AB InBev Should Strike While Kona's BREW Is Cold

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About: Craft Brew Alliance, Inc. (BREW), Includes: BUD
by: Mike Loughran
Summary

Q1 showed strong KONA results with total depletions up 16% in the quarter and an increase of 25% in points of distribution. Big Wave STRs expanded in the mid-20s%.

CBA launched its first national KONA ad campaign late Q1/early Q2 during March Madness. Big Wave April depletions surged to 37% as the Bruddas "One Life" message resonated.

Investors are discounting the minimum $24.50 CBA buyout due to weakness in legacy brands and deal fatigue. SAM's acquisition of Dogfish Head jolted the somnambulant, demonstrates BREW shares are cheap.

Deal fatigued longs and short selling drove BREW shares to 52-week lows, due diligence data points should comfort the longs.

BREW shares are trading significantly below market value and $9 below a $24.50 proposed buyout price as investors wait and worry over whether or not Anheuser-Busch InBev (NYSE:BUD), hereafter AB/I, will buy Craft Brew Alliance (NASDAQ:BREW), hereafter CBA, prior to an 8/23/19 deadline. Investors should sit back, breathe easy, and enjoy a cold one as due diligence efforts demonstrate AB/I is expanding sales in Brazil and Chile as they prepare to initiate KONA brewing in Brazil next month. It is extremely unlikely that AB/I would choose to pay $30/Barrel royalties instead of owning the brand and potentially lose international distribution rights in seven years.

If AB/I fails to buy CBA, there are literally a dozen potential buyers for CBA who could take advantage of KONA's availability and opportunity both domestically and internationally. Several potential suitors have already announced multi-billion dollar M&A budgets and made pronouncements that they are looking for craft growth brands. These companies would be able to buy CBA on 8/24/19 and keep many favorable agreements in place.

AB/I entered into a series of agreements with CBA in August 2016, including the potential buyout of BREW shares for a minimum of $24.50 by 8/23/19. A brief review.

An M&A wave had hit the craft brewing market in late 2013. AB/I participated in this movement, acquiring eight craft brewers between 2014 and 2017 around the U.S. CBA seemed out of mind for AB/I, despite its two-decade relationship and 31.2% ownership in the company.

CBA shareholders watched with angst as AB/I binged on new craft acquisitions. Then, near the end of the M&A wave, CBA shareholders learned that AB/I was indeed evaluating the company and how they might work more closely together and eventually consider a buyout. These objectives and agreements were revealed in a series of agreements published in a comprehensive 8-K dated 8/23/16.

This 8-K was comprised of three main agreements. The Contract Brewing Agreement established that AB/I would contract brew up to 300K barrels of CBA's largest selling brands in their breweries providing the company with reduced production costs of approximately $10/barrel.

The International Distribution Agreement established AB/I as the exclusive distributor of CBA products going forward and called for the transitioning of existing international distribution to AB/I. The 8-K demonstrated that AB/I had some concern regarding the potential of a third party change of control, and AB/I crafted the agreements to lock in ownership of the CBA brands for international distribution in the event this occurred. In exchange for these rights, AB/I agreed to annual payments of $3MM, $5MM, $6MM, and a final $20MM payment in the event they did not buy CBA by 8/23/19.

The third agreement was an amendment to the Master Distributor Agreement which established reduced case fees for distributing CBA. These agreements also established a framework for an AB/I buyout of CBA for a minimum of $24.50 by 8/23/19.

CBA shareholders gained some protections in that if a deal was not ultimately reached, CBA would receive a final payment of $20MM, and all of the favorable agreements would remain in place for CBA until the end of their terms. CBA would also be able to sell itself to any other buyer and still the agreements would remain in effect.

Now, just slightly more than 3 months remain until the end of the agreement and BREW shares languish significantly below the minimum buyout price of $24.50. Concerned investors and short sellers have interpreted the lack of movement by AB/I as a clear signal AB/I has no intention of buying CBA, and the shares are trading at approximately $15.40. Short interest increased from 515K in January 2019, peaked at 960K shares in April, and now sits at just under 890K shares.

