Craft Beer - AB-Inbev: Craft A 6.8% Spread In This Merger

Jun. 22, 2020 4:11 PM ETCraft Brew Alliance, Inc. (BREW)BUD13 Comments

Summary

  • 6.8% gross spread and annualized return 17% if deal closes by mid November.
  • Strong strategic deal with easy implementation for AB-Inbev.
  • AB-Inbev already owns 31.2% of BREW.

Buying Craft Beer Alliance (NASDAQ:BREW) represents an opportunity to park some money on a strong strategical deal with a high probability of closing. Despite some regulatory issues, the annualized spread of 17% is a good risk reward bet. The green light by the DOJ is the only hurdle for the deal to close but AB-Inbev is committed to see it through.

Background

AB-Inbev and Craft Beer Alliance have been working with each other in some form or another for the last 25 years. The last commercial arrangement, signed in 2016 after a strategic review, forced AB-Inbev to pay $20 million to BREW if it did not make a qualifying offer by August 2019. The price to be paid for the all remaining shares would increase yearly, and in 2019 that price would reach $24.5 per share. In August 2019, AB-Inbev decided that would not be making a qualified offer and paid the $20 million. As a result, Craft Beer Alliance share priced tanked to around $8 per share. Nonetheless, a couple months later both companies announced that AB-Inbev would buy the remaining 68.8% shares that it did not own for 16.5$ per share.

The players

AB-Inbev is the largest beer company in the world. After merging with SAB Miller in 2016, the combined entity had around 400 brands. The company has been active in buying craft brands, but recently that trend has accelerated. The $321 million to pay is small change for a company with a market cap of $100 billion and $50 billion in revenues. Despite its mammoth size, the company is struggling with its legacy brands.

Craft Beer Alliance was formed 2008 and operates breweries and brewpubs across the U.S. The company brews, brands, and markets American craft beers. The company has several brands in its portfolio, but its most valuable asset is the Kona brewing company and its iconic Kona brand. CBA had revenues of $ 193 million in 2019.

The Deal

The deal is strategically compelling for AB-Inbev. The company has been growing its craft presence to keep up with the shifts in consumer tastes. The craft beer segment already represent more than 25% of the $116 billion US beer market. Additionally, the craft segment grew 4% in volume in 2019 while the beer market fell 2%. In August 2019, the company bought, for undisclosed amount, the Platform Beer, a rapidly growing regional craft brand. Another strategic key point is CBA integration. The assimilation will be extremely simple since the AB-Inbev already moves BREW brands through their brewers and vast distribution network and is intimately familiar with Craft Brew's portfolio and growth prospects.

AB-Inbev is paying $321 million for the remaining shares that it does not already own, valuing BREW at $466 million. The value paid appears to be more than fair according to the multiples paid.

(Source: Definitive merger agreement)

Additionally, the 125% premium was enough to sway BREW shareholders, who approved the deal in February, leaving the antitrust approval as the only condition outstanding. The DOJ made a second request for further information which was a surprise due to the size of the deal. The deal did not have any financing pre-condition and it will be easy for BUD to pay from its cash on hand.

The implied probability priced in the market for the deal to close is around 88% if, we consider the unaffected price to be $8.05 per share (30 day VWAP pre-announcement price). I believe that the probability to close is higher and that is why the deal spread is interesting, but keep in mind that it in the end is always a binary event.

Risks

In relation to risks, the bigger one is the antitrust, and thus this spread. The second request was in February and on the 16th of June the company announced that it was working with regulators actively to get the approval needed to close the deal. AB-Inbev stated that it would sell the Kona Brewing Operations in Hawaii including the new brewery and two brewpubs. The company said that they were trying to "expedite the regulatory review process and alleviate potential regulatory concerns regarding the proposed expanded partnership." This is the reason why strategic deals are safer than purely financial ones because as they say, "where there is a will there's a way".

Another minor risk is the fact that AB-Inbev is under pressure to reduce its debt burden. The measures to tackle the problem included asset sales, and a $1 billion dividend cut. Nevertheless, the size of the deal is to small and too strategic for AB-Inbev to abandon.

This article was written by

"If you want have better performance than the crowd, you must do things differently than the crowd" Sir John Templeton I am a value investor and I try to look for misplaced bets, bets where the odds are heavily on my side. I make my own research, reach my own conclusions and try be an independent thinker.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may buy, add or sell without giving notice here. Do your own research.

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