Is the Keg of Craft Beer M&A Tapped?

Over the last several years, large and already-consolidated breweries have gone on a craft beer shopping spree – scooping up smaller, trendier brands to help offset sagging sales and diminishing market share. Large strategic buyers that include AB InBev, Sapporo, Constellation Brands, and MillerCoors have acquired over 20 craft breweries since 2014, representing a play by the stalwarts of the industry to freshen up their brand portfolios and tap into craft, the fastest growing segment of the $100B+ U.S. beer market. Lagunitas (acquired by Heineken), Ballast Point (acquired by Constellation), Goose Island (acquired by AB InBev), Anchor Steam (acquired by Sapporo), and Terrapin (acquired by MillerCoors), represent a few of the marquee acquisitions by the mass producers aimed at diversifying their beer offerings, expanding local presence, and integrating inventive brew masters.

However, craft beer M&A has slowed of late, likely due to a number of factors that include a slowdown in craft beer segment sales growth, a shortage of viable “move-the-needle” targets, lack of bandwidth from large strategics that have all made their craft brew bets and are preoccupied digesting / integrating acquisitions, and greater pushback from still-independent brewers. Craft segment growth (5% in volume, 8% in dollars in 2017 vs. 2016*), while still outpacing the non-craft segment, has slowed in recent years in part due to increased saturation / brand proliferation. According to the Brewers Association, the number of U.S. craft breweries doubled from 2013 to 2016. Then there is the resurgence of spirts sales, driven by the craft cocktail movement and the rapid growth of craft spirit brands across the country.

In terms of the shortage of viable targets, many of the “of-scale” craft breweries have largely been acquired, leaving a bevy of smaller, subscale breweries that do not likely possess the broad brand recognition, product quality, and offering variety to attract the attention of larger producers like AB InBev and MillerCoors. There is also the “I’m not for sale” crowd, which includes longtime nationally distributed craft brands Sierra Nevada and New Belgium.

The craft beer M&A market, although currently not as frothy, should eventually regain momentum as the litany of smaller craft brands compete, gain market share, and achieve the scale necessary to draw attention from larger strategic players.

*Brewers Association

Which Element has Chemical Symbol Co?

A. Calcium
B. Chlorine
C. Cobalt
D. Copper

If you picked C, you are right.

Cobalt, Co, is the top performing base metal this year, with its price per pound doubling since 2016. Cobalt is usually sourced as a byproduct of copper and nickel production. Given little demand for copper and nickel, there is a supply constraint on cobalt.

Why Does This Matter?

Two words: Electric Vehicles (“EV”). The lithium-ion batteries that power EVs need cobalt to function. The supply constraint on cobalt, driven by the surging growth of the EV market, has led to the uptick in cobalt’s price. Historic sales of EVs in the five-year period from 2012 to 2017 tell a compelling story. In 2012, less than 200,000 vehicles were sold globally. Fast-forward to 2017, global sales hit around 1.2 million. With a projected compound annual growth rate (“CAGR”) of ~28.0% going forward, the EV market is poised for meteoric growth. Even with all the buzz surrounding them, EVs only amount to ~1% of the total car market’s annual sales – a number disproportionate to all the daily news and reporting supporting the industry.

There are many entities backing the industry’s expansion. Car manufacturers are heavily investing in research and development to better position themselves to capture a large portion of market share. Governments are also incentivizing innovation from both manufacturers and purchasers, and driving increased demands from users in order to address greenhouse gas emissions.

What Else?

The rise of EVs is driving a need for infrastructure to support them, namely EV charging stations. Battery charging usually starts at a residential level, with owners “fueling up” during the night. However, the charging infrastructure does not stop there. More and more commercial buildings and public spaces are investing in the infrastructure to charge batteries throughout the day.

The proliferation of EV charging stations does not come without its fair share of problems, however. EV charging stations are often connected to the same electrical grid that provides electricity to homes and buildings. Utilizing these EV charging stations can cause unpredictable usage or “load,” leading to electrical grid instability.

This challenge causes a chicken-and-egg conundrum. Users need the infrastructure in order for EVs to scale, but utility companies need to be guaranteed that more electricity generation will translate to more energy usage before investing heavily on the supply side.

What’s the Solution?

There is no silver bullet that will address all the problems, but there are many companies attempting to tackle the issue from different angles.
One potential solution would be to maximize energy generation “behind-the-meter,” meaning to utilize renewable energy sources such as wind, water and solar, to charge vehicles. There is nothing novel about renewable energy sources as they have been around for a while. However, what is new is the ability for them to work in concert with the grid. For example, a grid operator could check to see how much electricity an EV charging station’s solar panel is generating and send more or less electricity accordingly.

Another solution would be to leverage machine learning and data analytics to more accurately forecast energy usage. Variations of this sort of software already exists. However, optimizing it in a way that considers off-grid energy sources such as solar and wind can help energy companies better predict user consumption.

Now What?

The continuous growth of the EV market is undeniable. It is inevitable that EVs will continue to capture market share at an accelerated pace. As this trend continues to take hold, the most innovative businesses supporting this ecosystem will continue to be rewarded.

All things considered, high-growth and market fragmentation positions the industry for consolidation. MHT Partners believes M&A in the sector will largely be driven by strategic acquirers seeking to offer a holistic solution to their customer base of both grid operators and system owners.