This article will demonstrate that many data points seem to signal AB/I is in fact moving closer to the acquisition of CBA and that the companies have never been more inter-dependent. I believe a close look at AB/I's actions and behind-the-scenes developments, uncovered by my due diligence efforts, demonstrate that AB/I remains extremely interested in CBA or the KONA brand at a minimum, as well as ownership of the international distribution rights for CBA products.

Should AB/I not buy CBA by 8/23/19, there will be a competitive advantage shift toward CBA as well as the potential for a third-party change of control. A buyer of CBA after that date will be able to both utilize AB/I's distribution system and production capacity at extremely favorable terms, while also gaining the right to terminate AB/I's international distribution rights at the agreements end in 12/26.

A careful reading of the 8-K establishes how important the international distribution rights were to AB/I when the agreements were crafted, and I believe these to have only become more important to AB/I since. AB/I can secure ownership of all CBA brands and international distribution rights for as little as $325 million for the shares it does not currently own by buying CBA at the minimum qualified offer price of $24.50.

As a result, I place a high degree of confidence that AB/I will buy CBA by the 8/23/19 deadline, indicating that the shares currently offer over a 60% return in the next three months. $325 million is a small sum for AB/I to own the international distribution rights for all CBA products, gain CBA's significant craft brewery assets, as well as full ownership of the fast growing KONA brand.

Recent Results

KONA sales in Q1 were strong, and March Madness Ad Spending propelled Big Wave Sales in late Q1 and into Q2.

The KONA brand continues to defy craft headwinds, notching another fantastic quarter of growth. CBA's first ever national ad campaign, an $8MM spend during the NCAA March Madness tournament, supercharged the brand and, more specifically, KONA Big Wave. The first glimpse of its effectiveness demonstrated a surge of 37% for Big Wave depletions in the month of April. Q2 will continue to benefit from the campaign and coordinated sales efforts with AB. KONA expanded distribution points by 25% prior to the ad campaign as the "white spaces" were filled in many parts of the U.S. On the Q1 conference call, we learned that the KONA ads had a significant impact on brand awareness and led to a 4X increase in web searches to identify the brand and locate points of sale, which bode well for increasing sales in Q2.

Given the potential for an Anheuser-Busch InBev buyout of CBA at a Minimum of $24.50, Why are BREW shares trading at $15, with just under 100 days left?

The current market value of BREW shares clearly indicates that the market has virtually no confidence in a potential buyout by AB/I at $24.50, as outlined in the 8-K dated 8/23/16. The stock price seems to reflect the uncertainty as well as perhaps a lack of confidence in CBA's go it alone "KONA plus" strategy, should the company be left at the altar by AB/I. At the same time, it is completely discounting the potential for a third-party change of control, which I believe is likely, should AB/I not buy CBA.

Having authored a number of articles on CBA available on Seeking Alpha, several professional investors, analysts, and a number of individuals have spoken with me over the past years to discuss the deal, as well as debate the likely outcome.

Two arguments have been repeated with some frequency as to why the market so discounts the potential of an AB/I offer. First, some argue, if AB/I was truly interested, they would have already bought CBA by now, and secondly, the failing legacy brands of Widmer and Redhook likely dampened any interest AB/I originally had in CBA.

The first argument can't be ignored out of hand and arguably has some merit. Nearly 33 months of a 36-month agreement have elapsed, and AB/I has not made a qualifying offer. An examination of the process and what has transpired during this seemingly interminable time frame, as well as major roadblocks being resolved methodically, gives me significant confidence that a qualifying offer will be made under the terms of the agreement.

The second argument, the hypothesis that Widmer and Redhook's legacy brand weakness would discourage an AB/I bid for CBA, signals a significant degree of unfamiliarity with the 8-K dated 8/23/16. This document explicitly states that CBA can sell up to 50% of its assets (the legacy brands) and not trigger the "change in control provisions" outlined in the agreement, but the company is explicitly prohibited from selling any KONA related assets. The insignificance of the legacy brands from an AB/I perspective could not be more clear in the agreements.

