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.

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. 

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 Positioned for Whatever Comes Next: 2018 Report

The Craft Brew Alliance issued its Q4 and overall 2018 financials the other day. There's good news and bad news if you absorb the full report. Mostly, though, the numbers paint a fairly positive picture of the CBA's position moving forward.

The bad news in the report, which I shall get to, apparently cooled investor interest in the CBA. Its stock price opened the week at over $17 and closed Friday just above $15. Investors may be missing the boat. Because there's a chance the CBA will be gobbled up in its entirety by Anheuser-Busch at $24.50 per share by next August.

Much of the CBA's good news relates to Kona, which grew 8 percent for the year, 11 percent during Q4. There's a bit of bad news associated with that growth, which is that Kona made up 63 percent of the CBA's total shipments. It's a little scary to be so dependent on one brand, although Kona is thus far proving itself to be immune from the fragmenting, flattening craft market.

The bad news involves the CBA's problem child brands, Widmer and Redhook. The former declined 20 percent, from 123,300 to 98,700 barrels. The latter lost 24 percent, from 94,200 to 71,200 barrels. Imploding sales of Widmer Hef and Redhook Longhammer IPA and ESB were identified as the primary reason for the decline. The two legacy brands, once strong growth engines, are losing the competitive battle in a market increasingly driven by smaller local breweries.

A few juicy tidbits from the report:

• Despite the continued success of Kona, total CBA shipments, including beer produced under contract at its facilities, declined by 700 barrels, to 747,600 barrels in 2018 versus 2017. Nonetheless, net dollar sales increased 1.3 percent, to $182.2 million, the result of stronger pricing.
• Total net sales were $206.2 million, a 1 percent decrease from 2017, primarily due to a $3.4 million shortfall in contract brewing fees received from Pabst in 2017 that did not recur in 2018. The decrease also reflects lower 2018 pub sales, mainly due to the absence of the Woodinville pub, which was closed at the end of 2017.
• As part of its agreement with AB, the CBA can brew up to 300,000 barrels a year at AB's plant in Fort Collins, Colorado at a net savings of $10 per barrel. They evidently came closer to realizing the $3 million in annual savings that arrangement could have brought in 2018.
• Partially as a result of production shifted to Fort Collins and other AB factories, capacity utilization at CBA facilities declined to 57 percent over the last two years. That's a lot of underutilized tank space and it happened despite the fact that Goose Island beer and Virtue Cider is being produced by the CBA in Portland and Portsmouth.
• Like its parent-apparent, the CBA is fixated on cost cutting and improving gross margins.Through strong revenue and rabid management, it delivered a 2.6 percent increase in total revenue per barrel, which led to a 5.6 percent improvement in beer gross profit and record full-year beer gross margin of 36.8 percent.
• Finally, shipments of the Omission, Square Mile Cider, Appalachian Mountain Brewing, Cisco Brewers, and Wynwood Brewing families grew by a combined 4,700 barrels to 93,200 barrels. That portion of the CBA’s portfolio now accounts for some 13 percent of total shipments.

What the CBA has effectively done by leveraging its arrangement with AB and aggressively tightening up underperforming aspects of its business is improve its position for the future, regardless of whether it becomes a fully-owned subsidiary of Anheuser-Busch. Investors, for the moment, appear to be too fixated on the bad news in the 2018 report to see that the prospects of a buyout at $24.50/share remain quite strong.

CEO Andy Thomas set an aggressive tone in comments made during the conference call, reminding shareholders that the CBA position is strong even if the possible takeover by AB doesn't happen. In the absence of a qualifying offer, he noted that the CBA will be entitled to a $20 million international incentive payment and AB could not terminate any part of the current agreement.

Further, Thomas went on, if AB fails to make a qualifying offer, CBA could continue to operate independently or come under the control of another entity. In either case, AB would be required to honor all agreements, including payment of the $20 million international incentive, continuation of the master distribution agreement at $0.25 a case, continuation of the international distribution agreement and fulfillment of the contract brewing agreement.

It's difficult to fathom the extent to which the current contract, signed in 2016, favors the CBA. What were the folks at AB smoking when they signed a deal that would allow the CBA to be taken over by another entity while Anheuser-Busch is forced to fulfill the terms of the agreement? The likely answer is the people who negotiated the agreement believed the CBA would be purchased during its term. There can be no other explanation.

Of course, the craft beer landscape has changed dramatically since 2016. Competition is fierce and most large craft breweries are suffering. Yet Anheuser-Busch recently reported that the High End (craft line) is its top growth engine, accounting for 30 percent of the company’s worldwide revenue growth and 10 percent of its total revenue in 2018. Why would AB want or need the CBA?

The answer is Kona, which continues to thrive in a flat overall market. Keep in mind that Kona beers, unlike some of craft's more nuanced offerings, can be brewed virtually anywhere, even in a factory brewery. Acquiring Kona, of which AB already owns nearly a third, would cost around $300 million. That's pocket change for a brand that has apparently unlimited potential.

Flies in the ointment are the CBA's declining brands, Widmer and Redhook. Anheuser-Busch, should it make a qualifying offer, will have no interest in salvaging those brands. They might be killed or sold in a buyout. In fact, you have to wonder what would become of CBA properties in Portland and Portsmouth. Those breweries, not as big or efficient as AB's giant factories, might well be closed and sold in the wake of a buyout to recoup some of the investment in Kona.

Inquiring minds keep asking what's so special about Kona. In my mind, there's nothing particularly special about any of the Kona beers. But Kona is a lifestyle brand with a strong connection to a place consumers identify with. It hardly matters that Kona beers have been brewed in Portland and elsewhere on the mainland for years. The brand is Hawaiian.

Honestly, there's a lot not to like about the CBA, an organization whose leaders appear to be fixated on numbers. This company ceased being about craft beer long ago. By cutting costs and leveraging their agreement with Anheuser-Busch to the hilt, executives have positioned the CBA to be bought lock, stock and barrel. The chances of that happening look to be better than 50/50 from here.

Then the fun begins.

Craft Brew Alliance Fumbles Forward

Tuesday's news that the Craft Brew Alliance has closed its Widmer pub on Russell St. came as a surprise to many. It was less of a surprise to others, who have taken recent brewery and pub closures to heart and are braced for more. Certainly there will be more closures in 2019.

I heard about the Widmer closure on social media. If there was a release, I wouldn't have gotten it. I was deleted from the CBA media rolls long ago. Even their PR firm doesn't send updates. Thin skins are everywhere in this industry, but these guys are special.

