.5m in sales.
In the chart above I've gathered key statistics from 5 publicly traded beverage companies; Bucha , Long Island Iced Tea (OTC:LTEA), Celsius (OTCQX:CELH), Reeds (NASDAQ:REED), Monster Beverage (NASDAQ:MNST). The beverage company peer group differs in terms of the exchange, size and maturity. The king of all beverage companies is Monster Beverage, however I am not arguing that they would be the best comp to determine the fair value of Bucha.
OTC traded companies including Celsius and Long Island Iced Tea are both OTC listed companies that trade at 5.31x and 22.66x sales. In addition to carrying high price to sales ratios both of these companies are very unprofitable.
After looking at comparative the data Bucha is trading at the lowest price to sales ratio of the comparative pool. Additionally, Bucha is the only company outside of Monster beverage that will be profitable over the next 12 months. You could argue that even at 1.5 to 3 times sales, which is a discount to unprofitable peers that Bucha is worth between a $78.8 million and $157.5m market cap.
My Final Thoughts
Bucha is an interesting story that is very underfollowed, underinvested and undervalued. Brent Willis the CEO of Bucha is an health centric beverage industry veteran that has led multibillion dollar companies and beverage sales organization.
Within his first 8 weeks on the job he pulled a rabbit out of his hat with the acquisition of privately held New Age Beverage/Xing Tea group for just under $20m or .4x sales. In return Bucha received an asset that can deliver over $50m of revenue, generate $3m of cash and produce over $3m of EBITDA over the next 12 months.
Bucha is currently trading at less than 1x sales versus 5x to 22x sales of the comparative beverage peer group. Bucha is the only company within the peer group outside of beverage giant Monster Beverage that is profitable. Bucha is one company that investors should take a closer look and you haven't already you should take a sip of Búcha Live Kombucha and see how it stacks up against the competition.
Disclosure: I am/we are long ABRW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investing in OTCBB stocks is often difficult in terms of liquidity and pricing, which may impact investors ability to buy and sell at satisfactory prices.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.