- Midwood Capital Management, which manages funds owning about 2% of Craft Brew Alliance, has written to the company's board urging it to pursue a sale to AB InBev or a third party. The letter was signed by David Cohen, Midwood's portfolio manager and managing member.
- AB InBev is the alliance's largest shareholder and also has distribution contracts with the company, the letter said. The most recent contract, signed in 2016, allows AB InBev to make a qualifying offer to acquire the alliance by August.
- Cohen said the Craft Brew Alliance has seen "significant volume declines" from two major brands — Widmer Brothers and Redhook — and faces other profitability challenges in scale. It has gross and EBITDA margins well below its peers. However, growth of the Kona brand, which the alliance bought in 2010, "has remained impressive," the letter said.
Midwood is not the only activist investor to take a strong stance about what a food or beverage company should do if it isn't delivering desired financial results. Jana Partners is credited with pushing Whole Foods toward its acquisition by Amazon in 2017, and it may have also influenced Pinnacle Foods' sale to Conagra last year.
Daniel Loeb's Third Point Management hedge fund has kept pressure on Nestlé to divest certain businesses and split up operations since buying a 1.25% stake in the Swiss company in 2017. So far, it seems to have had some success. Nestlé sold its U.S. candy business to Ferrero Group last year, ramped up investment in coffee and pet food, and now has its European cold cuts business up for sale.
Compared to those big food companies, Craft Brew Alliance is small potatoes, so it's unclear at this stage whether Midwood's letter will have the same impact. But the alliance does own a number of popular brands besides Kona — such as the newly acquired Appalachian Mountain Brewery, Cisco Brewers and Wynwood Brewing — so it's possible AB InBev might be interested in expanding its nearly one-third ownership share to buying the entire company.
Since the beverage giant is already a commercial partner of the alliance and handles its brand distribution — as well as having two members on its board — it presumably has a good sense of how the alliance is doing and whether putting in additional investment is worth the gamble. AB InBev has been buying up craft breweries in the recent past, such as Wicked Weed, Devils Backbone and Karbach Brewing, so it might be interested in taking on some more popular beer brands — particularly Kona.
Midwood's letter could also prompt the alliance to reevaluate its brand portfolio and potentially spin off some of its poorly performing products, including Redhook and Widmer. It would likely hang on to Kona, which posted a 10% increase in shipments during the quarter ending March 31, and the three newly acquired brands, which together saw a 13% increase in total shipments for that period.
Whatever direction alliance executives decide to take, they don't have a lot of time to decide. According to Seeking Alpha, the company's distribution agreement with AB InBev ended distribution fees, increased contract brewing and allowed for a $20 million incentive payment for international distribution payable this year. It seems to lay the groundwork for AB InBev to potentially buy out the alliance.
According to the agreement, if AB InBev doesn't offer to purchase the alliance for at least $24.50 per share by August 24, the alliance gets to retain the benefits spelled out in the revised distribution agreement. It also will get the $20 million incentive payment, and the alliance could then sell itself to another entity such as Heineken or MillerCoors.
There could be quite a bit of other interest in the alliance since craft beers have increased in popularity as the industry struggles to retain consumers. But since AB InBev seems to have the inside track and incentives to make such a move, it's more likely to acquire the alliance, or it will remain a standalone company.