The fact is, I've known several CBA brewers over the years. I've never acknowledged anything but respect for these folks. But my writing here hasn't been influenced by that. My goal is to be objective and that's not something CBA management is interested in. They prefer blind promotion. Oh well. No hard feelings.

The fortune hunters who currently run the CBA have spun their activities a variety of ways as they wait for an offer from Anheuser-Busch. As explained here and elsewhere, the contract renewal signed by the two parties in 2016 established a framework for a slow moving buyout. That's been reported in a number of places, not just here.

When they discontinued food service at the Russell St. pub in November 2017, they kept it open to showcase the specialty beers they're brewing in the innovation brewery. So they said. And that seemed reasonable. Rebuilding slipping local credibility would be a wise move, given the CBA portfolio, outside Kona, had been in negative growth mode for a while now.

But that was apparently a ruse. The decision to close the pub/taproom permanently a year later means they've effectively abandoned the local strategy. They say they'll continue to work the local angle with new canned product and by selling to beer bars and bottleshops. The tiny retail store on Russell will remain open to support that mission. Thank goodness.

The blunt reality is you cannot build local credibility on any kind of scale without a pub. Well, maybe you can if you're tiny and you produce nothing but stellar specialty beers. Upright comes to mind on that count and even Upright has a taproom. Building a following for Widmer's innovation beers (forget the dreadful PH stuff) without a pub will be impossible, out of the question.

Profitability, or lack thereof, was the reason given for closing the pub. Maybe they were losing money there. But this is a company that made millions last year. And the pub operated with a small staff and sold beer directly to patrons, where profit per pint is greatest. Even if the place was losing a bit of money, you keep it open to maintain a brand face in the community. Their commitment to the local strategy was evidently fleeting.

Only the fortune hunters upstairs on Russell St. know for sure. Don't give these bunglers too much credit, though. They've been swimming in Anheuser-Busch's wake for too long, and not for the better. If Widmer (and Redhook) hadn't stumbled onto Kona all those years ago, no one would be paying any attention to the CBA at this point. It would be roadkill.

But maybe, just maybe, closing the pub is a signal of something bigger. Perhaps the buyout CBA leadership has been praying for is in the works. Keep in mind that Anheuser-Busch must give DOJ 30 days notice of attempting to buy any craft brewery. Even though AB already owns roughly a third of the CBA, it would still have to give notice when submitting an offer.

If there is such an offer in place, closing the pub makes sense. Whatever the new ownership arrangement turns out to be, Anheuser-Busch won't be interested in rescuing the CBA's contracting brands. Kona is the darling. Redhook and Widmer will be cast adrift, probably sold. If someone wants to resurrect those brands, it won't be the clowns currently running the CBA.

Watch the CBA stock price for insight. When news of the pub closure hit the newscycle on Tuesday, the price was just under $16. It hasn't really moved, which means speculators haven't sniffed an impending buyout. If they do, the stock price will quickly rise to above $20. Why? Because AB is contractually obligated to offer at least $24.50/share between now and August.

There's irony here. When Widmer was born some 35 years ago, the focus was on beer. The boys had no thought of getting rich. But things have flipped. The people running things now covet money. And there's money to be made by selling the CBA to big beer.

The Uncertain Fate of the Craft Brew Alliance

I last discussed the Craft Brew Alliance roughly a year ago, just after they shut down the Gasthaus pub and turned it into a taproom for their small batch beers. That move was designed, at least partially, to make the CBA a juicier buyout target for Anheuser-Busch. But nothing has happened. What gives?

To understand why many assumed a buyout was imminent, you have to go back to the contract AB and the CBA signed in August 2016. That was a different time in craft beer, predating the market saturation and instability we see now. The document, which was a renewal and expansion of a prior contract, heavily favored the CBA and effectively established a framework for a slow moving buyout.

Giveaways in the contract involved domestic distribution costs, contract brewing opportunities, international distribution rights and more. They are covered thoroughly in the piece I wrote back in 2016. Rather than repeat those details, you can find them here if you're so inclined.

The reason many assumed a buyout was coming is the contract set escalating "qualifying offer" prices. By August 2017, a qualifying offer to buy the CBA had to be at least $22 per share. By August 2018, the number rose to $23.25 per share. By August 2019, a qualifying offer is set at $24.50 per share. There was incentive for AB to act sooner than later.

The allure of easy money attracted speculators. Soon after the new contract was announced in 2016, the CBA's stock price, which had been hovering around $14 per share, jumped to above $20. It hasn't yet worked out for the speculators that jumped aboard. The stock price has bounced around a bit, but shown life in July and August in each of the last two years, as speculators positioned themselves to cash in. It closed at $15.80 on Friday.

Given the structure of the contract, it's fair to wonder why the expected buyout hasn't happened. We all understand it's a different craft beer climate these days. Some of the big shots at AB have said they're comfortable with the High End portfolio as it is. They say they're focused on paying down debt acquired in the SABMiller merger/acquisition. Right.

The reality, though, is that Anheuser-Busch could not have gone through with a buyout in the wake of the SABMiller deal. It had to wait for the Department of Justice to complete its review. The "consent decree" was only recently issued, which means it's open season again, subject to certain limitations. One condition is that AB must give 30 days notice of any acquisition.

Opinions on whether a deal will happen on the 2019 timeline are mixed. Some believe the market is too unstable and that AB will stay focused on the craft assets it has and delay future acquisitions until the dust settles. That's not necessarily a bad argument.

However, there are sound reasons to believe a buyout may happen. Foremost is Kona, which continues strong growth despite the funk descending on the industry as a whole. Kona drove 64 percent of the CBA's total shipments during the first nine months of 2018 and its international potential is virtually untapped.

On the flip side, the CBA's legacy brands, Widmer and Redhook, are in decline and have no value to AB. They wouldn't be a stumbling block given the appeal of Kona, but they would likely be spun off in a buyout. It's ironic, for sure, given the history, but that's the way it is.

Should Anheuser-Busch fail to make a qualifying offer by August 2019, the contract stipulates that it pay the CBA a $20 million "international volume development incentive" fee. Those fees were $3 million in 2016 and $5 million in 2017. The $20 million balloon payment was put in the contract to leverage the imperative of a buyout.

It's entirely possible that AB moves forward in coming months. Since it already owns 31.4 percent of the CBA, it would spend only about $330 million (at $24.50 per share) to gain full ownership. That isn't a huge financial hit in a company so focused on reducing debt that it recently cut dividends to the tune of $4 billion a year. The spin for shareholders would be that the acquisition saves and makes the company money.

