Craft Brew Alliance (BREW) – Merger Arbitrage – 50% Upside

Current Price: $11.11

Offer Price: $16.50

Upside: 50%

Expected Closing Date: 2020

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Another transaction that involves a large cap buyer (no problems with financing) and used to trade very tightly until the recent market fall. It seems that increase of the spread has happened not because of the escalated risks, but rather due to the liquidity crunch and panic in the market.

Brewing giant ($67bn market cap) Anheuser-Busch is acquiring the remaining stake in craft brewing company Craft Brew Alliance for $16.50/share in cash ($320m in total). The buyer already holds a 31% stake in BREW. Shareholder approval has been received and the only remaining hurdle is antitrust approval. The size of the transaction implies that there should be no problem with antitrust, however in the beginning of February regulators have asked for additional information. It looks like the extension has been expected as the market has not reacted to this announcement by much. Overall, the management is confident in the eventual approval (Q3'19 conference call):

While this is a bigger than a breadbox deal, this will go through HSR review, we know that. It's over the thresholds. That will all be standard. It isn't terribly huge. I think it's one of the challenges CBA and its stakeholders have always had. We're bigger than a bread box, but we're not much bigger than a bread box. So from that perspective, there's nothing that I can signal to you that we think is egregious or anything that would be kind of a disproportionate concern for us as we enter into the transaction.

The review period will end April and the merger is expected to close this year (should close shortly after the regulatory blessing). In case the antitrust approval is not received, the parent will have to pay $15m termination fee (~5% of the total transaction value).

The buyer intends to finance the transaction through existing debt facilities.

Both companies have quite a close and long standing relationship (for about 25 years) and call this merger "an extension of partnership". From the Q3'19 conference call:

A-B already distributes virtually all of our beer. They brew a good amount of our beer. They've got two seats on our Board. They have certain rights and involvement in the company. So from our standpoint, again, from a regulatory perspective, this is a very natural progression in the relationship. And so we don't anticipate as a result of that, the fact that somebody would find this shocking or would find it to be a material change in kind of what's happening.

Interestingly, the current merger already came at an opportunistic price. Under the master distribution agreement signed in 2016, Anheuser-Busch had an option to either acquire the remaining ownership in BREW at $24.50/share by August'19 or to pay a one time fee of $20m. The brewing giant chose the later, which as a result made the share price of BREW drop significantly. The current merger announcement was announced 2.5 months later.

So overall, it seems that the merger shouldn't get cancelled.

12 COMMENTS

  1. Ilja

    Antitrust approval should be announced shortly. Currently the upside stands at 10% (widened from 4% on 29th of April).

      1. Ilja

        As stated by EB in the comment below, there is likely some market concentration issues in Hawaii here. At this point with no updates being made by the companies for a month now, it is hard to make any strong statements/expectations on the outcome, however it is hard to imagine that Hawaii issue alone could completely derail this deal. BREW has done relatively well in Q1 too, so the chances of Anheuser walking away remain low as well.
        As for myself, I’ve closed a significant portion of my position with 39% profit in mid-May.

  2. EB

    Any antitrust lawyers out there? Seems like this is getting hung up on market concentration in Hawaii specifically. Assuming BUD has a ~40% market share there (slightly lower than overall US share of ~45%) and CBA has ~10% market share there (from one of their annual reports), what could possibly be done to remedy this? Seems like divestiture wouldn’t work.

    Also, this is such a tiny market, so could all this headache cause BUD to scuttle the deal?

  3. EB

    With the sale of Kona Hawaii, I don’t see any other reason for this to be held up.

    1. Writser

      From the press release: CBA and A-B continue to expect the closing of the expanded partnership to occur no later than the end of 2020, after receipt of required regulatory clearance and satisfaction of other customary conditions.

      Yeah, seems very likely that it will go through. However, is a 6% spread worth waiting up to half a year in the year of Covid-19, with a topping of miniscule regulatory tail risk? It probably is, but doesn’t seem like the most attractive risk/reward out there.

      1. nostradamus

        You do of course have the occassional merger that keeps guiding way, way into the future and then suddenly closes in a matter of weeks after regulatory approval comes in (Kemet comes to mind, previous guidance “by the end of Q3”, now closes June 15).

  4. dole27

    Does anyone know if the offer price changes with with Kona Hawaii sale?

  5. g4734g

    Would have hoped for better price reaction after Hawaii announcement. Shows how arb deals aren’t completely immune from general market downdrafts even when news flow on the particular deal may be positive over the same time frame

    1. Writser

      BREW ‘only’ sold their Hawaii Kona assets and rights to a vehicle of a former A-B president for an upfront $5m consideration and some milestone payments. And upon closing: of the Kona Hawaii deal, CBA and PV Brewing will enter into ancillary agreements, including:

      An intellectual property license agreement for the Kona brand;
      A brewing and packaging agreement in which CBA and affiliated operations will brew, bottle and package certain Kona-branded beers for PV Brewing on a transitional basis;
      A distribution agreement in which PV Brewing will receive sales, promotion and distribution services in Hawaii via wholly owned A-B distributor Anheuser-Busch Sales of Hawaii Inc.

      ( https://www.brewbound.com/news/proposed-sale-of-konas-hawaii-operations-valued-at-16-million ). A skeptic could say the whole transaction is just a shell game. And there is still no regulatory approval.

      I also have a (small) position and I think it’s likely that the deal will close, but I think it is dangerous to dismiss a large spread in a 9-digit deal as being caused by a general market downdraft. Many other deals are trading at tighter spreads. I think a better mindset is acknowledging that the market is more skeptical about regulatory approval than you are.

  6. R

    Anyone seeing recent news on this? Traded as low as $13.55 so far this morning.

  7. Ilja

    Certain rumors appeared that this merger will close shortly. BREW jumped up and now the remaining spread stands at 4.6%. Given further uncertainties regarding regulatory decisions and timeline, I think its time to close this idea with 45% profit in 5 months.

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