Mergers and Acquisitions in the Brewing Industry · PDF fileNC Craft Brewers Conference...

Michael J. DennyManaging PartnerTel: (704) 560-7119Email: [email protected]: www.greenskylaw.com/attorneysBlog: www.beerlawmashing.comTwitter: www.twitter.com/BeerLawMashing

GreenSky Law715 Rollerton Road, Ste. 107Charlotte, NC 28205(704) 560-7119www.greenskylaw.com

Mergers and Acquisitions in the Brewing Industry

North Carolina Craft Brewers ConferenceNovember 9, 2017

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NC Craft Brewers Conference Mergers and Acquisitions in the Brewing Industry

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Table of Contents

Section 1 Introduction ……………………………………………....... Page 3

Section 2 Recent Craft Brewery Acquisitions...………………. Page 5

Section 3 M&A Geek Speak ………………………….………………. Page 7

Section 4 Strategic vs. Financial Buyers ………………………… Page 16

Section 5 What if “Big Beer” Comes Knocking………………. Page 18

Section 6 Why do Brewers Sell? ………………….....…………. 4

Section 7 M&A Deal Process ………….…………………………….. Page 26

Appendix A Additional Information …………………………………. Page A-1



Section 1

Introduction



Introduction

• A little about me . . . and thank you!

• About you?

• Why care about M&A in the brewing industry?

• Any war stories, successes, concerns for group discussion?



Section 2

Recent Craft Brewery Acquisitions



Recent Craft Brewery Acquisitions

20171

• Wicked Weed to AB-InBev (strategic, controlling)

• Lagunitas to Heineken (strategic, completed controlling)

• The Bruery to Castanea Partners (financial, private equity, controlling)

• Monkey Paw Brewing to Coronado Brewing (strategic, controlling)

• Short’s Brewing to Lagunitas U.S. Holdings (strategic, minority)

• Anchor Brewing to Sapporo (strategic, controlling)

• Magnolia Brewing to New Belgium (strategic, controlling, bankruptcy sale)

• Funky Buddha to Constellation Brands (strategic, controlling)

• Lord Hobo to Valterra Partners (financial, minority)

1. See VinePair, The Definitive Timeline of Craft Beer Acquisitions (2017), https://vinepair.com/craft-beer-sales/ (last viewed November 8, 2017).

https://vinepair.com/craft-beer-sales/



Section 3

M&A Geek Speak



M&A Geek Speak

Like the brewing industry, M&A has its own unique jargon.2 Not surprisingly, it’s not as creative as brewing slang. Here are a few basic terms:

The Deal

• Business Combination

• Merger

• Acquisition

The Parties

• Purchaser (aka, Acquirer, Bidder, or Buyer)

• Target Company (aka, Target Co., Seller)

2. See Latham & Watkins, THE BOOK OF JARGON, GLOBAL MERGERS AND ACQUISITIONS (2017), https://www.lw.com/admin/Upload/Documents/BoJ_Global_MandA-locked-March-2015.pdf (last viewed November 8, 2017).

https://www.lw.com/admin/Upload/Documents/BoJ_Global_MandA-locked-March-2015.pdf



M&A Geek Speak

The Parties

• Acquisition Company (aka, Acquisition Sub, Acquisition Co.)

• Surviving Company

• Selling Shareholders (aka, Selling Stockholders, Selling Securityholders, Sellers)

• Accredited Investor

• Public Company (aka, Pubco)

• Private Company

• Financial Buyers (aka, Venture Capital, Vulture Capital, Private Equity)

• Strategic Buyers (e.g., “Big Beer”)

• Advisers (“Representatives,” Brokers, Investment Banks, Accountants, Attorneys, PR Firms, Transfer Agent, etc.