Is there a logical explanation for the significant delay in the proposed AB buyout of CBA? I believe so...

To say that AB/I had a lot on its plate during the past 33 months would be an understatement. First, there was the $107 Billion acquisition and massive integration process of digesting the SABMiller deal. AB/I got right to work integrating this acquisition and progressing on the $3.2 Billion savings promised investors.

Following this acquisition, a two-year review was undertaken by the U.S. Department of Justice (DOJ) with the final transaction approval being received on October 22, 2018 - just seven months ago. The leadership of AB/I's High End division then changed in early January 2019 and, in February 2019, AB/I refinanced a significant portion of its long term debt. In fact, AB/I CEO Carlos Brito articulated confidence regarding the refinancing on the AB/I Q1 conference call, noting that, in the first quarter, AB/I

"...completed both the US and Euro notes offering... allowing us to significantly extend out debt maturity profile and eliminate refinancing pressure for the foreseeable future. These transactions enable us to repay our debt with free cash flow."

Clearly, these events have preoccupied AB/I management, and the logic of delaying a deal until after a significant refinancing is complete is sound. So, that brings us to mid-May - why was the deal not announced yesterday?

If you accept that there have been distractions for both companies, the next step should be easy. Let's examine the players action on the court, while the market and investors appear fixated on the game clock.

The market is focusing on the game clock, not the player's actions.

Let's start with an examination of what has been undertaken and accomplished since Q3/18.

On the Q3 conference call (transcripts are available on Seeking Alpha) in mid November, investors were informed that AB/I & CBA invested a "modest" sum and jointly promoted the KONA brand in Florida. The Florida "test" included a fully integrated retailer/wholesaler effort by both company's sales and marketing teams and drove KONA depletions to 44% in Florida, while the craft segment remained flat. Ken Kunze, CMO, spoke about AB/I's wholesaler network "embrace of the KONA brand" and noted the alignment of AB/I's and CBA's commercial interests. Clearly, the Florida test was a great success, and it begs a simple question. If AB/I had no intention of buying CBA in Q2/18, why would it have undertaken this test in Florida in Q3/18? I believe this signals the potential buyout of CBA was still under consideration at this point.

On the Q4/18 conference call, investors learned that Q4's Big Wave STRs increased 36% and were +30% in the competitive on-premise channel. Those results are in a Q4, seasonably weak, quarter, and are therefore all the more impressive. Investors further learned that, as a result of the success of the Florida test, there would be a significant ramp up of marketing spend in Q1 and Q2/19 as CBA planned to invest $8MM in KONA ads during the NCAA March Madness basketball tournament.

My interpretation is that the Florida "test" was so successful that it was going to be extended to the national level. Again, would AB/I participate in significant wholesaler events to propel KONA brand growth if it was wholly disinterested in acquiring CBA? As a result, I do not recognize significant merit to the "no-deal" outcome in what is commonly accepted as a "binary" event. And, I am certainly not watching the game clock.

If AB/I was not interested in KONA, why would its entire sales force and distribution arm be put behind the KONA brand now on an expanded national level? If AB/I is no longer interested in the KONA brand, why would it undertake joint marketing initiatives that make CBA more attractive to other third-party potential bidders following the 8/23/19 qualifying offer expiration date? A successful result would only seem to put AB/I's interest in owning the international distribution rights at greater risk by attracting a third-party change in control.

In preparation for this ad spend, investors were told KONA's distribution would be expanded nationally. We also learned that 100% of CBA's top AB/I wholesalers would participate in the promotional event. It was also announced that an additional second national wholesaler incentive event would occur in June.

We also learned about CBA's KONA team presenting the KONA brand to the entire AB/I wholesaler network in January 2019 at the annual AB/I National Wholesaler Conference. This event is normally for AB/I wholly-owned brands and not open to others to pitch AB/I's wholesalers and sales force. This invitation certainly does not demonstrate indifference toward KONA on the part of AB/I.

