WHY IT MATTERS

Keen eyes will note the geographic diversity of Craft Brew Alliance’s network of breweries, covering a variety of regions and beer-loving states across the country. This did not happen by chance.

Dating back to at least 2014, CBA prided itself on a clever tagline that continues to resonate as the number of U.S. breweries has almost doubled from the 3,785 that existed at that point in time: “The Soul of a Craft Brewer. The body of a Big Brewer.” This deliberate credo highlights a core purpose of the company’s broader strategy of embracing localized successes and helping them grow. Whereas AB InBev has turned breweries like Goose Island, Elysian, and Golden Road into national brands, Craft Brew Alliance has shifted in recent years into a “spoke and wheel” sort of approach, creating small hubs for established breweries and helping them grow regionally.

This has epitomized Craft Brew Alliance’s “Kona Plus” strategy, which has shrunk Redhook and Widmer into much smaller, state or regional brands while pushing Kona as a national flagship. Redhook, for example, closed a Washington brewery once capable of 220,000 BBLs a year to focus on a single brewpub in Seattle's Capitol Hill. Widmer has followed a similar path, slowly retrenching in Oregon from a national footprint while refreshing its brewpub.

All this—regional focus, building hospitality locations—has particular consequence because, under a 2016 contract brewing and distribution renewal agreement between Craft Brew Alliance and AB InBev, there’s now about a 10-month window for the multinational conglomerate to purchase CBA. Per the CBA-ABI agreement in 2016 filed with the SEC, AB InBev has a contractually locked-in price of $24.50 per share for the publicly traded company through August 2019. CBA stock has been a bit sporadic in recent months and has spent the early part of fall hovering around $16-$17. Its 52-week high was $21.

Based on an average acquisition premium of 20-30%, the $24.50/share price would easily be above a markup if stock were to stay on the low end of its current range ($16-$17 real stock price, about $20-$22 with premium) or if CBA stock rode last week’s news to continued growth, AB InBev’s buying price would easily be below its value ($21 real stock price high, about $25-$27 with premium).

After years of purchases, AB InBev’s High End unit announced in September 2017 that, with 10 craft brewery partners, the "plate's full" and more purchases weren’t necessary. However, given the longstanding relationship between the two companies that stretches back almost a decade, last week’s moves and other realities may make for worthwhile consideration. These connections aren’t necessarily new (market analysts have suggested this was coming), but there are plenty of factors that indicate things are continuing to move in the right direction for a buyout.

From a leadership perspective, CEO Andy Thomas’ contract with CBA ends on June 30, 2019, which would come right before the August 2019 deadline, and might make for an important voice among an AB InBev leadership structure that continues to evolve. Also, in 2016 SEC filings, the the Compensation Committee of the Board of Directors restructured severance packages specifically should a "change in control" take place via acquisition.

There’s also the simple matter of dollars and cents. Through August 2019, AB InBev has a set price of what it would cost to take over CBA. After that, any company would be allowed to swoop in to make an offer and AB InBev would be required to pay a $20 million sum as part of the company’s international distribution agreement. That cost would be waived in the case of a “change of control event” if AB InBev or an "affiliate thereof," according to SEC filings, made a qualifying offer and CBA accepts it. There’s also the case of an “international royalty payment” that would be one-time costs of $5 or $6 million to cover “costs of production plus reasonable out-of-pocket expenses relating to export shipment costs.”

For a parent company notoriously fickle about spending and creation of profit, the idea of spending millions beyond an already agreed upon contract may not be the most palatable move.

What could make the decision easier is the centerpiece to CBA’s strategy. As one of the faster-growing breweries in the country, Kona offers a unique opportunity for AB InBev. The Hawaii-focused branding has potential to offer a second, unique lifestyle brand behind the unstoppable force that is Michelob Ultra, and could even offer a counter to top import Corona, itself having built success on the idea of “find your beach.” Kona could present an interesting counter-punch for AB InBev in this case, after the company needed to sell Corona’s U.S distribution rights to Constellation Brands in 2013 to gain antitrust approval to merge with Grupo Modelo.

In the five-year span between 2013-2017, Kona increased its IRI-tracked sales volume in grocery, convenience and other stores by 56%. That rate has slowed in recent years and year-to-year growth may be about flat in 2018, but in IRI stores, Kona is still selling about the same amount as Firestone Walker and more than Goose Island through the start of October. Most importantly, IRI doesn’t account for the brewery’s increased on-premise presence where draft plays a significant role for the company.