The fly in the ointment is the state of the industry. There are a lot of nervous folks out there. Some fear we are looking at a repeat of what happened in the late 1990s, which in our present context would mean dozens, if not hundreds, of brewery closures, and a depressed market for several years, at least. It's a serious and realistic concern.

On the other hand, there's Kona, seemingly impervious to market conditions. Even in a shrinking beer market and with overall craft sales flat or barely growing, Kona continues to surge. It's been dragging the CBA forward for several years and has the kind of brand appeal that a lot of companies covet. Kona may be one of the few gems left and AB already owns a piece. Why not own it all?

With all that in mind, I rate the chances of a buyout before the end of August 2019 at less than 50 percent. The incentives for AB to own Kona outright are significant. One thing that would certainly scuttle a deal is a sudden slowdown in Kona's growth trajectory, a scenario that would also cripple the CBA.

Anheuser-Busch may very well let the buyout timeline expire in 2019. When the contract was renewed in 2016, the parties didn't anticipate the slowdown we're seeing. They foresaw continued rapid growth in the craft segment. The qualifying offer minimums were set to protect both parties, but it turns out the numbers were set too high and are now an obstacle.

Should the August 2019 deadline pass without a deal, the CBA will receive the $20 million international development payment. It will also continue to benefit from all other aspects of the contract, including distribution, contract brewing, etc. The CBA would, of course, be open to offers from other suitors, though it's difficult to imagine who might be in the market.

The CBA's stock price will likely level off at around $14-$16 in that scenario, only slightly higher than it was before the contract renewal and buyout provisions artificially boosted it. If Kona falters, the stock price could take a significant hit, possibly into single digits.

It seems entirely plausible that AB plays a waiting game that extends beyond the 2019 deadline. Unless they want to be really generous with their CBA friends, they'll watch what happens with Kona and the overall market. If Kona continues to look strong, they'll likely proceed with a buyout for something less than the current $24.50/share price.

Crapshoot on.

CBA Leverages Local Focus with Cisco in Portsmouth

As the Craft Brew Alliance taxis down the runway toward an eventual buyout by Anheuser-Busch, it continues efforts to reposition its brands as local. The most recent version of this trend is in Portsmouth, N.H., where the former Redhook pub is being rebranded as Cisco Brewing.

Recall what the CBA is doing elsewhere. In Portland, it shuttered the underperforming Gasthaus Pub late last year and replaced it with a tasting room featuring specialty beers. In Seattle, it opened the upscale Redhook Brewlab pub in the Capitol Hill neighborhood. They're also expanding Kona's brewing capacity in Hawaii.

The decision to end the Deadhook, I mean Redhook, run in Portsmouth makes good sense in the current craft beer climate. Redhook was once a brand with a national following. But the exploding brewery count has made local beer available everywhere and flipped the rules. Like a lot of regional and national brands, Redhook has been a loser in that scenario.

Cisco, based on nearby Nantucket Island, is a better bet in Portsmouth. It's a recognized local brand in the area and offers significant growth potential. They intend to lean heavily on an island theme in the reimagined pub. The CBA brass have learned via Kona, the crown jewel in their portfolio, that the island theme and connection to place is good for brand building.

If you're wondering how Cisco teamed up with the CBA, it's not complicated. The companies signed into a partnership arrangement several years ago. The CBA has no ownership stake in Cisco, although stories announcing the deal back in 2015 reported a 25 percent stake was being discussed. That never happened. Maybe it will now.

Anyway, the partnership gave Cisco access to the Portsmouth brewery, which likely had growing unused capacity as Redhook (and CBA) brands declined in appeal. The situation called for the CBA to do something to fill the capacity void and Cisco appeared to be a great choice. In a sense, Cisco is sliding into the space as Redhook slides out. The rebranded pub will make that official.

Cisco's core brands, including Whale's Tale Pale Ale and Grey Lady, have been brewed in Portsmouth since 2015. Having the capacity to brew and package those beers in large quantities helped fuel growth and expand the Cisco footprint. The portfolio continues on that path with the addition of Madaquet IPA and the newly launched grapefruit Gripah IPA.

The transition in Portsmouth, underway as we speak, evidently won't result in lost jobs. The current staff will retain their current roles with the rebranding. To support a smooth transformation, Cisco is conducting a branding "boot camp" for current Portsmouth staff this week. They have some fairly grandiose plans for this place.

When you look at this situation, you have to think the CBA sees a reflection of Kona in Cisco. Nantucket and Portsmouth aren't exactly tropical destinations, as is obviously the case with Kona. But Cisco's connection to Nantucket represents the kind thematic branding angle that has supported Kona's rise, as it did with Corona, for example.

The change in Portsmouth is a smart business move on the part of the CBA. It's stuck chasing the local theme that's dominating today's industry, and Cisco represents great potential. Pursuing that strategy fits perfectly with maximizing profits, which means the CBA will get a higher price per share in the coming AB buyout.

On the off chance that the expected buyout fails to materialize, well, further development of the local theme will serve as a rear guard action to keep the CBA viable on its own. You may question their motives, but don't make the mistake of thinking these are dumb people.

They aren't.

Kona and the Case for Transparency in Beer Labeling

The case of some Californians who filed suit against Kona and the Craft Brew Alliance for deceptive labeling is emblematic of a problem that isn't new in beer or craft beer. Consolidation, marketing and the chase for production efficiencies have undermined honest labeling.

You may be aware of Kona's plight. Earlier this year, two California beer consumers filed suit against Kona and corporate parent, the CBA, charging they had been tricked into thinking Kona is made in Hawaii.

In fact, all packaged and draft Kona sold on the mainland is brewed at CBA facilities in Portland, New Hampshire and Tennessee. (With the closure of the old Redhook brewery in Woodinville, packaged Kona is no longer produced in Washington, if you're wondering.)

There's a bit of a back story, if you don't mind a slight detour. Years ago, before it became part of the CBA, Kona began using Widmer and Redhook to brew its bottled beer for the mainland and Hawaii. Whether you were buying bottled Kona on the Big Island or in Phoenix, it was produced on the mainland. Yup.

Brewing for the mainland on the mainland makes sense, right? Much more efficient. The Hawaii strategy was evidently driven by production efficiencies here and the fact that Hawaii at the time (perhaps still) had a 50 cent per case tax on empty bottles entering the state. It was apparently more efficient to brew and package the beer here and ship it to Hawaii.