Clearly, CBA investors will benefit significantly from these marketing efforts, the significant ad spend, and the "delay" in completing a transaction. Investors should also realize that KONA was a 397K BBL brand in FY16 growing volumes 12.9% when the terms of the buyout were crafted. Q1/19 KONA volume is 54% greater than the corresponding volume in Q1/16, and the brand is expected to have significantly higher growth in FY19. Investors will be far better off selling today than on the FY16 numbers, which led to the minimum buyout price of $24.50.

So, in retrospect, isn't it common sense that the KONA brand was expanded nationally and then supported with its first ever national ad campaign? Is that not what any seller would do in order to maximize proceeds in the event of a sale?

The last remaining hurdle that I see is the finalization of the lawsuit over the KONA labeling issue, which is now scheduled for judiciary review June 13th. In mid June, all parties will have better information regarding the success of the national KONA ad campaign in the quarter, a better handle on CBA valuation, with all KONA litigation issues resolved.

CBA Valuation Revisited

The market has been struggling to determine what valuations are appropriate for craft brands today and there have been few large deals with which to compare. As if on cue, Boston Beer (NYSE:SAM) last week announced the buyout of Dogfish Head, a successful and respected brewer in the 280K BBL range expected to grow 9% or so to about 300K BBLs. SAM paid $300MM for the company, which works out to about $1,070/BBL. The Dogfish Head acquisition not only signaled the next M&A wave had arrived but also that it was impacting the largest craft brands, not just smaller regional brewers and brands. I believe the KONA brand is worth at least this amount per barrel.

The Dogfish Head brand is more profitable than KONA to be sure. But I believe KONA has ample room to expand its margins, but currently, CBA seems singularly focused on increasing market penetration and generating volume gains. I would expect that CBA has already tested the price elasticity of demand in several markets and not only can negotiate any transaction with that data but also initiate some price increases following the current marketing effort.

Any acquirer of KONA will certainly see that there is pricing power, given the significant growth rate relative to the flat results seen in craft. Therefore, some of this profitability differential will be eliminated. KONA, a Hawaiian beer playing as an import, has fewer natural competitors than an IPA brand and an easier marketing channel forward. Pete Dunlop, a respected craft beer aficionado and author recently referred to the KONA brand as a "unicorn", which appears to me to be the most succinct description of KONA and its place among other craft brewers. As a "unicorn" brand, it occupies a unique place in the market and is difficult to duplicate, which increases its value over brands competing in more crowded spaces.

In addition, KONA's brewers (like many of CBA's brewers) seem to keep brewing winners. In addition to Big Wave's success, Hanalei IPA and Kona Kanaha were the number 4 and number 7 new product introductions in 2017 and 2018. These are impressive results, given there were over 1,000 new SKUs in these years. This shows KONA to be a powerhouse brand with brewers capable of formulating additional craft winners.

KONA is likely a 520-530K BBL brand in FY19 growing in the high teens. Moreover, the KONA Big Wave portion of the pie is approaching 50% of the brand volume with even higher growth rates.

Another important difference is that KONA is already available in over 30 countries via Craft Can Travel, and Ambev (NYSE:ABEV) is slated to begin brewing KONA in Brazil in Q2. So, KONA has far greater potential as an international brand. For AB/I, once Craft Can Travel agrees to turn over their assigned territories, it has approved labels in over 30 countries that can be expanded quickly (CBA DECK, Slide 13). That is an extremely valuable asset to CBA and only available to AB/I until 12/26 without a qualifying offer being made.

In conclusion, KONA's success both in the U.S. and abroad has been significant. The March Madness marketing spend certainly moved the needle in April, but more importantly, comparing KONA to itself 3 years ago when the terms of the agreement were finalized, or to other brands today, nothing in its performance would seem to diminish the brands attractiveness to AB/I. In fact, quite to the contrary, KONA seems of much greater value to AB/I.

If KONA was valued at $1,100 and assuming FY19 volumes of 500K BBLs, just the KONA portion would be worth $28 per share.

Given this, I am going to address one other observation at length, then will adopt a quicker format to list other data points and observations.

Anheuser-Busch InBev has two seats on the CBA Board, a review of these individual's expertise seems to support the CBA buyout thesis.