What’s more, CBA internal tracking showed that Kona volume was up 45% internationally in 2017. Whether home or abroad, there’s lots to like about Kona, especially with a new, $20 million brewery—complete with a capacity of 100,000 BBLs—coming online. Adding an already-established brand that exists within the AB distribution network offers lots to be excited about for those involved, should a buyout happen.

But it also presents a unique challenge with a solution potentially made easier by CBA’s structure. After spending years compiling craft breweries, AB InBev and its High End met some market resistance last year, which led to a restructure of staffing among High End employees. Almost entirely across the board, the AB InBev portfolio of craft breweries have shown growth, particularly in 2017. The lone exception has been Goose Island, which actually shrunk by 1% in volume from 2016-2017 while others like Elysian (111%), Wicked Weed (82%), Karbach (46%), and Blue Point (40%) showed strongest growth year-to-year in that timeframe. As a whole, there was an 11% combined volume growth from 2016 to 2017.

But with the exception of Kona, most of CBA’s breweries have the advantage of not trying to be the national or international giants some High End brands are being built up to be. With a stronger, localized focus, Redhook and Widmer have worked to entrench themselves in the markets that made them into recognized companies, and Appalachian Mountain and Wynwood have smaller ambitions (at the moment) that connect to their home states or immediate surrounding areas. Both do exist in close proximity to AB InBev breweries—Wicked Weed in Asheville, North Carolina and Veza Sur in Miami—so it would be worth considering the appeal of these brands and whether CBA’s new purchases would ideally fit geographically. Cisco beer can be found along the East Coast, but CBA has been specific in its intent to support brands positioned to scale relevance in strategic markets.

In 2015, the company identified the Northeast and Southeast as areas least developed for its brands, two regions that also had lots of room to grow in relation to craft volume share. At the time, CBA estimated that the Southeast accounted for 9.8% of craft’s national case volume and the Northeast compiled 11.3%. Whether it would be overkill for AB InBev to have additional properties in these areas is one issue at hand, but if localized penetration is worthwhile in what would essentially be underserved areas compared to national sales, perhaps it’s not the worst game plan to consider.

And, for what it’s worth, craft brewing consumer insight company DataQuencher found that Florida (50%), Massachusetts (54%), and North Carolina (57%) residents all underindex against an average of beer drinkers (59%) who say that "locally-made products" are very important. In the cases of Wynwood, Cisco, and Appalachian Mountain, local matters, but the ultimate corporate structure may not be as strongly correlated to purchase decisions, something that follows broader trends with marketing when it comes to beer.

CBA actually highlights this connection in a 2018 investor deck in which it places its collection of brands and partners alongside The High End, touting beers in development that could be ideal to distribute alongside AB InBev's craft offerings. From Kona, a Radler and pineapple IPA; Widmer with an IPA with terpenes (mimicking marijuana, like others); an Oyster Stout and Hazy IPA from Cisco; and more.

These potential connections and CBA’s proactive approach to its future is not without guidance, either. CBA partnered with the Yale School of Management to lead analysis of marketplace and consumer behavior, and this summer launched the "pH Experiment," which provided 50 participants access to a new brand every month if they were to provide feedback on their impressions and alcohol buying habits. CEO Andy Thomas has long called for greater attention to be paid to beer’s place among other beverage options, citing the need to bring beer into more “occasions” against wine and spirits in particular.

If not of interest to AB InBev’s already sizable collection of craft brands, another hurdle to consider would be potential Department of Justice involvement, who issued a requirement to AB InBev in 2016 as part of its purchase of SABMiller that the DOJ could investigate any further brewery acquisitions, should it have interest. (It’s unclear if a purchase of CBA would be seen as one giant buyout or many individual transactions.) But at the very least, laying out CBA’s path for the next year shows what Craft Brew Alliance might offer another interested company come September 2019, when InBev’s exclusive purchase window will have closed.

So whether all these dots actually end up connecting Craft Brew Alliance and AB InBev is one thing, but given last week’s moves and CBA’s positioning up to this point, it makes sense that nothing is completely certain. That is, at least until next summer.

—Bryan Roth