The $1 Billion Ballast Point deal earlier this month had me thinking about value and growth in the craft beer industry, and about a previous deal that I had covered – BrewDog’s Equity for Punks 4.
James Watt’s ears must have been burning, because he sent me an email on exactly the same subject last week.
It followed what I thought was quite a fruitful discussion on James’ Reddit AMA last Wednesday, where he was kind enough to answer all of my questions. He must have thought it was fruitful too, because he sent me some answers to questions I hadn’t even asked in his email.
Naturally, James will be defensive of his Equity for Punks scheme and he was so, over on my original article that looked at the deal from a potential investors’ point of view.
The email raised four points, which are copied and pasted below:
- The Ballast Point Deal. I have attached a brief comparison. One key thing to bear in mind to in terms of speed of growth is that we are 8 years old whilst they are 24 years old.
- The strength of Punk IPA in the UK on trade. Number 1 craft beer by a long way and growing at over 100%. I have attached the latest data set from Neilson Data.
- Details of actual financial returns our Equity Punks made when they sold their shares. Every year we have a trading day (meaning the shares are completely liquid) powered by www.assetmatch.co.uk – on the last trading day Equity Punks were able to sell for returns in excess of 400% – a pretty staggering return. And over £250,000 worth of shares were sold as some Equity Punks decided to cash in.
- You could also compare our fundamentals to FeverTree – a publicly listed drinks company valued currently at over £660m – their details are here http://www.hl.co.uk/shares/shares-search-results/f/fevertree-drinks-plc-ordinary-0.25p – if you compare our financials, growth rates and business fundamentals to theirs, we stack up very, very favourably in terms of value. We have over £20m more of fixed assets, have been growing faster over the last 3 years and have been more profitable over the last 3 years.
1) The Ballast Point Deal
Oh, the Ballast Point acquisition. $1 Billion is a lot of money. £664.67 million, or just over twice as much as BrewDog’s value based on their share offer. It’s the kind of offer that makes you feel that anything can happen. James kindly attached a comparison between the two:
Very important here is the fact that James is comparing BrewDog to the Ballast Point of the previous year. Of course, he isn’t privy to their projections for next year, but the comparison is still not a fair one. I understand that it’s attempting to show that BrewDog are where Ballast point were a year ago, so have a similar value potential, but it isn’t the same market, the years will show separate trends and Ballast Point’s value is inflated by the flattering offer from a buyer, which will apparently never apply to BrewDog.
What it does show is that BrewDog are on track to produce a similar amount of beer and turnover a similar amount of cash, just a year later. That doesn’t really say anything without knowing what of that is profit though. The bar estate is obviously larger, but who knows if it’s healthier?
2) The Strength of Punk IPA
Punk IPA is driving growth for BrewDog, but it still has a long way to go. It may well be at the top of the above chart, but it is still a long way behind in a list of the 20 most popular bottles ales in the country, sitting in a lowly 17th. It is the largest selling craft beer in the country though, positioning itself as the go-to craft beer in chain bars like Wetherspoons and Stonegate pubs, as well as supermarkets like Tesco or Sainsbury’s. Hence £4million more than it’s closest craft rival.
Punk’s strength is undoubted and irrefutable, but it’s name becomes oxymoronic with its popularity, its ubiquity and it’s availability (at very little cost) in some of the least punk fridges in the world. Whilst the numbers are good signs for investors, is the fact that the company doesn’t know its own position (despite being prominently featured in any and all copy that comes from Ellon) similarly settling? I don’t think so.
Punk may be strong, but it’s also two faced.
And the more popular and the further ahead of its rivals it grows, the more it risks losing its reputation as a craft beer, and the more it looks at home among the macro brews.
3) Equity for Punks Liquidity
James described Equity for Punks shares as “completely liquid”, as they can be traded once a year, gaining returns of more than 400% in some cases. Completely liquid in as much as the contents of my freezer are, seeing as I defrost it once a year. Whilst I acknowledge that they can be sold, and profits can be made, I wouldn’t say they are “completely liquid”.
I guess that by limiting the availability of the shares to once a year on a trading day, you create a demand for them. That demand goes out the window a little bit when you release more shares and only sell half of them in more than seven months.
No Equity Punks will make a profit on their “investment” until all the available Equity for Punks 4 shares have been bought. I don’t think they will have all gone when the one year anniversary comes round, and by that time I expect Equity for Punks 5 to be in the pipeworks. So investors might well be restricted for another year, simply due to lack of demand. Now the shares may be technically liquid, but they’re hardly freely flowing. I’d describe that as more glacial.
James attached another information sheet below:
There is certainly more than 400% increases, but there is also a downward trend. Of course, the older shares have had more time to accrue value, but the only way Equity for Punks 3 and Equity for Punks 4 will see the same increases is a) if BrewDog grows over the next three years as much as it did in its first four, or b) if a company offers over the odds for those shares, both of which are unlikely.
