Brewbound Live 2021 - Livestream Studio: Ryan Lake, Director, Arlington Capital Advisors

Justin Kendall [00:12] Hey everyone. Welcome to a special Brewbound Live sponsor interview. My name is Justin Kendall, and I'm the editor of Brewbound. And I'm joined right now by Ryan Lake, a director at Arlington Capital Advisors. What's up, Ryan? How you doing? I'm doing well, and, you know, I was talking to somebody the other day, and we are so impressed at your ability to keep secrets. Like, if I have a secret, I'm, I'm coming to you, man.

Speaker 2 [00:39] It's one of the biggest parts of my job, so I hope I'm OK with that.

Justin Kendall [00:43] You are very good at it. So, and those secrets, uh, they eventually come out, and that's what we're gonna talk a little bit about here. Arlington has been involved in some of the biggest transactions in craft beer, most recently Bell's Lion, New Belgium. You guys were also in on the Boston Beer and Dogfish head deal, but Beyond Kraft, you guys have done a lot of deals as well. Ryan, for those not in the know, tell us a little bit about what Arlington does.

Speaker 2 [01:13] Sure, so we're a specialized investment banking firm. Um, by that I mean that we Advise and represent people in companies, um, looking to do transactions like raising capital, raising debt, uh, buying a company or a brand, selling a company or a brand, merging two companies together, uh, those sort of events. So, we focus basically on four different industries. Uh, beverage is a big piece of our work, and I spend all my time in beverage. Uh, we also do restaurants, we do Franchiss and we do cannabis as well. Um, and beverage, we do deals all over the world. Um, collectively as a team, we've probably done $15 billion worth of transactions, um, and that covers beer, wine, spirits, non-alkc, um, we've done deals for suppliers, brand owners, distributors, importers, retailers, Pretty much within beverage, if you can name a, a segment or a tier, we've touched it in some way, shape or form transactionally.

Justin Kendall [02:05] Nice. Well, we've seen a lot of deal activity in the beer space pick up lately. How much of a pause did the pandemic put on that activity?

Speaker 2 [02:15] The pandemic put a slight pause on it. I mean, honestly, it had largely slowed down even prior to the pandemic. Um, you know, we were certainly getting some deals done within beer and craft beer, um, but it wasn't the deal flow we saw back between 2014 and 2016 or 2017. Um, but the pandemic certainly, I would say, you know, end of March through, um, probably July or August last year, put a pretty serious pause in a lot of our activities across beer, across restaurants, um, obviously in a bunch of other sectors. Um, but, you know, beer is a resilient product, beverage in general. As a resilient product through recessions and through now we know pandemics and other events. Um, so the market came back fairly quickly. Um, it still takes a while to get these things done and announced and closed, but, um, the market for looking at transactions came back, you know, sort of late summer, early fall of last year.

Justin Kendall [03:05] Well, I mentioned that that deal activity has picked up, and really, when I look at the top 10 or so BA defined craft breweries from last year, most of them have taken investment, partnered in some way, transacted in some way, uh, with one exception, which is Sierra Nevada. When you look at this, what do you think that suggests for the larger industry?

Speaker 2 [03:28] I mean, I think it suggests a few things. I think some things are probably specific to the industry, some things are not. I mean, I think, you know, one of the macro issues that any um business faces once you get to 1015, 2030 years in business is succession, you know. Oftentimes, you know, if the owner was in their 20s or 30s when they started, by the time you're 20 or 30 years in, You know, they're at a phase of life where they're thinking about what's next, um, who runs the business after them? Do they have kids they can pass it down to? Do the kids want to take it on? If they don't have kids, who does it go to? You know, who, who is the next, you know, caretaker of that business and that brand? Is it family? Is it professionals, you know, is it ESOP? There's different ways they can go. So, I think a lot of craft brewery owners have to face that decision, and then I think, you know, specific to beer and craft beer, I think, you know, the, um, The success of a lot of these, you know, foundational and legacy craft players, um, has also been some of their greatest challenge. You know, they've created such a great industry and such a fervent, uh, consumer and fan base, um, and eventually you start to get, you know, death by 1000 cuts by virtue of what you've created. I, you know, it wasn't that long ago, there were 2 or 3. 1000 or 4000 breweries, and now we're on the verge of 9000 breweries in the United States. Um, you know, we didn't see, we didn't see 4000 breweries since pre-prohibition until a few years ago. Now we're already more than double that. So, you know, and I think as much as all of these craft brewery, um, founders and icons love to see the growth and love to see what they've created in the industry life. You know, it's also tough when you're losing tap handles and shelf placements, um, to these brands that have emulated what you've done and followed in your footsteps. Um, so I think as the industry gets tougher, um, and as people get older and start thinking about the next step, um, you know, logically they have to figure out what that means for their company and their brand and their people, and community and everything.

