Yeastie Boys are selling a 12.5 per cent stake in the business to UK drinks distributor KBE Drinks.
KBE Drinks is a sales, marketing and distribution company that was set up 15 years ago primarily to sell Indian super-brand Kingfisher but now has a global range of beer and cider in its portfolio, including Sagres, Ichnusa and Dos Equis.
The decision to sell a stake to KBE was supported by 90 per cent of shareholders at a special general meeting last week. Shareholders who opposed the deal are able to cash out their shares at a value of 86c per $1 share.
“We’ve been looking into various ways to fund future growth over the last few years, without constantly moving the focus of management and the board away from running the business,” Yeastie Boys said in the proposal to shareholders.
“It had become clear to us that the best approach would be finding a business in the brewing/distribution sector that had sufficient cash for cash flow requirements, access to capital for future funding rounds, and who needed to fill a craft beer gap in their portfolio.
“We’ve talked to a few big names in the beer world, even getting into fairly advanced talks with one, but the fit has never felt quite right until we were approached by KBE Drinks.”
Shareholder approval was needed because the deal involves transferring all Yeastie Boys’ intellectual property rights and trademarks to the UK arm of the business as KBE’s proposal was for investment into a UK-based entity. In transferring the intellectual property to Yeastie Boys UK Limited, Yeastie Boys (NZ) Limited will in effect become a holding company for that ownership.
Much shareholder discussion around the deal focused on the valuation of the company. The post-investment value has been placed at £6 million but “the realistic valuation of the business in its current condition, prior to investment, was agreed to be just £2M,” Yeastie Boys told shareholders.
“With brand revenue at £617k for the just-completed 2020/21 financial year, this represents a 3.2x valuation multiple on revenue.”
McKinlay said the drop in valuation was not entirely due to the pandemic.
“It cannot be used to explain away recent revenue challenges and be considered a one-off event that the business will automatically bounce back from.”
The key factor in declining revenue was losing a Tesco listing in April last year, which took a chunk out of their revenue. McKinlay said bigger players such as supermarkets increasingly wanted to deal with single suppliers rather than a bunch of smaller craft breweries.
“Without a partner of this nature [KBE] opportunities for a business such as ours are limited.”
“The reality is that without the KBE investment, the opportunities and valuation for the company is limited,” an FAQ to shareholders noted.
“It is likely that without the investment from KBE, or a similar partnership, the company will struggle to maintain solvency through to the end of the current financial year.”
McKinlay said he felt the pandemic-related loss of on-premise revenue will not automatically return to pre-COVID levels because more Britons were adopting the New Zealand and Australian practice of drinking more at home.
With more people continuing to work from home in a post-pandemic world city pubs may not return to pre-pandemic trading levels.
The company said the board also regarded the valuation as fair given the current state of the market for craft brands wanting to sell.
“The board acknowledges that this represents a significant discount on previous valuations at a share price of just NZ $0.86 per share, however it believes it fairly reflects other recent market valuations and opportunities for Yeastie Boys without this investment partnership.”
More simply, McKinlay said the market for buying craft breweries had plunged after a series of high-profile sales in UK such as Beavertown, Magic Rock, Fourpure, Fuller’s and Camden Town.
“The market has changed completely, and we’ve seen reduced valuation multiples. I think we’ll see more fire sales in the future.”
He said Yeastie Boys had also discussed investment with BrewDog, Molson Coors, Fullers and Masters.
“None of these groups would have paid more. The current valuation reflects the market and is not influenced directly by the pandemic.”
However, the growth forecasts laid out under the KBE deal would see Yeastie Boys’ valuation increase to £15 million within four years for a share value of NZ$4.67.
As a part of this proposal, KBE will pay £250,000 for the initial investment (half now and half at end of year one) with an added commitment of subsidising a set percentage of Yeastie Boys’ head office operational costs across the first three years of the investment (estimated at £237,000 according to current forecasts).
Yeastie Boys previously worked with KBE in 2019 on a licensing deal for the manufacture, sales and distribution of Kome Biru — a joint venture Japanese Rice Beer. As KBE looked to add a craft beer brand to their relatively conservative line-up, they turned to Yeastie Boys.
KBE also has an established relationship with Cameron’s Brewing, a UK-based contract brewing company that works with the likes of Heineken and Carlsberg. Yeastie Boys hope to use Cameron’s for some large batch brews in the future but will continue to use current partner Utopian for smaller-batch brews.
McKinlay says the deal with KBE takes a lot of pressure off himself and co-founder Sam Possenniskie.
“It’s taken a weight off us,” McKinlay said, adding that he had often been spread too thin working in an HR role, brewing and sales as well as being on the board. “And it de-risks the business in terms of reliance on Sam and I as founders.”
He said KBE was just the right size for Yeastie Boys.
“They are big enough to bring that corporate savvy and have access to mature routes to market across traditional channels but are small enough for us to have sit down with their CEO and senior management team.”
McKinlay acknowledged that Yeastie Boys’ profile had slipped a little in New Zealand but hoped that would change. The beers continue to be brewed under licence at Urbanaut but as that brewery has grown, Yeastie Boys has struggled to find tank space and Urbanaut had struggled to sell on their behalf.
McKinlay said bringing in their own sales rep was a possibility after they previously made the NZ team redundant.
In Australia, the relationship with Nomad was strong and the push there would be for more lower-volume, higher-value seasonal offerings.
Hear Stu Mckinlay discuss the company’s 2014 Crowd Funding campaign in this early Radio Brews News podcast.