I don't have the labels to prove it, but my recollection is that Kona has always represented itself as being produced in Hawaii, regardless of where the beer was actually produced. I'm always amazed that many are unaware of that deception, even in the beer geek crowd.

In recent times, Kona has increasingly cashed in on its connection to place, in much the same way that Corona and other Mexican imports benefit via that connection. As referenced many times in these pages, Kona is the only brand floating the CBA boat at the moment. Consequently, it has been useful to maintain the fiction that the beer is produced in Hawaii.

Back to the lawsuit. The plaintiffs claim the Hawaiian imagery found on the packaging, the map of Hawaii and address of Kona's Hawaiian brewery, as well as the invitation to visit said brewery, qualifies as false and deceptive advertising.

I went to my nearby ghetto Fred Meyer to investigate. Sure enough, there's a map of Hawaii and invitation to visit the brewery on the 12-pack box. There's also nothing on the packaging to suggest the beer is produced anywhere other than Hawaii. Once you open up the box (or six-pack), labels on the bottles list the various places where the beer may have been produced.

The CBA pointed to the bottle labels in an effort to get the lawsuit dismissed. No dice. The judge noted that the labels are not visible on the outer packaging and ruled the map of Hawaii and invitation to visit the brewery are enough to make a reasonable consumer believe the beer is produced there.

This case is now headed to the discovery phase of litigation. Kona and the CBA will soon be forced to decide if they will risk a court case or negotiate a monetary settlement. The expense involved in such cases typically causes defendants to pursue a settlement at this point, sources say.

Whatever happens, the CBA will surely revise Kona packaging to avoid similar legal entanglements going forward. It would be nice if the entire industry would take a look at labeling practices. Because Kona is far from the only example of intentional chicanery.

The Baby Buds come instantly to mind. Some portion of their beer is now produced in giant factory breweries, yet they maintain the fiction via labeling and advertising that they are still small local brands. Some legacy macro brands, now owned by big beer, do something similar.

Transparency in beer labeling and packaging is good for consumers. The reason we don't have it is there's money to be made in not being transparent. Regulations preventing the practice either aren't stiff enough or aren't seriously enforced. That leaves lawsuits as the lever of change.

How many lawsuits will it take to affect change? Maybe a lot of them. Fine with me. Nothing wrong with challenging misrepresentation and duplicity.

Messy Times for the Craft Brew Alliance

Not so long ago, the folks at the Craft Brew Alliance were all smiles. That was back in August, right after they signed an agreement with Anheuser-Busch expanding the relationship and establishing the framework of a sale. The CBA's stock price spiked to over $21 a share. High times.

Fast forward to last week. The smugness is gone. So is the hefty stock price. After a three week delay, the CBA released fourth quarter and full year earnings. The numbers aren't pretty, though there is continued good news for what has become the company's flagship brand, Kona.

Despite that fact that Kona was up bigly for the year, the full CBA portfolio was down 6 percent, declining by nearly 39K bbls. The fourth quarter was particularly unkind, as the brand family was down 13 percent. That sad number occurred partly due to the fact that wholesaler inventories were built out late last year in anticipation of the Portland brewery's temporary closure. And constricted in late 2016 due to slowing craft category growth. Still. Not good.

Kona is essentially dragging the CBA forward. It gained 13 percent (up more than 45K bbls) and reached nearly 400K total bbls in 2016. Based on those numbers, Kona is a top 10 craft brewer, according to one industry publication. It is easily the CBA's largest brand family, more than double the volume of flagging Widmer.

Indeed, the rest of the CBA portfolio appears to be in free fall. Redhook tanked, declining nearly 32 percent to 127K bbls last year, Widmer shipments dropped 15.7 percent to 148K bbls. Over the course of the past two years, Widmer and Redhook have lost 136K bbls. Omission, the CBA's (throwaway) gluten-reduced brand, dropped nearly 17 percent.

Given the stifling collapse of once proud Widmer and Redhook, the CBA doesn't have a lot of options going forward. It will certainly ride Kona's momentum for as long as it can. Part of that strategy relies on its arrangement with Anheuser-Busch, whose distribution network has helped turn Kona into a national and emerging international player.

In a press release, CEO Andy Thomas acknowledged the poor 2016 performance, but emphasized the importance of the agreements with AB and the acceleration of Kona. “Looking forward, we are excited to build on the strength of Kona, which continues to distinguish itself in an increasingly competitive category,” he wrote.

The CBA may not be in as much distress as last year's numbers suggest. Even if you take away Kona, the deal with Anheuser-Busch is going to reap significant benefits on the cost and profit sides of the ledger in coming years. The partnership may actually help insulate the CBA from imminent challenges that will be faced by many if not most large craft breweries.

Nonetheless, the distressing numbers make you wonder about the road ahead. Will the CBA be absorbed by Anheuser-Busch or remain more or less independent? Last summer's agreement, which heavily favors the CBA, makes it financially advantageous for AB to pull the trigger on full purchase sooner than later. (AB currently has about a 33 percent stake in the CBA.)

When I wrote about the situation last summer, I thought a buyout was imminent. At the time, MegaBrew was still being evaluated by the Department of Justice and AB was laying somewhat low. I figured, particularly in light of the escalating costs to AB if they didn't move soon, a buyout would happen sometime in 2017. It might still happen.

I'm guessing the collapse of Redhook and Widmer isn't a huge concern for AB. Those are tired regional brands that don't have the kind of marketing traction AB wants. Kona is the darling. It suggests a lifestyle and a place consumers want to connect with. The national and international growth of the Kona family proves that.

Kona's growing popularity adds a complicated twist to the possibility of a buyout. Anheuser-Busch has little or no interest in the CBA's declining brands. It only truly wants Kona. But the CBA can't reasonably sell Kona by itself because Kona is the only growth engine it has. Without Kona, the CBA may as well not exist.

If I had a crystal ball, I'd know which way this is going to go. I don't. But it's hard to imagine a scenario in which the CBA sells Kona separately. If a sale happens, I think AB buys the CBA as a block entity, then spins off Widmer, Redhook and the other junk brands. The other possibility is there's no sale and the CBA carries on as it is, sucking up to its mentor, Anheuser-Busch.

These are uncertain, messy times in craft beer. You do what you have to.

