Anheuser-Busch InBev must decide soon how badly it wants to own a fast-growing craft beer brand.
Kona, a Hawaiian brand owned by Craft Brew Alliance of Portland, Ore., posted 7.5 percent volume growth last year, a rare feat in the stagnant U.S. beer industry.
Anheuser-Busch, whose own North American volume fell 2.5 percent, is in a position to benefit from Kona’s success: It owns 31 percent of Craft Brew Alliance and has an option to buy the rest for $24.50 a share, or $327 million.
A-B has until Aug. 23 to exercise the option, but the decision is far from straightforward. The Red Hook and Widmer Brothers brands, which account for a quarter of Craft Brew Alliance’s volume, have experienced a sharp decline.
Also, the U.S. craft-beer boom seems to have peaked. When A-B InBev agreed to the purchase option in 2016, Constellation Brands had just paid $1 billion for San Diego’s Ballast Point Brewing. This month, the similar-sized Dogfish Head Brewery sold to Boston Beer for a mere $300 million.
Craft Brew Alliance shares closed Monday at $15.46, so A-B InBev’s option represents a 58 percent premium. One analyst, Amit Sharma of BMO Capital Markets, estimates that the shares would be worth just $10.50 if A-B declines to pay up.
One Alliance shareholder, Boston-based Midwood Capital Management, is agitating for a sale. It sent a letter last week asking the company’s board to “do everything it can to facilitate ABI making an offer.”
If that fails, Midwood says, the board should put the company up for sale. The question is, to whom?
A-B’s distribution and contract brewing relationships with Craft Brew Alliance would be difficult for a competitor to unwind. A private-equity firm might be interested, but Chris Shepard, senior editor of Craft Brew News, says A-B probably is shareholders’ best hope.
“From Anheuser-Busch’s perspective, it’s a little bit more complicated,” Shepard adds. “Kona is a great brand, but Widmer and Red Hook have suffered greatly.”
Kona has boosted sales almost 80 percent in five years with an image that “crosses over between craft and imports,” Shepard says. Names such as Big Wave Golden Ale and Longboard Island Lager emphasize its beach-beer credentials.
The deal, if it happens, would face antitrust scrutiny. When A-B InBev got approval to buy SABMiller in 2016, it agreed to submit any future acquisitions, no matter how small, to the Justice Department.
Tom Pirko, managing director of California consulting firm Bevmark, doesn’t think that’s an obstacle. “It would be easy to put together a list of solid arguments why this wouldn’t be anti-competitive,” he said. “I don’t see any insurmountable problems here.”
President Donald Trump’s hands-off approach to regulation might be one reason to complete the deal now, even at a premium price. A future administration could decide it doesn’t want the world’s largest brewer owning a top-10 craft brand.
Meanwhile, A-B’s overall strategy in craft beer is unclear. In 2017, when it laid off 300 sales employees, executives said the company was done acquiring small brands and would focus on ones it already owns.
Craft Brew Alliance, however, is almost like family. A-B has had an ownership stake since the 1990s, its distributors have exclusive rights to Alliance products and its Fort Collins, Colo., brewery produces a substantial amount of the smaller company’s beer.
Midwood, the Alliance investor, argues that Kona alone is worth $24.50 a share, given its growth. The beer barons in Leuven, Belgium, and on Pestalozzi Street may decide they can’t risk letting such a gem fall into a competitor’s hands.