Anheuser-Busch Takeover Target: Craft Brewers Alliance?

WOODINVILLE, Wash. ( TheStreet) -- Shares of Craft Brewers Alliance ( HOOK) fell sharply early Monday after the little-known craft beer maker posted seemingly lukewarm quarterly results.

Net profits of $1.7 million, or 10 cents per share, were flat year-over-year. The key news was not in the numbers, however, according to Bryce Peterson, founder and president of Washington Street Investments.
Craft Brewers

As craft and artisanal beer consumption gains momentum in the U.S. -- picking up market share from the likes of industry titans Anheuser-Busch Inbev ( BUD), SAB Miller and Molson Coors Brewing ( TAP) in the process -- there has been speculation that Anheuser-Busch would make a buyout offer for Craft.


Peterson says such speculation is premature, but conceded the Budweiser brewer "might think it's smart to buy a strong brand in the craft area and use its incredible distribution and marketing strengths to grow the acquired business."

Washington Street owns about 2.5% of Craft.

Craft already has a distribution agreement with Anheuser-Busch for which it paid $5.8 million last year, and $3 million in the first half of 2010. Craft said Friday that, as of August 12, Anheuser-Busch agreed to reduce that fee by nearly 30% which will result in additional annual top-line savings of $1.6 million. Craft said it expects to reinvest all of the savings from those fees into the development, marketing and support of its brands.

"Boils down to BUD agreeing to fund a marketing campaign for HOOK," Peterson explained.

In other words, Anheuser-Busch sees major national growth potential in several of Craft's beers -- namely Widmer Drifter and Kona Longboard Island Lager, according to Peterson -- and could benefit in the long run if Craft's value, and the value of the beer brands it produces, increases.

It's a more notable point when considering that Craft shares hit a fresh 52-week high of $6.14 last Wednesday at quadruple their trailing 30-day average volume, and that trading volume spiked again Friday ahead of its earnings release.

>>Craft Brewers Alliance Taps 52-Week High

It was suggested that Craft's big share price move last week could have been the result of someone trying to accumulate the stock in anticipation of a takeover. "Craft beers represent a niche that larger brewers would no doubt like to get in on," said Scott Rothbort, president of Lakeview Asset Management and frequent contributor to TheStreet, conceding that he hadn't heard such speculation from any other sources.


Big-name brewers like Anheuser-Busch and Molson Coors have lost market share to smaller brewers like those operated by Craft and Boston Beer ( SAM). During 2009, craft beer shipments increased 7.9%, up from the previous annual growth rate of 5.9%, pointing to an accelerating trend. As a percentage of total beer shipped, Craft crept up from 4% to 4.3% in 2009.

"There's no doubt the craft beer industry is a growing sector," Rothbort said.

Craft, a collection of regional breweries including Redhook, Widmer Brothers, Goose Island and Kona, said Friday it grew second-quarter revenue by 4.5% to $37.2 million, despite flat earnings. Peterson said Craft's EPS of 10 cents per share was negatively affected by a 2 cent per share loss from the disposal of beer that did not pass quality control tests. Craft also spent about 3 cents per share more than Peterson expected on marketing and promotional costs. Excluding those combined 5 cents, earnings would have been 15 cents per share.

"They ramped-up the spending to build future growth," Peterson said. "I think HOOK's management sees they have two fast-growing beers in Widmer Drifter and Kona Longboard Island Lager, plus many great seasonal beers, and decided to invest money today to build the brand for tomorrow."

Anheuser-Busch own 35.6% of Craft, according to an April 9 filing with the Securities and Exchange Commission. Brothers Kurt and Rob Widmer, founders of Widmer Brothers beer, own a combined 18% of Craft shares.

Craft announced earlier this month that Kona Brewing, a craft brewer based in Hawaii, would become its wholly-owned subsidiary for the purchase price of $13.9 million.

Shares of Craft fell 3.7% to $5.74 at midday, off earlier lows.

Do you think Budweiser is developing a taste for Craft Brewers? Take our poll below and see what readers of TheStreet think.

Is Anheuser-Busch Angling to Acquire Craft Brewers Alliance?

Yes -- Anheuser-Busch sees long-term potential in Craft's growing corner of the market.
No -- Anheuser-Busch wouldn't bother with such a small-time player.

-- Reported by Miriam Marcus Reimer from New York.

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