Consolidation 101 at Woodinville Brewery

If you follow happenings in and around the beer industry, you likely know the Craft Brew Alliance recently laid off about half of the production staff at its Woodinville brewery. It's an unfortunate development, but also related to the CBA's evolution.

Earlier this year, the CBA entered into a contract brewing arrangement with Pabst at the old Redhook brewery. Pabst, which planned to brew Rainier Pale Mountain Ale and some other brands in Woodinville, has an option to purchase the brewery within three years.

Back up a bit. The need to lease the brewery was activated for good reason. First, expansion (to 750,000 barrels/year) and modernization of the Portland facility means more CBA brands will be brewed there. Second, an expanded deal with Anheuser-Busch means some CBA beers, up to 300,000 barrels a year, will be brewed at AB factory breweries.

The plan was for Pabst to soak up production capacity as the CBA shifted its own production to Portland and elsewhere. The Woodinville brewery, somewhat antiquated with a capacity of about 250,000 barrels a year, continues to produce a few CBA brands, including all Redhook and Widmer 22 oz bombers. But those numbers are declining.

And Pabst has failed to fill the capacity vacated by departing CBA brands. Reports say the brewery was running at 30 percent of capacity. That's what forced the layoffs. This was obviously not a desired outcome for the CBA, which hoped Pabst would do well and eventually purchase the old brewery. It's stock price has dipped slightly in recent weeks in response.

Inquiring minds may wonder why Pabst, which owns a number of "heritage" brands, has failed to use more of the available production capacity in Woodinville. The answer is simple. Except for Mountain Ale and Not Your Daddy's Root Beer, most Pabst brands are brewed at MillerCoors plants. That's apparently something Pabst can't or won't change in the near term.

Mountain Ale, released last spring, is based on a pre-prohibition ale. It's darker than you might expect, but a serviceable beer that's roughly on par with lower end craft brands. If Mountain Ale isn't moving as Pabst hoped, perhaps they should consider the price...currently $11.99 (on sale) at my local Fred Meyer. That's for a six-pack of 16 oz bottles. Neither the 16 oz bottles nor the price make sense to me, but never mind.

For its part, the CBA brass, shareholders and Woodinville employees are hoping things turn around for Pabst. Because if Pabst doesn't morph into an eligible buyer, the CBA has limited options with a property whose size and efficiency are problematic. The most likely scenario if nothing changes is closure, in which case the jobs and investment there will simply be lost.

This chain of events was set in motion by consolidation. The CBA initiated the arrangement with Pabst in anticipation of an impending deal with Anheuser-Busch, as well as its own expansion. The big idea is consolidation of CBA production in larger, more efficient breweries. Once that happened, the Woodinville brewery was expendable and subject to closure or sale.

Give the CBA credit. They took a flyer on Pabst, hoping (perhaps praying) things would work out and that the brewery would eventually be purchased and the jobs there transitioned to Pabst. They almost certainly knew or should have known that the chances of that happening were sketchy. But there was at least a chance.

This is how consolidation works, folks. When brewers get so large that they move production to huge, largely automated factory breweries, jobs at smaller, less efficient facilities are lost. What's happening at Woodinville is Consolidation 101.

Liquid Aloha to the Craft Brew Alliance

Last week was a good one for the Craft Brew Alliance. The company's stock price reached an all-time high of over $20 per share on Friday. Two days earlier, the CBA released details of an agreement that puts in motion its sale to Anheuser-Busch. Those details are most certainly related.

Back in June, I wrote a piece predicting an imminent buyout. The deal announced this week isn't quite that; it isn't final and there are still details to be worked out. But the arrangement is the precursor to a completed deal, make no mistake.

The fact is, now is not a great moment for a buyout. In approving its merger with SABMiller, the Department of Justice nullified certain AB practices and told them future acquisitions would receive careful scrutiny. Now is a good time for Anheuser-Busch to keep a low profile.

Anyway, the CBA and Anheuser-Busch have been virtually joined at the hip for about 20 years. As one industry publication noted, "it seems AB and the CBA are engaged to be married, after having shacked up for a while." A buyout is imminent unless something strange happens, including the possibility that DOJ could block it.

"Collaborative independence" is the phrase both AB and the CBA are using to describe their relationship for now. In this scenario, there are three areas of commitment in place, all of which serve the interests of the CBA. It's quite bizarre, really.

Master Distributor Agreement
Anheuser-Busch will continue as the CBA's master distributor through 2028. Fees remain at 25 cents per case. That's good news for the CBA, which was bracing for a tripling of fees when the old deal expired in 2018. If volumes exceed today's 11 million cases, the CBA will save an estimated $6 million per year starting in 2019, escalating with growth over the contract term.

Contract Brewing
The CBA will have the opportunity to brew up to 300,000 barrels (more than a third of its 2015 output) within AB's network at a cost savings of $10 or more per barrel compared to their current cost. Transitioning those barrels to AB's factory breweries will take a couple of years, after which the cost benefits will gradually be realized.

You will recall that the CBA brewery in Woodinville, Wash. is currently leased to Pabst, which has an option to buy it within three years. The CBA brewery in Portsmouth, N.H., might meet a similar fate. Or the CBA could use it to build partnerships with smaller craft breweries, whose beer would be contract brewed in Portsmouth and distributed via the AB network. There are some significant financial windfalls here, regardless of which way things go.

International Distribution
The CBA awarded AB exclusive rights to distribute its beer in countries not covered by existing agreements. Starting in 2019, AB will pay a royalty of $30-$40 per barrel, pay production and material costs and reimburse the CBA for out of pocket shipping costs.

Until 2019, AB will make fixed international payments of $3 million in 2016, $5 million in 2017 and $6 million in 2018. As an incentive for "international volume development," AB will pay an additional $20 million in 2019. What's $20 million between friends, huh?

Stuck With Me
Of course, there's more. Anheuser-Busch is obligated to carry out all elements of the new agreement unless it makes a "qualifying offer" to purchase the CBA and the CBA rejects it. At that point, AB could reconsider any or all of the agreement. What's a qualifying offer? I'll get to that. Just remember AB's only way out is if the CBA turns down an offer or shifts control to someone else. Fat chance of that happening given the pork in this deal.

Okay, qualifying offer. It's an offer to acquire CBA for a minimum of $22 per share during the first year of the agreement. The minimum bumps up to $23.25 a share in the second year and to $24.50 a share in the third year. The stock price was hovering around $14 before the new deal was announced, but finished the week above $20. Wall Street loves this deal.