M&A Geek Speak

Deal Structures

• Minority vs. Majority Stake

• Asset Deal (aka, Asset Purchase)

• Stock Deal (aka, Stock Purchase, Securities Deal)

• Merger

• Direct Merger

• Triangular Merger

• Forward Triangular Merger

• Reverse Triangular Merger

• Two-Step Acquisition – Tender Offer followed by Back-End Merger

• Merger of Equals (See “Additional Information” below)



M&A Geek Speak

Documents

• Offering Memo

• Offer Letters (Love Letters or “Bear Hugs”)

• Letter of Intent (aka, LOI)

• Non-Disclosure Agreement (aka, NDA)

• Purchase Agreement (aka, SPA or APA)

• Merger Agreement

• Disclosure Schedules

• Escrow Agreement

• Employment Agreements



M&A Geek Speak

Documents

• Noncompete Agreements

• Voting Agreements

• Lock-Up Agreements

• Standstill Agreements

• Assignment & Assumption Agreements (Copyrights, Trademarks, Liabilities, Domain Names)

• Fairness Opinion

• Legal Opinions (Due Authorization, No Conflicts, Securities, Litigation, Tax, etc.)

• Proxy Statement

• Prospectus



M&A Geek Speak

Deal Terms

• Assumed & Excluded Liabilities

• Earn-Outs

• Excluded Assets

• Material Adverse Effect (aka, MAE)

• Purchase Price

• Purchased & Excluded Assets

• Purchase Price Adjustment

• Representations and Warranties

• Covenants



M&A Geek Speak

Deal Terms

• Closing Conditions (Due Diligence, Financing, Consents, Regulatory Approvals, MAEs, Pending Litigation, Securityholder Approval, etc.)

• Termination Events

• Indemnification (Baskets and Caps)

• Closing (Sign & Close vs. Delayed Close)

• Funding!

• Closing Dinner!

• Deal Toys!



M&A Geek Speak

Pubco Takeover Defenses

• Shareholder Rights Plans (aka, Poison Pills)

• Staggered Boards

• Advance Notice Provisions

• Shareholder Action by Written Consent

• Shareholders’ Ability to Call Meetings

• Number of Directors Fixed by Board

• Supermajority Voting to Amend Charter and Bylaws

• Supermajority Voting for Fundamental Transactions, etc.

• Others



Section 4

Strategic vs. Financial Buyers



Strategic vs. Financial Buyers

Strategic Buyers – “Big Beer,” competitors, etc.

• Synergies & economies of scale – increased negotiating and purchasing power, eliminate duplicate functions and expenses, distribution and sales force synergies (including footprint synergies), eliminate competition, etc. (1+1=3) See Appendix A.

• Can pay higher purchase prices

• Indefinite investment horizon

• Not always sophisticated in M&A

Financial Buyers – Investors, Venture Capital, Private Equity, etc.

• Management efficiencies, debt structure, governance, etc.

• Uses debt for acquisitions; leverage increases returns

• Cash flows to service high debt levels

• Retain management team

• Exit strategy – IPO, future sale, liquidate, short-termism, etc.



Section 5

What if “Big Beer” Comes Knocking?




Common Questions

• Should we be concerned about a hostile takeover?

• Do we have a duty to negotiate, or can we “just say no”?

• What if they offer a significant premium for our brewery?

• What if we approve a bad deal or inadequate sales price?

• What if our minority securityholders disagree with our decision no to sell (or to sell)?

Short Answer

These shouldn’t be major concerns for a privately held brewery as long as:

• It has sound organizational documents and governance structure (e.g., Articles of Organization and Operating Agreement); and

• Its board, officers, and controlling securityholders exercise their fiduciary duties.




Sound Organizational Documents and Governance Structure

• Clear voting power and ownership structure

• Good governance

• Fundamental transaction approval requirements (e.g., sales of “substantially all assets”, mergers, etc.)

• Security transfer restrictions

• Rights of first refusal, Drag-along rights, etc.




Satisfy Fiduciary Duties

1. Consider Applicable State Law – North Carolina, Delaware, etc.

2. Standard Fiduciary Duties – Business Judgment Rule – If a director or officer satisfies the fiduciary duties of good faith, due care, and loyalty, then decisions will not be second guessed by the courts.

• Best interests of company and securityholders

• What about best interests of employees, community, etc.?!

• Reasonable inquiry

• Informed of reasonably available information (e.g. updated strategic plans, valuations, projections, etc.)

• Good faith reliance on advice of officers and experts (e.g., financial advisers, attorneys, etc.)

