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Tuesday, August 27, 2019

The Day Anheuser-Busch Blinked

It turns out I was wrong. For the past couple of years, I had been expecting and predicting that Anheuser-Busch would purchase the Craft Brew Alliance based on contractual terms agreed to in 2016. The final deadline came and went last week with no offer. Blink.

There are reasons for everything and those of us who expected a deal missed the most important indicator...which is that the last of three escalating offer prices agreed to in 2016 was entirely too high in 2019. That's really what it came down to.

The escalating contractual prices have been reported here and there over the course of the last three years. During the first two years, AB could have purchased the CBA for less than the $24.50 required by the final 2019 deadline. It failed to act.

Had AB followed through with a purchase last week, the hefty price would have delivered a veritable financial windfall to CBA shareholders and executives, alike. Those folks are now holding stock that's trading at around $10/share. They were hoping for a gravy train deal that didn't happen. Sucky.

It was fairly obvious in recent weeks that the chances of a deal were dimming. The stock price was meandering around at under $15. Had anyone sniffed a deal, the price would have rocketed to $20 or more. Even the $15 price was artificial, propped up by looming buyout potential. As soon as it became known that there would be no deal, the price collapsed. And here we are.

Those of us who believed a deal would happen thought AB would pay the premium price to avoid the possibility of CBA being sold to another interested party. Prior to the deadline passing, the CBA could have sold itself to anyone, but AB had the right to counter. Now that the deadline has passed without a deal, the CBA can sell itself to anyone at any price and AB has no recourse.  

There's a toxic pill attached to that because, as I've noted here before, the 2016 contract requires Anheuser-Busch to fulfill contract brewing and distribution terms through 2026 (2028 for the master distribution portion of the contract), regardless of who owns the CBA. Should the CBA be purchased by say, Heineken, AB would have to honor the terms of the contract. Many of us thought they'd avoid that possibility. We whiffed.

I need to backtrack for just a minute. One of the things everyone should fully realize is that outside Kona, the CBA has no value to AB. Widmer and Redhook are in steep decline. The other brands, even the ones that are growing, are small and really of no interest to big beer. The only reason they would buy the CBA is Kona, which continues to grow in a tough market. 

Why was Anheuser-Busch willing to risk the possibility of losing Kona and being stuck with some fairly nasty contract terms? Good question. With craft beer flat or growing slowly, AB may fear that even Kona will falter. That notion may have been bolstered by the knowledge that the CBA primed the pump with advertising to help fuel Kona growth in early 2019. 

But the market likely held the real key. Because the CBA has been routinely missing on revenue projections, shareholder return has been poor and the stock price has suffered. AB may have simply concluded it could pass on the buyout deadline and acquire the CBA for significantly less than the required offer price. That could happen in coming weeks.

There's another possibility I haven't seen mentioned. As part of its merger with SABMiller, Anheuser-Busch is required to give the Department of Justice 30-day notice of any brewery acquisition. What if AB gave DOJ notice and DOJ refused to consider the acquisition? I don't have any evidence of that, but I doubt either party would have admitted it. So it is a possibility.

Where does the CBA go from here? They'll discuss the future in a press conference next week. Some think the CBA can carry on independently (AB owns 31 percent). It will receive a $20 million international distribution incentive payment from AB that kicked in when no buyout materialized. That money could be used to pay down debt or finance marketing efforts for Kona.

Honestly, though, it's tough to see a way forward for the CBA under its current leadership. For the last three years, that leadership has been focused almost entirely on selling the business to Anheuser-Busch at a premium price. They failed. They also invested in pet brands and programs that failed to deliver value for shareholders. And they don't alone have the ability to help Kona, their only significant growth engine, reach its full potential nationally and internationally.

My guess is the CBA will soon sell to someone for something less than $20 a share. The buyer may or may not be Anheuser-Busch. In fact, I believe current CBA leadership, having been jilted at the altar, will aggressively try to sell to someone else while AB is stuck holding the 2016 contract bag.

The weeks and months ahead ought to be interesting. Don't touch that dial. 

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