Timelines and Plotlines
It's clear AB and the CBA have established a framework for a delayed buyout. That scenario seems well-suited to both parties. What's the timeline? The way the agreement is structured and the way certain internal CBA details line up, the pressure to acquire the CBA increases in each of the next three years. A finalized deal is likely by 2019, if not sooner.

The elephant in the living room is this: Why did Anheuser-Busch agree to terms that are slanted so wildly in favor of the CBA? These are not reckless business people. They are accustomed to acquiring brands, squashing competition and winning. They like getting their way. Why so many concessions to the CBA?

The answer is Kona. AB wants it and the CBA has it. In fact, Kona is the only CBA brand with broad potential. It will be the biggest fish in AB's kettle of craft fish due to its national and international appeal. The big shots in St Louis and Brazil intend to market Kona against arch-rival Constellation's trio of Corona, Modelo and Ballast Point. For starters.

The rest of the CBA portfolio is junk, by comparison, likely to be sold piece-by-piece once a buyout is finalized. Redhook, relegated to discount status, likely ends up with Pabst. What happens to Widmer? That's an open question. It might be reformed as a boutique brand known for unique and innovative beers. That can't happen under the current regime of corporate profiteers, but it might happen if AB sells the brand to the right person or group.

What's the impact of the impending deal? Obviously, executives and big shareholders are going to rake in some serious cash. Past and present employees with stock or stock options will make some money. Some jobs will be lost after AB takes over and implements the cost-cutting initiatives it's famous for. But, then, you can't make an omelet without smashing a few eggs.

The official passing of the CBA torch to Anheuser-Busch will have no significant or lasting impact among consumers. The CBA may or may not cease to exist. It won't matter since most knew it only vaguely via the brands it represented, brands that will henceforth be owned by big beer.

Liquid aloha, folks.

Revised Severance Policy Suggests Imminent CBA Sale

For a while now, I've wondered about the future of the Craft Brew Alliance. There are a number of reasons, which I'll get to. My working assumption for a year or two is that they would sell, mostly likely to Anheuser-Busch. Recent developments suggest a deal may be imminent, although maybe not the deal I envisioned.

Let me back up for just a moment. The principal players in the CBA, you will recall, are Widmer, Redhook and Kona. No need to review the history of the organization here. But do keep in mind that Anheuser-Busch owns roughly a third interest in the CBA. That's been the case for a number of years.

Over the course of the last few of weeks, CBA stock gained 36 percent. It jumped 8.1 percent this past Tuesday. Why the increase? Some think it's linked to the announcement of an updated severance policy for executives in the event company ownership changes.

The new policy, unveiled on May 24, calls for executives to receive 18 months of their base salary, plus their annual target bonus and health benefits, if the company is acquired and they're out of a job. Execs who leave prior to a takeover would receive less favorable severance.

Some will say it's just a coincidence, that the severance policy has nothing to do with anything. But one of the things you don't want when positioning yourself for a sale is the appearance of instability. You cannot have executives jumping ship. So you make it worth their while to stick around.

By the way, CBA stock isn't going up specifically due of the severance plan. That's not how these things work. What's happening is investors have sniffed out the fact that the CBA is likely to be sold and there's an opportunity to make some money, one way or another.

Inquiring minds may fairly wonder why the CBA might want to sell. Several reasons:

Struggling Brands
In case you aren't aware, the growth of craft is slowing nationally. That's having a particularly dramatic affect on older, established brands. They face steep challenges staying relevant in a sea of newcomers. Widmer and Redhook are perfect examples of that theme. In certain quarters, there's a perception that both brands, among hundreds of others, are tired and past their prime.

Distribution
Anheuser-Busch's incentive programs, which have been widely reported in a variety of places, work against the interests of the CBA, despite the partial ownership arrangement. That's because distributors are incentivized to sell AB-owned brands. Since the CBA isn't fully owned, its beers don't get the attention that AB's High End brands get. It's a pickle for the CBA, which has derived significant benefits through its relationship with Anheuser-Busch dating to 1997.

Consolidation
Some in the industry believe the key to surviving in an increasingly crowded, competitive and complex marketplace is to partner with big beer. Breweries that do so give up, at a minimum, the perception of autonomy. What they get in return is the security of a partner with deep pockets, a massive supply chain and an extensive distribution network.

Value
Despite its declining brands, the CBA possesses a gem in Kona, which has built a strong national following mostly because it's marketed like Corona. People somehow visualize the beach when drinking Kona. It hardly matters that Kona consumed on the mainland is also brewed here, not in Hawaii. Anyway, Kona is a big fat target for the likes of AB, which desperately wants to take a bite out of Corona/Constellation.

Kurt
It's hard to know how much influence Kurt Widmer had at the CBA in recent years. He was definitely the visionary behind the origins of Widmer Brewing. Did his retirement at the end of last year open the door to acquisition? There's no way to know and no one talking. My guess is he retained a fair amount of power over the direction of things until he retired. Not so much now.

Returning to my original assumption, I now believe they will likely do one of two things: Either they will sell to Anheuser-Busch or they will somehow buy their independence and focus on rebuilding their brands via new partnerships. Continuing along as they have been is problematic, given what's happening in the industry and what their friends in St Louis are up to with acquisitions and incentives.

It turns out there's another possibility I hadn't considered until an industry friend mentioned it. In that scenario, only Kona would be sold to Anheuser-Busch. That makes some sense. Kona, as noted, is the crown jewel the CBA portfolio. Its seismic growth potential makes it a high value asset and provides plenty of incentive to any potential suitor.

One of the things AB would likely do with Kona is open Hawaiian-themed, Kona brewpubs around the country. We've seen a tiny bit of that with 10 Barrel (pubs in several cities), but Kona is an emerging national brand oozing with pub and shelf appeal. None of the other CBA brands are in the same league and, honestly, there's nothing with the upside of Kona out there.

What would happen to the remaining CBA brands? Here's where it gets crazy. In the scenario described to me, those brands would be sold to Pabst. Interesting. Pabst, you may recall, is currently leasing (with an option to buy) the antiquated CBA brewery in Woodinville, Wash. Could a deal like this happen? It sounds pretty far-fetched, but stranger things have happened.

If you're wondering about a timeline, time is of the essence. The slowdown in overall craft has the industry on edge. There will undoubtedly be deals this year. The various pressures and incentives suggest the CBA is ripe to be part of that. But we shall see.

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.

