Consumer goods companies (CGCs), once they are well established within a specific geographic area, constitute durable cash machines. That’s the reason why so many investors (like Warren Buffett) pay such high earning multiples to own them. Once a CGC has built strong distribution networks within its area, it has also built a competitive advantage that is extremely difficult to defeat. This is reason to explain why international companies such as Anheuser-Busch InBev NV (ADR) (NYSE:BUD) rather buy established national champions to start new companies from scratch when they go into new markets.
The natural consolidation process I see in all CGC segments has been particularly strong in the beer business. It not only happens internationally but also within the US. For years now, companies have been buying one another. Nowadays the market seems quiet concentrated since just one player (BUD) controls 40% of the market. That said, new trends in the beer industry have permitted a whole segment of the industry to emerge. Craft beer makers such as Craft Brew Alliance Inc (NASDAQ:BREW) or Boston Beer Co Inc (NYSE:SAM) are surging fast and M&A activity is always latent. In other words, they always are potential M&A targets. As a passive investor, those companies might be interesting propositions if the price they are selling for in the public market is below the price a beer giant would pay to take it private.
The case for Craft Brew Alliance Inc (NASDAQ:BREW) is special. The company is growing fast but a significant share of its volume is sold in exclusive pubs or restaurants the company controls. In a few words, the company has found a way to push volume creating its own demand. Craft Brew Alliance Inc (NASDAQ:BREW) is growing its top line at a 12% year-over-year (YoY) rate and has a great brand such as Kona which is growing sales at rates well above 25% YoY. Craft’s other brands like Redhook and Widmer Brothers are growing slower but they already have some brand equity into them. The company doesn’t seem overly expensive selling at 2013 11x EV/EBITDA, but with a market capitalization of $125 million, it seems too small for a giant like BUD. BREW could be acquired by not only a bigger brewer but also by a Private Equity (PE) firm looking to ameliorate its seemingly low 8% EBITDA margin (BUD’s EBITDA margin is above 39%). The fact that BREW is almost debt free would make it an even more attractive M&A candidate for a medium sized PE firm. My opinion on this name is that it is going to be taken private at some point and at a slightly higher EV/EBITDA multiple. Though, nobody knows when and time is very valuable.