• Interest of company over personal interests (e.g., conflicts of interest, corporate opportunities, etc.)





3. Enhanced Fiduciary Duties – Delaware and other states have recognized enhanced fiduciary duties under certain circumstances:

• Takeover defense measures (e.g., poison pills) – Must be reasonable in relation to perceived threat (Unocal)

• Sale of control (e.g., shopping the company) – Duty to make a reasonable effort to obtain the highest possible value in a change of control. If Revlon duty is triggered, may no longer “just say no” (Revlon). Must focus primarily on selling price.





4. Controlling Securityholder Duties – A controlling securityholder owes fiduciary duties to minority securityholders, but these are not as clear as director and officer duties . . .

Red flags if:

• Controlling securityholders are on both sides of transaction (e.g., affiliated with buyer, management rollovers, going private transactions, etc.)

• Transaction will result in special benefits for controlling securityholders (e.g., merger resulting in liquidation preference for preferred stockholders and nothing for common stockholders)



Section 6

Why Do Brewers Sell?



Why Do Brewers Sell?

• Liquidity for investors – cash and/or publicly traded acquirer stock

• Lock in high price now – mitigate future risk

• Strategic business reasons (see Appendix A)

• Diversify portfolio

• Pursue other opportunities

• Retirement planning, life events, etc.

• Others? Unexpected Events? Sometimes, life gets in the way . . .



Section 7

M&A Deal Process



M&A Deal Process

• Unsolicited Offers and Responses

• Strategic Plan, Projections, and Valuations – Periodic Updates and Reviews

• Prepare Company

• Engage advisers (Financial adviser, M&A Attorney, Accountant)

• Internal Due Diligence

• Prepare Data Room (e.g., “Virtual” Data Room)

• Draft Offering Memo

• Organization, Corporate Documents, etc.

• Marketing Process

• Non-Disclosure Agreements (Confidentiality, etc.)

• Auction vs. Targeted Negotiations



M&A Deal Process

• Management Meetings

• Due Diligence

• Receive and Review Offers

• Letter of Intent (No-Shop, Standstill, etc.)

• Negotiate Purchase Agreement and Ancillary Documents

• Sign Purchase Agreement

• Announce Transaction

• Satisfy Closing Conditions – Regulatory Approvals, Shareholder Approval, Consents, etc.

• Closing


GreenSky Law www.greenskylaw.comA-1

Appendix A

Additional Information




Detailed Merger and Disclosure Documents

• Widmer | Redhook

See Joint Proxy Statement/Prospectus for merger of equals between Redhook Ale Brewery and Widmer Brothers Brewing Company (May 13, 2008), https://www.sec.gov/Archives/edgar/data/892222/000089102008000119/v36488b3e424b3.htm. The proxy statement/prospectus provides detailed disclosure related to the merger, including reasons for merger, background of negotiations, opinions of financial advisers, valuations, merger agreement and ancillary documents, business plan of combined companies, risk factors, executive compensation, etc.

• Anheuser-Busch | InBev

See Preliminary Proxy Statement for merger between Anheuser-Busch and InBev, https://www.sec.gov/Archives/edgar/data/310569/000095012308011957/y65691r2prer14a.htm.

https://www.sec.gov/Archives/edgar/data/892222/000089102008000119/v36488b3e424b3.htm

https://www.sec.gov/Archives/edgar/data/310569/000095012308011957/y65691r2prer14a.htm




Electronic Copy of this Presentation

• An electronic copy of this presentation is posted on my blog at www.beerlawmashing.com.

Legal History and Purpose of North Carolina’s Three-Tier Beer Distribution System

• See Michael Denny, What’s All the Fuss About North Carolina’s Beer Distribution Laws? Part II—The Three-Tier System (October 29, 2017), https://beerlawmashing.com/2017/10/29/north-carolinas-three-tier-system/.

http://www.beerlawmashing.com/

https://beerlawmashing.com/2017/10/29/north-carolinas-three-tier-system/


GreenSky Law www.greenskylaw.com

Fin.

Mergers and Acquisitions in the Brewing Industry · PDF fileNC Craft Brewers Conference...

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