CBA Shows True Colors with Pabst Deal

Back in November, I reported that Laurelwood was shifting its contract brewing from the CBA's Woodinville, Wash. facility to Full Sail in Hood River. Laurelwood will be just fine brewing large scale packaged product at Full Sail. But it wasn't their choice to make the change.

The way it apparently came down is the Craft Brew Alliance told Laurelwood it wanted out of the contract. It was a little puzzling. This had been a good arrangement for both parties. Why end it? Well, sometimes you need to see the full picture. And it was revealed this week.

On Monday, the CBA announced it has entered into an agreement by which Pabst will begin brewing a subsidiary brand, Rainier Mountain Ale, at the Woodinville brewery this spring. Further, Pabst has the option of purchasing the brewery outright at any time in the next three years.

For its part, Pabst is pleased as punch that they will be brewing a Rainier brand in its home state. It makes for a nice story, if nothing else. They will apparently revive several archived Rainier brands. Mountain Ale, to be packaged in iconic 16 oz bottles, will be first. Pabst's portfolio is loaded with crap brands, most of which are brewed by MillerCoors. That isn't going to change. Even standard Rainier won't be brewed in Woodinville. Pity.

Pabst was able to negotiate a deal for the Woodinville brewery because the CBA no longer needs it. Expansion and modernization at the Portland brewery, which will be capable of producing 750,000 barrels annually, means (as one source put it) the CBA will soon have a very efficient brewery in Portland and a very inefficient one in Woodinville.

Rumors had been circulating that the Woodinville facility was for sale. The CBA brass surely preferred sale to closure, and the arrangement with Pabst is a step in that direction. Moreover, it buys time for the CBA to fully shift production to Portland while Pabst gets comfortable in Woodinville. Sale of the brewery seems imminent within the three year timeline.

In case you're wondering, the Woodinville facility, better known as Redhook Brewery, was built in 1994. It has a capacity of around 200,000 barrels a year and has brewed Widmer and Redhook beers, as well as contract brands, like Laurelwood. This is where Widmer brewed all of its hoppier brands, a result of the fact that the Portland brewery was unable to handle those beers. But never mind.

The CBA is striving to consolidate production and increase efficiencies wherever possible. Shifting Northwest production to Portland is part of that. They're also leveraging a partnership with Blues City in Memphis, which brews Kona brands for the eastern market and allows them to contract brew non-owned brands at their Portsmouth, N.H. brewery. Efficiency, efficiency, efficiency.

CEO Andy Thomas says the CBA has never worked more closely or been more closely aligned with the interests of its mentor and part-owner, Anheuser-Busch. Right. The comment makes a ton of sense when you look at what they're up to. And there's more.

Recall that CBA beers are distributed by AB around the country, an arrangement dating back nearly two decades. Now comes news that they are pushing Kona brands into Brazil via ABI subsidiary Ambev, which dominates the beer market there. In the US, the CBA is a party to AB's anti-competitive incentive program, whereby distributors receive giant bonuses for selling AB products while dumping or ignoring independent craft brands. Great stuff.

Of course, none of this matters all that much to Laurelwood, which is where I started. They've been asked to let the CBA know they'll be done in Woodinville, another way of asking when they'll be ready to go in Hood River. Time is money and the bean counters are clock watching.

No word on when the CBA will become a fully-owned subsidiary of Anheuser-Busch. Sometime in the not-too-distant future, I suppose.

Good and Sketchy Times at the Craft Brew Alliance

The Craft Brew Alliance, represented by the Widmer, Kona, Redhook and Omission brands, released its preliminary financial results for 2014 last week. If you keep your gaze fixated on that report, the news is all good. You have to look a bit deeper to see potential problems.

Some Highlights

• Net sales increased 12 percent over 2013, topping the $200 million milestone.
• Shipments grew 10 percent, compared to 4 percent in 2013.
• Contract brewing and related sales increased 33 percent.
• Diluted earnings per share reached 16 cents, compared to 10 cents in 2013.
• Gross margin expanded to 29.4 percent, compared to 28.1 percent in 2013.

The report paints a picture of a company that is doing quite well. The CBA is based in Portland and has strong roots in the Northwest, but its brands are making a strong statement in markets throughout the country. The first full quarter of brewing in Memphis helped contribute to what was, in fact, a record year for the company.

The Sketchy
If it's true that every grey cloud has a silver lining, then the reverse must also be true. In the case of the CBA's 2014 results, there are some issues. For example, growth slowed to 7 percent in the fourth quarter, when sales to retailers were up just 2 percent. The report says that "primarily reflects the SKU rationalization of seasonals across the portfolio." Fine.

By far the most significant factoid on the grey side of the ledger is the fact that CBA volume was down 5 percent in Portland, Seattle and Bay Area grocery stores, according to IRI (Information Resources, Inc.) data. These are the top craft markets in the country and the CBA is traditionally a big player in each (#1 in Portland and Seattle; #3 in Bay Area).

The CBA report doesn't mention or attempt to explain...no reason to in a stellar year. But volume losses in traditional core markets in a record year mean the company did extremely well somewhere else. Info in the report and IRI data suggests the CBA's most robust 2014 growth occurred in underdeveloped craft markets in the East.

That makes perfect sense if you think about it. Mainstream CBA beers are in a tight spot in mature craft markets like Portland, particularly in grocery stores, where competition for shelf space is brutal. The place where their beers shine is markets that have recently jumped on the craft bandwagon. There isn't much competition in these "soft" markets and the CBA is tapping them with gusto.

None of this means the CBA makes crappy beer. Far from it. I'm not a big fan of the standards, but I've enjoyed some fantastic specialty beers on recent trips to Widmer's Gasthaus pub. They always seem to have seasonals and specialty beers on the board. CBA beers may not have a strong presence in the area's elite taprooms and beer bars, but they are brewing some great beer.

Future Angst
OLCC stats for 2014 (through November at this point) put the CBA at the top of the heap for barrels sold in Oregon. Of course, they are selling far more beer outside the state and Northwest. A big reason for that is the arrangement they have with Anheuser-Busch, which owns roughly 30 percent of the company and has an extensive, nationwide distribution network.

Some wonder where CBA products fit into AB's strategy going forward. With the acquisitions of Goose Island, 10 Barrel and Elysian, and their efforts to acquire and operate branch distributors wherever the law allows it, will AB shift its focus to fully-owned brands at the expense of partly-owned CBA brands? Inquiring minds wonder how that will play out.