Justin Kendall [05:15] Do you expect that to be a major reason why uh folks are seeking a transaction in the in the coming years, I guess, is, is generational successor?

Speaker 2 [05:26] It's part of it. I mean, there's different reasons. I mean, some people, um, you know, start companies and brands with the idea of selling them. Some start them and they're successful, sort of, you know, um, not planning to be so, and then find they have something that's sellable, and they weren't really planning on that being an option. Um, and then some get to a point in their lives where they have to consider a transaction or some sort of a transition out. Um, so it's different for every founder, um, and every company owner, um, but yeah, it's certainly a subset of these, of these transactions are happening because of that, and some happen because of other reasons, you know, they've got a company. Where, you know, they need to make a financial decision. Um, maybe they've, you know, taken on an investor and eventually they've got to find liquidity for that investor, or maybe they've gotten themselves in a position where, you know, they would like to delever the company and take some risk off the table so that they're not, you know, the only one on the personal guarantee and They're not, you know, the one responsible for all of their employees having jobs every day. It's nice to have a partner sometimes. So, there's a variety of reasons why you get to a point where you consider a transaction. And sometimes, you know, you got someone who created a company or a brand, and, and a buyer comes calling on them, and they never planned on thinking about that as an option, but, um, you know, the more they think about it, the more that becomes interesting to them.

Justin Kendall [06:32] We've seen a lot of other segments heat up recently beyond craft. We've seen hard seltzers, ready to drink canned cocktails, whether that's hard teas or hard kombuchas or, or whatever it may be, non-alcoholic beer, all these other segments are sort of heating up at the moment. Are you getting a lot more deal activity in regards to those type of segments?

Speaker 2 [06:55] Yeah, we're seeing a lot more there. Um, we were fortunate to work with, um, Katie Beale Brown at Lone River earlier this year, helped her find a good partner for that brand. But yeah, I mean, I think the, the RTD category in general, whether it's malt-based, sugar-based, spirits-based, wine-based, there's a lot of activity around there. Um, you know, I think the more the lines blur between traditional alcohol and non-alcohol. Categories, you know, the more you have creative people who are creating new brands and sometimes even new segments, um, of interesting things. And I think, you know, we're finding out that the consumer every day is, uh, more and more agnostic to what the actual alcohol base is of the products they drink, um, and they're more concerned with the flavor profile, the nutritional, the price points. The packaging. Um, so I think anything RTD, um, especially during the pandemic, and how much volume that pushed into the off-premise, um, I think as it's accelerated, you know, the rise of all of these new brands and companies who are innovating through, uh, new brands of their own, um, all exploring what you can do with, you know, with, with beverage and different, different sort of packages and pack sizes, and retailers and, and channels of selling.

Justin Kendall [08:05] Are those brands able to command similar multiples to what we've seen in craft in the past?

Speaker 2 [08:11] Yeah, I mean, some have gotten even higher multiples than we've seen in certain occasions. Some have gotten pretty comparable multiples. Um, you know, there's a lot of factors at play there, how the product's made, where it's made, what the profitability looks like now or in the future, um, you know, how many markets that product might be in versus what it could be in, you know, it, it oftentimes you'll see a brand that has really high growth and Maybe they're on a bunch of different markets, and maybe it's challenging to find a buyer, especially in the world of franchise laws and regulations in the three-tier system. Um, you know, they might get a decent multiple, but someone who's maybe only in a handful of states, um, and has a brand that's got real legs, and a buyer believes they could take that brand and put it into 12 more states or 40 more states, um, there's some real value there, and you can get the buyer to pay a pretty high multiple, if you can paint the picture of where that brand could go.

Justin Kendall [08:59] Do you get the sense that a lot of folks are trying to fill out their portfolios or plug in holes that they may have, uh, for some of those beverage areas?