Examining the Potential Impact of New ACS Screening Guidelines on Gastroenterologists

On Wednesday, May 30, 2018, the American Cancer Society (“ACS”) announced a major change to the recommended age for beginning colorectal cancer screening. Previously, the organization recommended that those at average risk of colorectal cancer begin regular screening at age 50. However, prompted by a 2017 study led by ACS researchers and published in the Journal of the National Cancer Institute, which found that new cases of colon cancer and rectal cancer are occurring at an increasing rate among young and middle-aged adults, the ACS is providing guidance to lower the recommended age for beginning screening to 45.

The revised guidance is almost certain to reduce incidence of colorectal cancer for those between ages 45 and 49. That population stands to benefit from early detection and the removal of polyps, which has similarly decreased incidence rates for those over 50. The effect might even be magnified, as the study also found that young and middle-aged adults in the U.S. are at a higher risk of colorectal cancer than earlier generations.

For gastroenterologists (“GI”) and other medical professionals, the ACS’s findings and guidance may impact their practices in several ways:

  1. The revised guidance will increase the active patient population for the nation’s GI practitioners. According to the New York Times, changing the recommended screening age from 50 to 45 will extend cancer screening to an additional 22 million American adults, potentially straining the patient workload for the approximately 14,000 existing gastroenterologists in practice today. With increased demand for GI services, gastroenterologists may find themselves with increased leverage when negotiating with commercial payors. At the same time, efficient practice management will be required in order for physicians to focus their energy on providing high-quality care.
  2. The responsibilities for colonoscopy and endoscopy screening may increasingly fall to midlevel providers. Scope-of-practice guidelines currently vary between states, and midlevel providers are not widely performing colonoscopy and endoscopy procedures at the present time. Nevertheless, increasing evidence that midlevel providers have similar outcomes to physicians for those procedures, combined with increased demand for screening services, may support the case for expanding the scope of practice to include procedures performed, in part, by midlevel providers.
  3. Increased colorectal cancer screening will bring increased attention and investment in GI health. The practice of gastroenterology, accompanying subspecialties, clinical and practice management technology, and research in digestive health are sure to be bolstered by increased patient awareness and engagement. A premium will be placed on innovation, quality, and scale for businesses participating in the GI space, and there will be numerous strategic options for business owners and entrepreneurs seeking partnerships.

MHT Partners’ healthcare investment banking practice represents founders, owners, and entrepreneurs undergoing M&A transactions. If you would like to learn more about MHT’s healthcare services transaction advisory experience, please e-mail Taylor Curtis (tcurtis@mhtpartners.com) or Alex Sauter (asauter@mhtpartners.com).

JAB Holding Company’s Long-term Love Affair with the American Consumer

One name has dominated the headlines over the last few years in global food, beverage, and casual dining M&A:  JAB Holding Company.  It seems like every month a billion dollar deal is announced involving JAB, including the May 29th Pret a Manger acquisition for a reported £1.5 billion.  Outside financial circles, however, few people know much about JAB.  Is it a private equity firm?  Family office?  What is its source of capital, and why all of the sudden does JAB seem like the largest coffee company in the world?

First off, a bit of history on JAB Holdings Company.  JAB is short for Johann A. Benckiser, who founded German industrial chemical company Benckiser in 1823.  Benckiser’s cofounder, Austrian Albert Reimann, married into the Benckiser family (Johann’s daughter), and the Reimann family controlled Benckiser until its merger with Reckitt in 1999.  JAB was subsequently formed as an investment vehicle and is currently controlled by four Reimann family members.  JAB is not a sleepy family office, as the entity invests like a multi-billion dollar PE fund, including the use of debt and coinvestors.  While there are several layers of family ownership and publicly traded bonds, JAB’s website currently lists only six “investments” managed by a relatively lean team.  However, the portfolio is deceiving as four of the investments are majority-owned holding companies representing tens of billions of dollars’ worth of acquisitions over a relatively short period of time.  In 2017, per the publicly disclosed accounts of JAB Holding Company S.a.r.l (a Luxembourg entity), JAB’s assets were valued at €22.7 billion[1], including minority positions in publicly traded Reckitt Benckiser and Coty Inc.

Drilling down on U.S. investments, JAB owns a controlling interest in Keurig Green Mountain, which JAB took private with Mondelez in 2016 in a $14.4 billion transaction.  If that wasn’t enough caffeine for JAB (the world’s second largest coffee company[2]), the Keurig ownership group (Acorn Holdings) announced in January it will acquire Dr. Pepper Snapple for $18.7 billion (JAB is contributing $9.0 billion of equity).  JAB also controls JAB Beech Inc., which has spent over $10 billion since 2013 building a coffee, donut, bagel, and fast casual restaurant empire that now rivals the likes of Starbucks, Burger King, and McDonalds.  Consider some additional U.S. deals and their announced valuations:

2012:  Peet’s Coffee & Tea:  $1.0 billion (followed by Stumptown, Intelligentsia, Mighty Leaf, and others)

2014:  Einstein Noah Restaurant Group:  $485 million (preceded by Caribou Coffee, followed by Bruegger’s Bagels)

2016:  Krispy Kreme Doughnuts:  $1.3 billion

2017:  Panera Bread Company:  $7.8 billion (followed by Au Bon Pain)

Not to be ignored are JAB’s investments in over a dozen leading European coffee (and soon restaurant) brands as well as its minority interest in European fashion brand Bally.

What is next for JAB in the U.S.?  More coffee?  Alcohol brands?  More restaurant chains?  JAB’s partners have not publicly disclosed any plans, but as long-term investors, they are clearly not scared off by today’s asset valuations and have the deal chops to take large, publicly traded companies private.

[1] JAB S.a.r.l. consolidated financials Dec 2017

[2] Source:  Bloomberg