For decades, AB/I assigned directors to the CBA BOD remained on the BOD for at least a decade and there was little turnover. AB/I's directors typically included one senior AB officer and a member of the AB/I Wholesaler Development group. Here is a review of AB/I's directors serving on the CBA BOD since the deal agreement was signed. Note both the expertise they brought to the BOD as well as their short tenure as the deal clock has wound down. (Note: these are not formally known by their seat numbers, I do it to chronologically demonstrate how the assignments unfolded).

Seat 1

Thomas Larson, General Counsel of AB/I

Mr. Larson was on the CBA BOD from 7/2011 through 12/2016. Mr. Larson was a signatory to The Contract Brewing Agreement as Senior Associate General Counsel, as well as a signatory to the International Distribution Agreement as Chairman of the Board, President and Secretary of Anheuser-Busch Worldwide Investments, LLC. Mr. Larson left the CBA BOD at the end of 2016 following the completion of the agreements that outline the proposed buyout of CBA by AB/I.

Nick Mills, VP Supply High End and Brewmaster

Mr. Mills joined the CBA BOD in January 2017 and brought his brewing expertise to CBA at a time when CBA was rationalizing its brewing footprint, shifting 300K BBLs of KONA production to AB/I breweries in Fort Collins, CO, and undertaking the construction of a new KONA brewery in Hawaii. He currently serves on the CBA BOD.

Seat 2

Mike Taylor, VP Business Development and Strategy/Transactional Execution

Mr. Taylor served on the CBA BOD from 1/2017 through 5/2018 when he departed to take a position as CEO of a craft brewer. Mr. Taylor had been responsible for identifying craft acquisition candidates for AB/I and negotiated many of AB's craft acquisitions.

Joao Paulo Falcao Veira, Head of M&A for the High End for Ambev Brazil

Mr. Veira served on the CBA BOD from 6/2018 through 12/2018 as AB/I and its subsidiaries commenced distribution of KONA products to Brazil and began planning for the production of KONA in Brazil.

Matthew Gilbertson, Senior VP

Mr. Gilbertson joined the CBA BOD in 2/2019, just three months ago. Prior to joining AB/I, for ten years, Mr. Gilbertson was an investment banker with the business valuation firm of Duff & Phelps.

So, my first observation is that where AB/I assigned directors previously would spend a decade or more on the CBA BOD, since the agreements were signed, directors were assigned that could help integrate CBA into AB/I. Each successive director brought a distinct skill set, which would allow AB/I to evaluate and integrate CBA in the event of an acquisition.

The recent appointment of Mr. Gilbertson is especially interesting, given his background in investment banking and valuation. I believe AB/I will buy CBA, likely keep KONA and then dispose of the brands and assets it does not want. Mr. Gilbertson's background is exactly what is needed to value both KONA as well as any legacy brands they choose to sell.

I believe it is likely that AB/I will purchase the entire company and then simultaneously divest brands it does not want in that it could then terminate the favorable terms of the agreements that it would not want to continue on with a subsequent buyer. If any part of CBA remains, then those favorable terms last until the end of the respective agreements, which is not beneficial to AB/I.

It appears convincing that the AB/I assigned directors to the CBA BOD took on the role for shorter periods and lent expertise directly related to the integration of CBA into AB/I and expansion into Brazil.

Additional Data Points, Observations, and Discussion:

Craft Segment M&A is heating up - how will it impact AB/I & CBA?

I noticed with some interest in March 2019, when Constellation Brands (NYSE:STZ) sold $1.7 BN worth of wine businesses to E. & J. Gallo while stating they had interest in acquiring more high end beer brands. Then, just two weeks ago, Simon Thorp, a noted deal maker, was tapped to lead Lion Global Markets, the North American craft beer division of Kirin Holdings. Mr. Thorp started the last M&A wave when he led Duvel Moortgat's purchase of Boulevard Brewing in October 2013.

