We've seen a whole lot of deals this year and none of them come close to the price per barrel Constellation paid for Ballast Point. Obviously, Constellation sees a lot of potential in the brand, but the billion-dollar price tag is astounding. So industry financial advisor Ippolito and Christon Co. modeled a potential 10-year trajectory for Ballast Point that justifies the buyer's billion-dollar price tag. (I/C most recently participated in the sale of Lagunitas and Stone brand rights to Reyes Beverage Group, representing the seller, Hop and Wine Beverage.)
To put the deal into perspective, Constellation is paying nearly $3,800 per barrel for Ballast Point. "By comparison, ABI's pending acquisition of SAB Miller is priced in the range of $384 per bbl." That's quite a valuation.
But "value is about the future," wrote I/C. And to model Ballast Point's, the industry consultant looked at three things: growth, profitability, and reinvestment.
Using a "free cash flow" methodology, I/C inserted their own projections for each of these determinants. "If a trajectory like this does not unfold, all bets are off about Constellation and our predictions about craft," they said.
GROWTH. I/C projected Ballast Point to be cooking at a million barrels before the end of year five. A decade into the deal, Ballast Point could be churning out 1,350,000 barrels. I/C feels Ballast Point can achieve this growth with its "access to new markets, and building share in existing markets."
PROFITABILITY. Ballast Point's current gross profit margin sits at 49%. I/C thinks it can grow to "around 56%" in the next decade, as it builds out operations. They feel its "normalized" 2015 EBITDA margin of 32% will likely hover in the same area on account of the "rising cost of sales and marketing" and "increasingly fierce competition." (I/C "assumed an effective combined marginal tax rate of about 38% for federal and state.")
REINVESTMENT. Management feels they're equipped to "cover projected growth near term." (Still, we all know how incredibly difficult it is to forecast growth in the craft segment.) "Anticipating that significant additional capacity will be necessary to support aggressive growth," I/C estimates total CAPEX "for the first four years would exceed $200 million, tapering off in later years."
Because Constellation ponied up the billion dollars in cash, the brewer will be "permitted to reduce cash taxes by approximately $25 million per year by amortizing acquired goodwill or 'Blue Sky,' courtesy of Uncle Sam and § 197 of the Internal Revenue Code." That means over the next 15 years, Constellation "will recover 38% of the total purchase price (i.e., the amount of EBITDA shielded by the amortization) as a result of this tax shield." I/C said they factored in this perk in "evaluating the purchase price and the anticipated ROI generated by Ballast Point."
I/C's forecast on growth, profitability and reinvestment was just "one of many possible combinations" that would yield Constellation "a ROI of approximately 8-9% after tax," which the financial advisor deems to be "more than sufficient to satisfy its lenders and shareholders."
MORE MIND-BOGGLING STATS. Company believes the "financial impact of this significant transaction marks a milestone in the continuing realignment and consolidation of craft brewers and distributors nationwide." To put things in perspective here's a fascinating little tidbit: According to Ippolito's math, Constellation's investment more than doubles all the money A-B has recently spent on craft acquisitions and distributor alignment.
How so? According to the press, A-B spends around $200,000 per distributor on alignment incentives, which equates to an estimated $300 million for the A-B network over a 3-year plan. A-B has spent half that amount on its five acquisitions in craft. Therefore, "AB's projected investment in brand alignment and expansion totals an estimated $450 million, less than half of Constellation's bet on Ballast."
DISTRIBUTION FACTOR(S). Nice synergies here: Reyes Beverage Group is both Constellation's largest distributor and Ballast Point's. Thus I/C foresees Reyes acting as "a major route to market" for Ballast Point, "using its market presence and power to expand Ballast into other markets outside of California, similar to its partnering with Lagunitas nationwide."
Ballast Point is currently aligned with about half of Constellation's distributor network. I/C thinks "negotiated brand transfers between distributors or termination notices and fights over the fair market value of the Ballast brand rights" are possible to get Ballast fully aligned.
Interestingly, I/C believes "Constellation's future trajectory may impact the 'long tail' of craft beer as much as AB's strategy of alignment."
And it's hard to argue one of their final points, that "continuing realignment and consolidation will affect the value of transferred distribution rights and the future value of craft brewers and distributorships in unforeseen ways."Craft Business Daily