Buffalo Wild Wings Has High Hopes for Game Changer

Buffalo Wild Wings isn't on my personal list of favorite beer stops. The places have a frenetic character I find mildly distracting. This is largely a generational issue, I think. Many of my younger friends are big fans of these places...more than 900 of them across the country. Shazam!

The Minneapolis-based company recently announced a deal whereby Redhook Brewery (part of the Portland-based Craft Brew Alliance, if you aren't aware) will produce a beer specifically designed for the BWW experience. The beer, which will be officially rolled out next week and is already on tap at some locations, is called Game Changer.

To understand the beer, you must first understand Buffalo Wild Wings. They bill themselves as being about beer, sports and wings. The order depends on the time of day, week and year, I suspect. They nearly always have sports on multiple big screens at BWW. These places are gathering points for sports fans who like to enjoy a beer and some food while viewing a game or games.

Lloyd District BWW

Game Changer is designed to maximize that experience by allowing patrons to drink several pints without losing touch with their faculties. The beer clocks in at 4.6% ABV and is said to be light amber in color. I suspect it doesn't have an elaborate flavor profile, but I'm sure it is an improvement on standard macro sludge. I'll check it out soon and update this post.

By the way, Game Changer is the kind of beer the late Don Younger would love. Don was not a fan of big beers because he wanted patrons to be able to drink more than one pint in his pubs. His Lompoc partner, Jerry Fechter, delights in telling the beer media that Don would hate a particular beer due to its high ABV. I always get a kick out of Jerry's recollections and stories. I digress.

More than 30 tap handles

I can't say what Don Younger thought of Buffalo Wild Wings. He surely appreciated the fact that they offer a decent selection of craft beers. The Lloyd District BWW has more than 30 tap handles and the majority are dedicated to craft brands. These are mostly mainstream beers from established breweries, as opposed to the more eccentric brews you'll find at places that specialize in new-fangled beers.

Buffalo Wild Wings has made a commitment to improving its craft beer selection by increasing the number of taps at most locations. It makes sense given the growth of craft beer. They will put a substantial effort into promoting Game Changer, hoping to up-sell customers who drink light beer. In other words, they are targeting folks who are typically content to sip on Coors Light or Bud Light while they watch games. Not a bad strategy if they can pull it off.

Word is that Game Changer will not be exclusive to Buffalo Wild Wings. It may also find its way into Redhook's other sales channels. Redhook's connection to the Anheuser-Busch distribution network means Game Changer might wind up on store shelves around the country someday. That likely hinges on how successful the beer is with BWW patrons.

Of course, the Anheuser-Busch connection creates a bit of irony. Because AB owns a 32 percent stake in the Craft Brew Alliance (Redhook's parent), the Brewers Association says Redhook is not a craft brewery...which means Game Changer isn't technically a craft beer. This is largely semantics, but still ironic given BWW's effort to expand its craft beer presence.

Update
Game Changer is just what they say it is. I stopped by for a pint the other evening and found it to be a pleasant beer. It's reminiscent of Widmer's Columbia Common ale, which was a seasonal over the winter, though Game Changer definitely has a lower hop profile. This is a great beer for sports fans who want to enjoy a few beers with some flavor while they watch their favorite event at Buffalo Wild Wings. Also a great lunch beer when you need to return to the office intact.

Game Changer in the flesh (glass)

All that said, Game Changer definitely isn't going to satisfy the pallets of folks who are looking for a feisty IPA or meaty red. This is an easy drinking beer you can drink a few of and not have to worry about getting home. It functions well in that role. Redhook did a nice job with this beer. However, discriminating beer fans may want more.

Behind Laurelwood's Big Deal: Something for Everyone

Last week's announcement that Laurelwood will be partnering with the Craft Brew Alliance for a portion of its production brewing caught some people flat-footed. It was unexpected. But make no mistake, it's a huge deal. With something for everyone.

The details of the deal have been reported in several places, notably by John Foyston here. Essentially, the deal will expand Laurelwood's capacity to around 20,000 barrels a year. They brewed just over 5,400 barrels for Oregon in 2012, according to OLCC numbers, and another 1,300 or so were sold out-of-state. The bulk of the new production is going into 12 oz bottles of Workhorse and Red (which will not be organic in bottles).

Putting their most popular beers in six-packs is something owner Mike DeKalb has been thinking about for a while. And it makes sense. Laurelwood has built a solid reputation via 22 oz bombers and kegs in Oregon and Washington. Smaller bottles are a logical step because six-packs remain the most popular form of retail packaging in beer.

They aren't going to have to go out and find places to sell this beer. Laurelwood has already built demand for its beer in Portland and beyond. They have put a ton of effort into developing Seattle, one of the best craft beer markets in the country. In fact, they have been unable to fully develop all of their markets because capacity at the Sandy brewery is maxed out.

"We've been putting 80 percent of our production effort into Workhorse and Red," said Micah Bell, Laurelwood's director of marketing. Portland was apparently getting 85 percent of what they were producing. With a good portion of that production moving to the CBA, they will now be able to fill distribution holes in Oregon and Washington. Alaska, British Columbia and California are on the horizon.

Some 12,000 barrels of the additional production capacity will be at the CBA's Woodinville, Wash. facility. From a strategic standpoint, this is perfect because a lot of that beer is going into the Seattle area. Brewing and bottling it in Woodinville means the beer will be at its best when it hits store shelves. Woodinville fits into Laurelwood's plan almost perfectly.

One of the more significant things about this arrangement is it allows Laurelwood to continue to develop its markets without investing in a production brewery or bottling plant. Many thought they would open a production facility after the Sellwood pub launched last year. There's no doubt DeKalb considered it. With the CBA deal, he can delay a decision on that. He may very well build a production brewery at some future point, but delaying the decision gives him more time to figure out what it looks like.

Vasili at work

Of course, people are already wondering if beer contract-brewed by the CBA will live up to the standards of Laurelwood's relatively small operation. I am generally not a fan of contract brewing. However, Laurelwood brewmaster Vasili Gletsos has significant experience on large production systems from his time at Pyramid. He will be working with highly competent CBA brewers to ensure solid production values. We'll see how it works out, but I get the feeling things will be fine.

For fans of Laurelwood here in Portland, shifting production will be huge. They will continue to brew for 22 oz bottles at the Sandy brewery and the organic brewing program will be maintained for beers served in the pubs. More importantly, Vasili and his crew will be freed up to create more specialty beers. I'm looking forward to the specialty board having more options. And I suspect some of these beers will make their way to better shops around town.

This deal has something for everyone, for sure.