And now, last week, Boston Beer bought Dogfish Head, a 280K BBL craft brewer for $300MM. This is the largest in the latest series of M&A transactions and marks the arrival of the next M&A wave in my opinion. The last acquisition boom was mostly smaller breweries in the 50K BBLS and below although Heineken's (OTCQX:HEINY) purchase of Lagunitas did take out a top 10 craft brewer.

It goes without saying that we have no idea if any of these players would be interested in acquiring CBA (or KONA). But it is a certainty that if companies are looking to acquire large growth brands, there are few 500K BBL brands available that are in rapid growth mode to choose from. In this category, KONA stands out.

The market is not only discounting an AB/I buyout of CBA but summarily dismissing the potential for a third party acquirer. The majority of CBA analysts and commentators have focused almost exclusively on the possibility of a binary outcome for CBA: AB/I either buys CBA or CBA remains independent. I don't believe the outcomes are limited to these two, and the recent influx of foreign investment would seem to support this contention.

Given that the distribution and contract brewing agreements will remain intact, that opens up a range of possibilities including foreign buyers for CBA. Few had heard of Duvel Moortgat or Cerveceria Dominicana before they bought out U.S. craft beer companies. More recently, Mahou San Miguel teamed up with Founders to buy 70% of Avery Brewing in Colorado.

KONA's market trend defying growth in the U.S. as well as its success in international markets surely should make CBA a potential target by a large AB/I competitor or even a financial buyer.

It is ironic that the 8-K was so focused on AB/I's protections in the event of a third party change of control, and now, 100 days short of the most opportune time for that event to occur, the market remains fixated with the negative result of a binary outcome.

Apparently lost is that all of the favorable agreements remain in force if AB/I fails to buy CBA and that this event increases both the number and type of potential acquirers for CBA. Not only would CBA remain attractive to brewers, but financial buyers would now have the opportunity to act, supported by AB/I production and distribution agreements which remain in force.

Imagine the opportunity for an international brewer. Buy CBA after 8/23/19, have them brew new brands or other owned brands, and then have the AB/I system at your service for distribution.

I believe CBA's attractiveness to a financial buyer is also a distinct possibility. A financial buyer might sell all of the legacy brands to large brewers who could re-establish them as national brands. These brands had 35 years of marketing and market presence but no funds to support the brands. Like KONA, Redhook's Brewlab is producing some of the best Redhook beers ever made - but they are currently only available at the BrewLab pub in Seattle (BrewLab Beers, Scroll to Bottom). These new brands can compete with many higher priced craft products, and there are national players that could use these additional brands. And if you are a fan of Mexican style beers/ Corona, go try El Sonido, a brand new brew from Redhook.

A financial buyer could then divest the breweries and contract brew with the new owners for production needs. KONA would then be left as a fast growing virtual brewer with little overhead. KONA could then be spun off into a new publicly traded vehicle, which would be a very attractive craft beer stock, especially if continued growth affords pricing power. My point here is that the sum of the parts here is far greater than the current $300MM market cap afforded by the market. KONA alone should be worth a minimum of $500MM and more if there are multiple bidders which I would expect in the event CBA passes on a deal.

If AB/I passes on CBA, they could stand to lose all CBA international distribution rights in 2026

AB/I announced the potential for a buyout of CBA and their interest in KONA and, more specifically, KONA for international distribution in the 8-K. Investors were recently told AB/I had successfully completed test batches in Brazil and would commence brewing there in Q2, using that as a base for further distribution gains in the region. Again, would AB/I expend all this effort if they stood to lose the rights to international distribution in 2026?

Remember, should AB/I pass on buying CBA, then they will have paid CBA $34MM for the distribution rights thru 2026, but in addition, they will be obligated to pay CBA $30-40/BBL royalty for each barrel of CBA products sold internationally until the end of the agreement. Any brand that they are not actively selling abroad can be recalled by CBA unless "cured" by AB/I within 90 days. AB/I would either need to distribute the brands or give up their rights on a market by market basis. I believe the royalty plan to be a good one, should AB/I pass, CBA could see if any other major brewers in those markets had an interest in a similar deal- license CBA brands and brew them for their home markets.

