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Sunday, July 19, 2020

AB/CBA Suit Alleges Conspiracy, Collusion, Dereliction of Duty

Given the players involved and the result, a lawsuit was probably inevitable. The suit filed last week in Multnomah County court alleges that Anheuser-Busch conspired to drive down the value of the Craft Brew Alliance, allowing it to acquire the company for less than fair value. Further, the suit charges that AB was aided and abetted by CBA leadership that sherked its fiduciary duties.

The lawsuit was filed by shareholder Tim Malloy, represented by Portland law firm, Motschenbacher and Blattner. Malloy seeks class action status and a jury trial. He seeks damages of $107 million on behalf of CBA shareholders. essentially the amount shareholders were shorted when the company sold for $16.50, not $24.50.

I've followed this story for several years. I anticipated that AB would purchase the CBA for the required offer price in 2017 or 2018. They didn't. I then expected them to buy the CBA for the obligatory $24.50/share prior to the expiration of the contract last August. That didn't happen. Instead, AB jilted the CBA, opting to pay $20 million for holding the option open. About two months later, the parties announced that the sale would move forward at $16.50 per share.

The suit is a double-edged sword and worth reading if you can find it and have time...it isn't a quick read. Malloy alleges that AB, whose distribution network is responsible for 90+ percent of CBA sales, "systematically and purposefully" used its control of that network to slow the sale of CBA products as the buyout approached, artificially lowering the company’s results and stock price.

There's some interesting detail. Keep in mind that Kona is the only CBA brand AB wants. It's a unicorn brand with wide appeal. Kona sales were increasing rapidly year-over-year (+13% in 2014, +16% in 2015, +17% in 2016). But the gains reversed (+10% in 2017, +8% in 2018, +4% in 2019) as the deadline for the buyout approached.

The suit references Kona stock outs in hot markets that allegedly occurred due to AB's dictatorial focus on its fully owned brands...10 Barrel, Goose Island, Elysian, etc. That strategy isn't news. Anheuser-Busch, which owns distributors in states that allow it, has gotten into regulatory trouble for incentifying the sale of its own brands over others sold via those distributors and independents they work with. Nonetheless, it would be fairly damning if they were treating Kona like a redheaded stepchild in the runup to the CBA buyout.

The flipside of the complaint involves CBA leadership. The suit names CEO Andy Thomas and other board members and managers as defendants. Malloy alleges that they negotiated the merger on the basis of a personal financial gain rather than for the benefit of common shareholders. In effect, he believes CBA leaders insulated themselves from non-controlling shareholders and had little or no incentive to maximize the sale price.

There's more, of course. Malloy claims that the CBA's sole objective in recent years was acquisition by Anheuser-Busch. An accurate appraisal, I think. CBA leadership, he says, failed to pursue strategies that might have produced organic growth because its only plan was to offload the company to AB. When the expected buyout at what would have been a good price failed to materialize, the defendants scrambled to sell the company to AB at any price. They never considered another buyer because, again, they had always intended to sell to Anheuser-Busch.

The plaintiff acknowledges that the CBA had no choice but to negotiate with Anheuser-Busch once a deal at the contracted price didn't happen. That was the reality of AB's partial ownership (around 31 percent), its two seats on the board of directors and its control of CBA distribution. Those things made it impossible to sell to anyone but Anheuser-Busch.

Nonetheless, the suit charges that "defendants acted disloyally and in bad faith by knowingly and intentionally abdicating their fiduciary obligations to the company’s non-controlling shareholders, declining to take all reasonable steps to maximize value for all shareholders, favoring a deal with Anheuser Busch, and placing their own personal interests ahead of the Company’s shareholders."

It's hard to know where this is headed. Anheuser-Busch's acquisition of the CBA has been under regulatory review since it was announced in November. Regulators appear troubled by aspects of the deal and have asked for further documentation at least twice. In response, the Hawaii portion of Kona's business is to be sold to a (supposedly) independent group. The deal remains in limbo.

As for Malloy's suit, the defendants have not responded publicly that I'm aware of. Whether the case will go to a jury trial, as requested, remains to be seen. The text of the suit suggests that Malloy has documents supporting his allegations. The form of that evidence is not revealed in the suit. If it turns out that he has substantive proof of his charges, the suit may have traction.

If it does have traction and it does wind up in a trial situation, I suspect AB/CBA will simply settle out of court. They would have no desire to air dirty laundry connected with what is turning out to be a toxic public relations deal. And $107 million is pocket change to Anheuser-Busch.

Could the lawsuit scuttle the acquisition? Doubtful. Anheuser-Busch has wanted to add to Kona to its portfolio for many years. They got it on the cheap and won't grumble too much if they have to pay a little more to make the court case go away...particularly if it looks like they will lose.

If the deal isn't finalized for whatever reason, the CBA is in trouble. They've been burning through cash and have a maxed out credit line. They don't have the cash to do much of anything. Without the buyout or a credit line extension, the company may be bankrupt.