It was again reported last week that Reyes made another major purchase, this time buying the rights for Constellation Brands in southern California from three wholesalers: Markstein, Triangle, and Beauchamp. In all, these purchases represent just under six million cases of STZ products.
It is also estimated that Reyes paid up to $37 per case which translates to approximately seven times GP for the STZ brands. In doing the math, Reyes paid $200 million for these products. Did Reyes overpay or not?
Traditional wisdom has always stated that if the buyer can recoup their investment within five years, then the purchase was considered a “good deal.” In today’s market, however, if a distributor is a long-term player, meaning they have no intention of selling-out, the traditional ROI methods can be thrown out.
Today, if given the opportunity to purchase STZ brands, a wholesaler might look at this as a once in a once in a lifetime chance and would surely pay whatever the asking price. Take for example, the AB wholesaler who, years ago, turned down the Model brands. This represented what many at the time thought was an unrealistic price. If those wholesalers had a mulligan, one would speculate that they would now write the check.
Reyes paid the wholesalers what some have called a “premium multiple.” Obviously, this multiple was not in dispute as this deal had been negotiated and agreed upon.
In past decades, when a multiple was in dispute, the usual method of resolution was through the courts. Such disagreements were typically resolved using industry expert witnesses who determined a range of value. Some experts used DCF as a way to determine the value and others used ROI. In recent years, however, several courts have determined that the ROI projections represented a better value for a brand over the DCF method. If the multiple is at seven times or more, neither party seems to have an issue with that valuation.
At the recent Beer Business Daily’s Distributor Productivity conference, Joe Thompson, John O’Conner, and I had the opportunity to visit. The three of us, along with Mike Mazzoni, were the expert witnesses in many of the beer industry disputes on valuations over the past 30 years. Interestingly, none of us, including Mike, were involved in any expert witness cases at this time. Part of this was our decisions to no longer accept such cases. One has to believe, however, that if companies like Reyes are now willing to pay multiples of seven times or more for products, there will be very few, if any valuation disputes.
In addition, many states now address GP multiples for breweries desiring to leave a distributor if they fall into that state’s definition of their percent of the distributors’ business. This eliminates any issues and moves away from any lawsuits, a good move for the industry.
Going forward there will always be situations where an expert witness will be needed, but in the current market, the seller will more than likely get their asking price.
An expert knows all the answers – if you ask the right questions.