Several have been quick to comment that AB/I would be able to pass on the deal and renegotiate the terms at a later date. That is simply not guaranteed - if a third party change of control occurs after 8/24, that party may have no interest in extending those rights for AB/I, but could exploit those markets for themselves.

On a recent conference call, shareholders learned that AB/I's subsidiary, ZX Ventures, reported that the Big Wave introduction in Rio de Janeiro was the most successful new product launch in Brazil in the company's history. The most successful product launch in Brazil ever, but the market thinks AB/I will pass on buying CBA - talk about a disconnect. Again, one has to wonder why AB/I would allow for any window of opportunity for a competitor to make a move on CBA and win KONA both domestically and eventually the international portion as well.

And, if that does not give you pause, searching the internet recently, I found that KONA distribution has already expanded beyond the Rio market and has become available in Chile. Here KONA products are sold as an integral part of a mixed AB/I 12 pack. There are several mixed 12s available that include one or more of the KONA products and they can be seen HERE.

There is also a KONA Big Wave & Longboard mixed 12 pack:

Here, again, the thought that AB/I is not interested in KONA runs counter to the evidence. These photos are from Casa de la Cerveza, a Chilean company which ships products throughout Chile. Not only are CBA's KONA beers integrated into many different 12 packs, but the prominence of KONA in the mixed AB/I packaging seems to showcase the KONA brand.

Moreover, at the minimum deal price, AB/I would only have to spend $325MM to eliminate all of this uncertainty and lock in ownership of the KONA brand in the U.S. and globally. Is all of the potential downside for AB/I not worth $325MM? It seems like a small price to secure KONA for domestic and international markets.

Effective April 1st, Christine Perich was named CFO & Chief Strategy Officer

Ms. Perich's background is impressive, including 16 years at New Belgium Brewing where she served as CFO, COO and ultimately President & CEO. She helped grow New Belgium into the 4th largest craft brewery. I find two things interesting about this hire. First, her most recent work experience was a 6-month consulting assignment with Owl's Brew, which is an AB/I ZX Ventures partially-owned company (the same AB/I subsidiary that reported the strong introduction of KONA in Brazil). In addition, her job does not require her to move to Portland, OR from Fort Collins, CO. Other CBA officers have had to establish residence in Portland, so this is moderately interesting as a data point given her hiring was made within 5 months of the end of the agreements.

The contract brewing agreement between CBA & AB/I was extended for another year on February 20, 2019

This agreement is important in that is demonstrates that it is more efficient for AB/I to use CBA breweries for some products. The size and locations of CBA's breweries complement AB/I's craft portfolio, and their reliance on CBA to brew these products supports the theory that AB/I would be interested in these brewing assets.

Insider transactions in BREW shares

There has been virtually no insider selling in BREW shares. One AB/I director sold less than 2K shares a month ago, but insiders have held onto over 2 million shares of stock for a considerable period. In July 2018, BREW shares traded as high as $21. This represented a 14% discount to the minimum AB/I buyout price of $24.50, yet there was no insider selling. If insiders had significant concerns regarding the deal or the future of CBA, with or without an AB/I buyout, you might expect an insider to take some off the table, given the small discount to the minimum deal price. But none did.

This is one of the issues that makes me wonder about the short sellers in BREW, who are currently short 900K shares in the face of a potential AB/I $24.50 minimum buyout. The short thesis lacks the insider selling that one would expect if insiders had fear that an AB/I buyout was unlikely or that the post "no deal" event would not be promising. Clearly, the insiders are comfortable holding BREW shares and do not see the downside the short sellers believe is in store.

Recently, the "Find Beer" tabs and corresponding craft beer maps available on the CBA brand's web sites were updated and the format changed to appear very similar to AB/I's craft brand maps

For instance, if you go to konabrewingco.com and hit the "Find A KONA" tab, you can search geographical locations for specific KONA beers. To see the similarity, enter Zip Code 98122 for both brands.

