U.S. craft beer specialist soars after deal with Anheuser-Busch
Shares of small-cap beer maker Craft Brew Alliance (BREW) soared Wednesday after expanding its ties to Anheuser-Busch Inbev (BUD), which included distribution and brewing contracts likely to yield significant cost savings and established terms of a potential buyout by the beer giant. BACKGROUND: Craft Brew announced a number of agreements with its much-larger rival Anheuser-Busch, including extended distribution agreements and a contract brewing arrangement. Specifically, the companies extended the fee structure of their existing distributor agreement for 10 additional years, through 2028; reached a new contract brewing arrangement which will see up to 300,000 barrels of volume transitioned into Anheuser-Busch breweries; and signed an international distribution pact under which AB will support a global rollout of Craft Brew Alliance brands. Commenting on the news, Craft Brew CEO Andy Thomas said he looks forward to the "financial and operational benefits, which will positively impact our top and bottom line." SIDOTI SAYS TERMS EXTREMELY FAVORABLE: Research firm Sidoti reiterated its Buy rating on Craft Brew while raising its target to $22 from $18, saying the deal terms are "extremely favorable" and should begin accruing benefits in Q1 of 2017. Notably, Sidoti highlights that the subsequent conference revealed the new pacts feature escalating qualifying buyout offers that Craft Brew has the right to reject over the next three years, including a potential $22 per share offer by late August 2017, $23.25 by late August 2018, and $24.50 by late August 2019. Sidoti takes its 2017 shipment growth forecast to 17% from 9%, while raising its 2017 earnings view to 66c a share against the 34c consensus estimate. ROTH EXPECTS SIGNIFICANT INCOME BOOST: Roth Capital analyst Anton Brenner said the favorable deals will "significantly bolster" Craft Brew's income from 2017 onward. The new master distribution pact avoids a planned price step-up, providing an initial $5.5M in annual savings, while the brewing contract should save up to $3M a year and free up capacity for new partnerships with local brewers. Meanwhile, the international deal allows Anheuser-Busch to send Craft's brands to all countries not covered by existing agreements in exchange for fixed multi-million payments over the next several years, and will see AB initially focus on Latin America. Brenner keeps his Buy rating and $20 target on the shares, explaining that he will wait for detailed filings on the agreements before making any changes to estimates. COWEN RAISES TARGET ON NEW COST SAVINGS: Cowen analyst Vivien Azer reiterated her Outperform rating on Craft Brew while raising her price target to $19 from $16, citing the roughly $10M in annualized cost benefits. Benefits from the master distribution pact's lower pricing will only escalate as volume grows through 2028, she says, noting that Craft is required under the deal to reinvest half of those savings back into the company. PRICE ACTION: Shares of Craft Brew Alliance are up nearly 22% to $17.60 in afternoon trading, while Anheuser-Busch is down 0.4%.