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Anheuser-Busch InBev (NYSE: BUD) looks like it's sitting in the catbird seat regardless of whether or not it makes a "qualifying offer" to purchase the portion of Craft Brew Alliance (NASDAQ: BREW) it doesn't already own by the Aug. 23 deadline.
Because it already owns almost one-third of the craft brewer, it can profit as Craft Brew's turnaround strategy takes hold. It doesn't need to own the whole shooting match.
Kona Big Wave Golden Ale may help determine whether Anheuser-Busch buys the rest of Craft Brew Alliance. Image source: Kona Brewing.
According to the agreement they settled on in 2016, Anheuser-Busch must buy Craft Brew Alliance for $24.50 per share by the August deadline -- around $475 million based on current shares outstanding -- or pay Craft Brew Alliance (CBA) $20 million.
With the craft brewer currently trading just below $14 per share, it suggests that with less than two weeks to go, the market doesn't think a deal will happen.
If that is the outcome, the agreement keeps the status quo for at least another seven years: Craft Brew Alliance can continue using Anheuser-Busch's massive distribution network, CBA can continue using A-B's brewery facilities to brew up to 300,000 barrels, and A-B will continue helping CBA grow an international footprint, especially in Brazil and Mexico.
There are several reasons Anheuser-Busch might not want to make the deal. Craft Brew Alliance is still trying to turn around its business, and while its recent earnings report indicates it is beginning to work, it has to prove it can maintain the momentum.
At the same time, A-B is trying to pay down a massive $100 billion debt load and has begun selling off assets. So it might not want to shell out almost a half-billion dollars to acquire a partner that has yet to find its legs.
But here are three reasons I think it will make a buyout offer.
1. It just jumped back into the acquisition market
After making its first craft beer acquisition in 2011, Anheuser-Busch went on to become a serial acquirer of craft brewers, snatching up 11 between 2014 and 2017, and then stopped, no doubt because of the SABMiller acquisition that larded its balance sheet with all that debt.
However, after a two-year hiatus, Anheuser-Busch just announced it was back in the game and was acquiring Cleveland-based regional brewer Platform Beer for an undisclosed sum, becoming its 13th craft beer purchase.
Besides having been the fastest-growing regional brewer in 2017, Platform also brings four tasting rooms and brewhouses, along with its brewery and two more tasting rooms that will open in the near future.
2. Taprooms and brewpubs are where the growth is
The Brewers Association just reported the craft beer industry notched 4% growth over the first six months of 2019, and most of the growth is happening in microbreweries, taprooms, and brewpubs.
Because there are almost 7,500 craft breweries operating today, it's becoming more difficult for individual brewers to stand out. But success can be found in the trend toward locally made products and having a regional brewer with a taproom nearby.
Craft Brew Alliance's recent acquisitions of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing brought with them two taprooms of their own, plus one CBA had already operated in Portsmouth, New Hampshire, but ended up leasing to Cisco's founders in April. CBA also closed a taproom in Portland, Oregon, at the end of January, giving it a total of five brewpubs at the end of the second quarter.
Revenue from brewpubs was flat in the second quarter, but brewpub sales overall increased in the first half of 2019 due to the acquisitions, and that may be attractive to Anheuser-Busch.
3. Anheuser-Busch sales are hurting in North America
Although it reported surprisingly strong sales growth internationally in the most recent quarter, the North American market remained in decline, particularly the U.S. Revenue was up 6% year over year on the strength of Budweiser, Stella Artois, and Corona sales, but U.S. volumes were down 1.7% and sales to retailers fell 3% from last year. Its Budweiser brand has fallen out of the top five most-popular beers here at home, and U.S. sales of the onetime King of Beers are down 4.5% year to date.
Craft Brew Alliance, on the other hand, brings rising U.S. sales from Kona Brewing, which saw depletions (sales to distributors and retailers) of its flagship Big Wave Golden Ale surge 25% from last year in the most recent quarter.
Both CBA and Kona are outperforming the craft beer industry as a whole, and Kona demand was so great that CBA said of the quarter, "it appears demand outpaced in-store inventory as out-of-stock situations across markets were dramatic."
A big decision is brewing
Arguments on both sides of the buyout question are strong, but the need to get sales growing in the U.S., coupled with Kona's strong presence in all the important segments where craft beer is seeing success, points to Anheuser-Busch making the qualifying offer.
Adding Craft Brew Alliance's $200 million or so in annual revenue wouldn't move the needle much for the mega-brewer, which reported over $15 billion in revenue in just North America last year. But with production capacity of around 855,000 barrels, it would undoubtedly be one of Anheuser-Busch's biggest craft brewers and would let it enjoy the full benefit of its turnaround and not have to settle for just a small part of it.
This article was originally published on Fool.com