Each of the CBA and AB/I brands has their own website, and on this website, you will find a "FIND BEER" tab. You can search by City, State or Zip code and find where a particular beer is available by type of store. Within the past month, CBA maps were changed and now appear significantly similar to AB/I's own craft beer brands mapping. Here is the "Find Beer" result for Goose Island. From the "beer tab" enter IPA, then 98122. The prior maps for CBA products were distinct, and I believe provided more useful information, but now, they are virtually identical to AB/I craft brand maps. Again, just interesting timing for a distributors function to be somewhat streamlined for CBA and AB/I brands.

Anheuser-Busch Bier Gardens serve Big Wave

For the past several years, I have surveyed AB/I's bier gardens which are co-located with several of AB/I's main breweries. I have repeatedly found that they serve Big Wave on tap and often have other KONA beers available in bottles. Last week, all of the AB/I bier gardens were serving Big Wave. One hostess I asked if Big Wave was on tap reported, "let me check, that stuff sells out so fast, I want to make sure we will have it for you". Now, of course, this just could be that the local manager likes Big Wave, and he is trying to please his customer base, but I think the truer picture is AB/I continues to test KONA beers in its facilities. And, remember, beer is normally shipped from breweries to distributors, but in this case, KONA is being delivered to these AB/I bier gardens (shipped to the breweries) and made available to AB/I's guests. It does not seem to comport with a no-deal hypothesis.

CBA's open Corporate & Operations job positions have plummeted in the past month

I have tracked Job Availability on the CBA website under the "CAREERS" tab for over three years. Several months ago, it signalled the likely arrival of a new CFO as the CFO listing was dropped from the list.

Over the past three years, there have on average been 28-35 positions available in "Corporate & Operations". This would represent about 5% job/workforce availability, and it has remained remarkably constant. About a month ago, this number fell to the mid teens, and this morning has fallen to 11 open jobs, representing a significant new low. This, of course, can be viewed many ways - lower employee turnover or a new CFO impacting hiring and firing events, or it could signal CBA is curtailing hiring prior to a transaction. I am just reporting something has changed significantly in the hiring needs at CBA. It is but a single data point. But an interesting one.

Final Thoughts

In conclusion, if AB/I was attracted to the KONA brand nearly three years ago, nothing in KONA's performance has occurred that should diminish the appeal of the brand to AB/I. The Kona brand is 30% bigger and growing faster than when the agreements were signed. Given that AB/I is now making its international push with KONA, with guidance for brewing in Brazil to come online in this quarter, it is difficult to see that AB/I would undertake these efforts unless it intended to buy CBA and control the KONA brand both domestically and internationally. Again, shareholders learned that KONA in Brazil was the most successful launch in AB/I's history, why would they walk away from that?

Domestically, the coordinated marketing efforts and the preliminary results also demonstrate the companies are mutually interested in working together to drive KONA sales and that the efforts have been remarkably successful in a period of tepid craft results.

The wait for CBA shareholders has been excruciating to be sure and several long standing Institutional Holders just could not hold out any longer awaiting an AB/I decision and sold large portions or all of their positions. Given the size and relative growth rate of the KONA brand today, shareholders will be far better off today than if CBA was sold three years ago. Moreover, it is clear both companies have had a myriad of events to deal with and the timing just has not been right or optimum for CBA shareholders.

I believe AB/I will make a qualifying offer for CBA as the KONA brand offers it significant growth possibilities both domestically and internationally. KONA will have grown on its own to nearly 10X in revenues for the average craft acquisition AB/I has made. Few brands offer AB/I the opportunity for rapid growth like KONA in the hands of the AB/I marketing and sales force.

The $8M March Madness marketing spend I believe represents a KONA wedding dress - if AB/I chooses to not buy CBA, KONA is dressed up, in better condition than it has ever been, and ready for a partner who can significantly ramp advertising spend and further ramp its growth. And none of that would be good news for AB/I.

Disclosure: I am/we are long BREW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long BREW shares and options and reserve the right to make adjustments to my portfolio as market conditions dictate. I intend to continue this approach beyond the established deal end date.

I am a former Director of Redhook Ale Brewery and negotiated the merger with Widmer Brothers Brewing to form CBA. I have been off the BOD for over 10 years.