2AGENDABusiness OverviewMacro-Economic & Industry OverviewTechnical AnalysisFinancial RatiosValuationRecommendation
3CRAFT BREW ALLIANCE – INTRODUCTION Business:A craft beer brewing company with a unique alliance between three craft beer brandsOperates two segments:Beer related operations: Brewing and sale of craft beers and cider from six breweriesPubs operations: Operates 5 pubs for brand buildingHas master distribution partnership with Anheuser–BuschMarket Cap$281mmEmployees~725Annual production Capacity (000’s)1,075 barrelsSource: Company website and 10K_2013
4GID Presentation to NBWA Board (DRAFT 1) December 7DEVELOPMENT STRATEGYMerger Integrationand Building BusinessModel FoundationNational Portfolio StrategyDevelopment and Initial MarketIntroductionNational PortfolioStrategy Growth andValue CreationVolume Growth20082009201020112012201320142015KonaMergerSale of FSBOmission LaunchSquare Mile LaunchRedhook / Widmer MergerSource: CBA Investor Presentation
5GID Presentation to NBWA Board (DRAFT 1) December 7BRANDSLaunched in 1981 in SeattleDistributed in all 50 statesLaunched in 1984 in PortlandDistributed in all 50 statesLaunched in 1994 in HawaiiDistributed in 36 statesLaunched in 2012 in PortlandFirst gluten free beerLaunched in 2013Distributed in 10 states and expandingSource: Company website and 10K_2013
6GID Presentation to NBWA Board (DRAFT 1) December 7BREWING FACILITIESWashington BreweryAnnual / Max Capacity (000’s)220 / 280New Hampshire BreweryAnnual / Max Capacity (000’s)215 / 280Oregon BreweryAnnual / Max Capacity (000’s)630 / 650Hawaii BreweryAnnual / Max Capacity (000’s)10 / 10Source: Company website and 10K_2013
7GID Presentation to NBWA Board (DRAFT 1) December 7ANHEUSER–BUSCH PARTNERSHIPOwnership StructureMaster Distribution AgreementDistribution of Kona, Widmer Brothers, Redhook, Omission and Square Mile in all states, territories and possessions of the USDistributor Agreement has a term that expires on December 31, 2018, subject to automatic renewalCBA pays margin fees, invoicing, staging and cooperage handling fees, and inventory manager feesSource: Company website and 10K_2013
8GID Presentation to NBWA Board (DRAFT 1) December 7HISTORICAL FINANCIAL ANALYSISNet SalesGross MarginCompounded growth of ~11% , primarily because of shift in mix towards packaged, which has a higher selling price per barrel than draftDuring 2012 and 2013, product mix, variable costs, supply chain challenges and pubs pressured gross marginExpected 5‐year gross margin expansion of 500 to 700 basis pointsSource: 10K_2013 and investor presentationNote: does not include alternating proprietorship revenue
10BEER INDUSTRY CHARACTERISTICS Success FactorsGlobal Beer Market Distribution By VolumeEffective Quality ControlMarketing of ProductsControl of distribution networksEstablishment of brand namesDifferentiation FactorsPackagingPriceTasteIngredientsSource: IBISWorld. Craft Beer Production in the US. August 2013; MarketLine Industry Profile: Global Beer. August 2013.
11CONSUMER EXPENDITURE ON BEER – % CHANGE YOY Source: Passport. Euromonitor International. Consumer Expenditure on Alcoholic Drinks. February 2014.
12THE CRAFTGrowth In Craft Breweries2011 – 1,9702012 – 2,3472013 – 2,483Growth in Volume of Craft Beer2012 – 15%2013 – 18%Source: MarketLine. Craft Beer: A Fast Growing Market. September 2013;
13SWOT ANALYSIS FOR BREW Strengths Weaknesses Opportunities Threats Distribution to retailers through A-B agreementAbility to test products in pubs before new launchesQuality control by using local suppliersWeaknessesMajority ownership by Anheuser Busch limits some activitiesShipping costs associated with Kona brand productsConcentration in the Pacific NorthwestOpportunitiesNew product launchesExpansion in domestic and international marketsConsolidation in the industryThreatsChanges in consumer preferencesIncreases in regulation or taxes, especially the excise taxPublic relations and brand image
21DISCOUNTED CASH FLOW ANALYSIS WACCCost of debt6.0%Marginal tax rate40.0%Cost of debt after tax shield3.6%Cost of equityRisk-Free Rate (rf)2.7%Market Risk Premium (rm-rf)7.0%CAPM Beta1.24CAPM Cost of Equity11.4%BREW Realized Return21.1%Cost of Equity12.4%Capital structureDebt4.0%Market Cap96.0%Total100.0%Weighted average cost of capital12.0%Business risk premium1.0%Discount Rate13.0%FCF Build2014P2015P2016P2017P2018PEBIT7,868.912,243.715,806.519,861.024,916.0Less: Taxes(2,918.0)(4,645.0)(6,049.9)(7,649.8)(9,642.4)Less: Capex(8,698.0)(9,089.4)(9,816.5)(11,159.8)(11,662.0)Less: Change in NWC81.9(1,314.9)(1,157.1)(1,249.7)(1,687.1)Plus: D&A10,872.512,677.314,466.516,739.819,027.5Unleveled FCF7,207.39,871.713,249.416,541.420,952.1Terminal Value Assumptions4.0%Discounted rate (WACC)13.01%Terminal ValueDiscounted period (t)1.002.003.004.005.00Discount Factor0.880.780.690.610.54PV of FCFs (in thousands)6,377.47,729.39,179.410,140.611,365.6131,150.8% of Total EV3.6%4.4%5.2%5.8%6.5%74.5%PV of FCFsEnterprise ValueNet DebtEquity Value($ thousands)SharesPerpetuity Method44,792.3175,943.13,357.6172,585.518,Price$ 9.10
22Perpetuity Growth Rate SENSITIVITYEnterprise Value - WACC vs. Perpetuity Growth RatePerpetuity Growth Rate9.12.5%3.0%3.5%4.0%4.5%5.0%5.5%WACC10.0%11.812.513.314.315.416.818.511.0%10.210.811.412.112.913.814.912.0%9.09.49.910.411.011.712.413.0%8.08.48.79.610.110.614.0%220.127.116.11.18.104.22.168%6.66.87.08.216.0%6.06.26.36.57.3
23Add to Watch List RECOMMENDATION Price Weight DCF $9.10 75% Comparable $15.2125%Estimated Price$10.62Current Price$14.64Add toWatch List