Like Apple or Google, the early investors are going to reap the largest benefit from the company’s growth. But how much more can BrewDog grow, without losing the craft epithet which has given them so much success? While Apple and Google had unlimited potential, BrewDog are in a business which requires them to remain the underdog, the outsider, the small guy. How much can the small guy really grow?
4) Comparison to Fever Tree
Fever Tree is worth £660 million, or just under what Ballast Point is worth – around $1 billion USD. That’s a huge amount of money, but Fever Tree has positioned itself as the number one tonic producer in the world. Its premium product is used in the vast majority of premium food and drink establishment around the globe, and dominates the market so effectively that its competitors can be counted on one hand. This is not true for BrewDog, who have scores if not hundreds of competitors. The pool is just too crowded.
Plus, it’s apples and oranges again. Fever Tree is not part of a saturated market that thrives on novelty. It is a safe bet, secure in its position at the top of its tree. The same can’t be said for BrewDog.
The fundamentals may be favourable, but you don’t have to be an investor to know that bigger numbers don’t mean a better deal. It is never as simple as that. For a start, Fever Tree pays a dividend, and you can buy and sell whenever you like. No waiting around for the value to potentially drop. The financials may be favourable, but the risk is harder to measure. As a potential investor, that worries me. But then I don’t think Equity for Punks is designed for investors.
All In All
Of all the above, the Ballast Point Deal is the one that would convince me that BrewDog are in fact cheap at £305 million. But with the company adamant that they would never sell out, that’s rendered totally meaningless. They’ll never sell to a massive company for over the odds, so their only chance of achieving that value is to convince their existing customers to pay over the odds for it.
Why share value matters to a company ruled by the punk ethos I have no idea.
Questions and Answers
I mentioned that I’d asked James a couple of questions on his Reddit AMA, and I was very happy that he responded openly and at length. The full AMA can be found here, if you’d like to see the full thread, but below are some of the points I took away from it:
I asked James about potentially looking hypocritical by decrying the sale of craft breweries, whilst BrewDog owns a large part of London based Brew By Numbers. I was pleasantly surprised by his answer:
We are still searching for the perfect craft beer definition. I think independence will become more and more important. With that in mind we are negotiating to sell our shares in BBNO back to the guys for exactly what we paid for them as given the recent acquisitions in the USA we feel uncomfortable owning part of any other brewery, even through something as aspirational as our development fund.
Brew By Numbers have no doubt benefitted enormously from BrewDog’s help – in terms of the financial backing through their investment, and the doors it opened to get their beer into BrewDog’s bar estate. To hear that they will regain their independence from BrewDog, for the same price the shares were bought at, is a true statement of dedication to craft beer from BrewDog, which I respect enormously.
However, the question also raised a question about BrewDog’s own “craft” status. Over the last few years, BrewDog have been committed to defining the term craft beer in Europe, in a similar manner to the Brewer’s Association of the US. Their first draft included a size limit, which I pointed out BrewDog will surely surpass within the next year or two. The size limit was dropped from their second draft published a couple of years ago, which is lucky, as that could have got embarrassing once their US brewery takes them over the 500,000 HL maximum stated in the first version.
I suggested that this could be seen as moving the goalposts, and James replied that they were just trying to figure out where the goalposts are, which is fair enough. It’s a tricky business. The critic in me is positive that wherever the goalposts end up, no matter their size, BrewDog will sit nicely between them.
Bonds vs Equity
My second question concerned the difference between BrewDog bonds and shares, with bond holders receiving interest on their investment whilst shareholders have to settle for discounts on BrewDog products. On reflection I should have pressed a little more for an answer to the question – James managed to get away with saying BrewDog shareholders have managed 400% returns, as stated above. However, as I also stated above, I can’t see returns like that coming around again. Unless Constellation Brands wants to get involved?
Personally, I remain unconvinced of Equity for Punks, but have no doubt that BrewDog are here to stay and continue to contribute enormously to the fantastic beer scene in the UK.
I appreciate James’ time and effort in trying to clarify things, but I must say, every answer just leads to more questions for me. Of course, investing is not meant to be an easy business, so more questions are going to come, but I can’t get away from feeling that Equity for Punks exploits the loyal fanbase more than it benefits them.
So my final question, James:
If BrewDog is growing so quickly, making so much profit and doing so well, why do you need Equity for Punks?
I know about the benefits and the potential and the events, but £95 is a bit much for a membership club and a token slice of the pie. And for those who want to buy more shares for more benefits and more potential and more events, paying another fan four times as much as he paid for them seems a little unfair doesn’t it?
It all just seems a little brainwashy to me.
Punk. Punk. Punk. Punk. Buy. Sell. Punk. Punk.