Speaker 2 [09:08] Yeah, I mean, I think all of the big strategics are trying to think through what that that strategy looks like. Um, you know, I think they all know that they need to play in several different RTD categories. I think the question for a lot of them is, how do you do it? Do you innovate internally? Um, do you acquire things? Do you do both? You know, if so, how do you manage that? Also, a lot of these brands are so new that I think the acquirers are trying to figure out, you know, when do you make a bet. On a new brand, you know, how much time do you want to give it before you think it's really proven itself, or are you're better off taking a chance on it early before it gets, you know, too big and too expensive. Um, but all of the players understand they need to play in different ways, and you're seeing all sorts of category overlap. Beer company is doing things in spirits and wine, wine companies doing things in spirits and beer, vice versa. Alcohol companies doing things in non-alcohol. Um, so they're all trying to figure out how do you, how do you get to that consumer who's drinking a lot of different things at a lot of different times of the week, um, and, you know, command more of the share of their wallet and in their stomach.

Justin Kendall [10:07] Yeah, I mean, just like you were saying, Diageo made that leap really quick. That, that was a brand, Lone River, that wasn't even, I, I don't even think it was a year old when they made that deal.

Speaker 2 [10:19] Yeah, we've never, I don't think we've ever taken on a brand that was that young, but um we met Katie and saw what she was doing. We just immediately saw there was something special there. Um, she had found a very clear niche, and she had built an incredible brand that satisfied that niche, um, and everything just sort of seemed to fit. Um, but yeah, it was certainly an outlier in a lot of ways, um, but she did an amazing job.

Justin Kendall [10:41] Obviously, there's still a lot of interest in craft, but maybe you could give us a, a feel for what you're hearing in that space at the moment. I mean, when, when I say obviously, we just saw a huge deal with bells, and, you know, is that an outlier, or, you know, are we going to see more activity, you think, in the craft space?

Speaker 2 [11:01] Yeah, I mean, we're not back to the go go days of 2014 to 2016 yet by any stretch, um, but we are starting to see, um, I think, I think substantially more activity than there has been in the past two or three years, um, which is admittedly a pretty low baseline, but yeah, we're starting to see sort of the green shoots of, of buyers and investors coming back into the market, um. You know, I think that, um, you know, they're, they're on the lookout for the brands that have really proven themselves in the past 5 or 10 years. Brands that have real, you know, room to grow, room for profitability, um, so the right buyers for the right occasions are starting to step back in, and I think, you know, selfishly at Arlington, we're hopeful that that trend continues and accelerates next year.

Justin Kendall [11:41] One of the first things that we always hear from folks after a major deal is, you know, how, how much, you know, what were the multiples, and so, can you give us a sense, and I, I know you can't, you know, talk in specifics on deals, but give us a sense of the multiples that are out there, you know, without telling us too much info.

Speaker 2 [12:01] Yeah, without giving away anything specific. I mean, I would say that, you know, in general, you know, there are still good multiples to be had for really strong brands, um, you know, they're probably in general not back to some of the crazy multiples we saw back in 2015 and 2016, um, but for good brands, there are still good multiples out there. Um, you have to be very careful, I think, in how you go to market, um, who you talk to, and the buyer sets, you know, how you lay out why they should acquire or invest in your brand, um. All of those pieces are more important than they ever have been. You know, it was, it was never been easy to do these things. It wasn't easy to do deals back in 2015 and 201616, but, you know, there were probably more buyers at the table back then. Um, so, it was important back then to make sure you had the right strategy and story and buyer set. But I would say now it's even more so, um, but yeah, for the right brands that really have, you know, good growth prospects or profitability prospects, um, good brand positioning and culture, um, there are still good buyers out there, you just have to be very careful of how you approach that.

Justin Kendall [13:03] These have been great insights, Ryan. One last question for you. What are your expectations for how active 2022 is gonna be at this point?

Speaker 2 [13:12] I think it's gonna be fairly active. Um, I think there's a lot of unknowns still in terms of, you know, um, how Seltzer continues to shake out, you know, what happens with craft beer next year. Obviously this year they were lapping a lot of the COVID off-premise comps. You know, I think the question is what happens next year when you're not having such difficult comps, um, you know, how the On-premise continues to, to reopen and hopefully stabilize in different parts of the country and the world. Um, but I, we expect next year to be active. I think, you know, there's a lot of unknowns about exactly where that activity takes place in terms of what regions and what categories and what channels, um, but I think you're gonna see some good activity next year.

Justin Kendall [13:46] Excellent. Well, this has been awesome, Ryan. Thanks for the time. Thanks, Justin.

Speaker 2 [13:49] Appreciate it.