AB Purchase of CBA Imminent

The Craft Brew Alliance held its annual shareholder meeting Tuesday at the shuttered Widmer pub. Shareholders got to hear about the state of the company and pick up their free beer. Yeah, if you own stock, you get a free case of beer each year. You don't have to drink it.

I've been watching the CBA story for several years. If you've been following along, you probably know we're approaching the contractual deadline by which time Anheuser-Busch must make a qualifying offer to purchase the CBA. The date is August 23.

That timeline is based on a contract (actually several) signed in 2016. The details are fairly well-known. For the unaware, the agreement(s) covered contract brewing, domestic and international distribution. It also set deadlines for outright purchase at a set minimum price per share in successive years, the last of which comes in August at a minimum offer price of $24.50.

When the agreement was announced, many viewed it as a framework for a slow moving buyout. Craft beer was growing steadily. People who owned CBA stock figured to cash in. Investors on the outside, if they were paying attention, saw the chance to make some easy money.

Yet the stock price languished, staying well below the required buyout price. Yesterday, CBA stock closed at $15.33. Simple math. That's $10 less than the required 2019 offer price, which suggests the investment community isn't confident a deal will happen by August. If there was confidence, the stock price would be north of $20.

Why the lack of confidence. For one, the craft beer landscape looks a little sketchy. Established brands are suffering as a sea of newcomers sucks up market share. In the case of the CBA, its former flagship brands, Widmer and Redhook, are in dramatic decline and a drag on profitability. No need to delve into the details. Craft beer doesn't look like a great investment right now.

The CBA remains a buyout target only because of Kona, which continues strong growth in a fragmenting industry. Kona has been carrying the CBA for several years. It's a unicorn brand, seemingly impervious to volatility in the market. Kona lost a bit of momentum in Q1, but appears poised to rebound strongly heading into the busy summer beer season.

Virtually everything the CBA leadership has done in recent times was done to make the company a juicier buyout target for AB. The shuttering of unprofitable pubs looked awkward, but removed overhead and costly benefit packages from the ledger. Closing the Widmer tasting room, where they briefly showcased experimental beers, saved barely any money, but signaled that they were abandoning any effort to rebuild local brand status. And so on.

Those who own CBA stock have been patient. Current and former employees who hold stock quietly hope for a payday. However, those who invested because they perceived that the 2016 agreement set the stage for easy money are getting restless.

Fast forward to yesterday. That's when Boston-based Midwood Capital Management sent a public letter to CBA leadership effectively demanding that they complete a sale to Anheuser-Busch or, failing that, to an unspecified third party investor or company.

This is great stuff. It turns out Midwood Capital loaded up on CBA stock in early 2017 and today sits on about 2 percent of the outstanding shares. Needless to say, they were counting on a financial windfall and aren't happy with the downward trajectory of the stock price. They want action.

What these folks correctly realize is that CBA stock is undervalued on the public market. That's largely due to its grubby appearance. When Wall Street looks at the CBA, it sees the complete package and the complete package doesn't look all that appealing thanks to the dying brands and other drags on profitability.

What Midwood Capital also realizes, correctly it seems, is there is no way shareholder value will be maximized if the CBA stays independent (AB owns just 31 percent). They see the value of Kona, but believe fulfilling that potential will require investment and strategic know-how an independent CBA can't deliver. Again, they're surely right.

With that in mind, Midwood urges the CBA board to accept the qualifying offer if it comes. Further, it wants the board to do whatever it can to encourage AB to make a qualifying offer. If no offer comes, they want quick action to stabilize the stock price and sell the company to another suitor.

Listen, CBA leadership is bent on selling. They can't force a deal, but they want one and have been scheming for several years to make one happen. The idea of staying independent, which they've floated, is a ruse. They know what Midwood knows...that they don't have the horsepower to fully realize Kona's potential. 

For its part, Anheuser-Busch can't afford to pass on this opportunity. Letting Kona fall into the hands of someone else would be a disaster. That's partly because Kona has terrific global potential. But mostly it's because AB would be stuck honoring some pretty unpalatable contractual obligations in a scenario where it didn't own CBA/Kona. Zero chance of that happening.

The clock is ticking, obviously. Buyout details are almost certainly being finalized and a deal will be announced shortly. Expect AB's offer price to exceed the required $24.50 by a dollar or two. They don't want to look cheap. There's no running out the clock on this.

CBA Rides Kona Growth Wave into the Future

Sometimes, perhaps often, it's better to be lucky than good. And maybe the Craft Brew Alliance was lucky when it bought Kona Brewing in 2010. Or maybe that purchase was part of a well-informed, ingenious plan that has worked out especially well for them.

Because it turns out that Kona has stepped to the forefront of the CBA's brand portfolio. After accounting for just 20 percent of CBA sales early on, Kona now accounts for 45 percent of the mix, up 17 percent in volume over the last year. It is the dominant CBA brand.

Recall that, prior to being purchased by the CBA, Kona was contract brewed by Widmer and Redhook for a number of years. Part of this was a tax dodge, a way around Hawaii's draconian tax on empty bottles shipped to the islands. It was also a way to more easily market Kona on the mainland.

With the coming of CBA ownership, Kona gained full access to the Anheuser-Busch distribution network. As you likely know, AB owns roughly a third of the CBA and has worked diligently to market its brands domestically and internationally. For Kona, the arrangement changed everything.

Access to the AB network essentially drove Kona into hyper growth, despite the beers being arguably the softest and least distinctive in the CBA portfolio. The year-round beers include Longboard Island Lager, Big Wave Golden Ale, Fire Rock Pale Ale and Castaway IPA. Nothing too exciting.

One may rightfully wonder how Kona could rise to the top of the CBA heap, which includes some vaguely distinctive Widmer beers, alongside a covey of less than stellar Redhook stuff. The answer, in my mind, is image. Kona is connected to place in much the same way Corona is. Kona is much better beer than Corona, but they both lean heavily on connection to place in their marketing. Constellation will do something similar with Ballast Point.

There's more, of course. These Kona beers, particularly top-selling Longboard and Big Wave, have caught on in a lot of places precisely because they aren't all that distinctive or aggressive. Kona is proof that, when you want to appeal to a broad consumer audience, mundane isn't such a bad thing. And maybe Kona's connection to place works well with drab.

An interesting twist involves where Kona is brewed. Most consumers assume they're drinking a Hawaiian product. That's far less the case than many realize. The bottle tax means bottled Kona is produced on the mainland, even for the Hawaiian market. That's less true with draft beer, at least some of which is produced in Hawaii for that market. The situation may be changing with the expansion of Kona's facility on the Big Island and other developments on the islands.

Regardless, the CBA is hitching its wagon to Kona and counting on the brand to pull it into the future. You can't blame them. When you have a winner, whether you got it by luck or via a proactive plan, you might as well ride it for as long and as far as you can. Kona is the little engine that could...or can, if things work out for the CBA.