Pouring it on: M&A activity picks up in the beverage space

Joseph Goode is Senior Vice President and Beverage Industry Manager for Truist, and Michael Stollmack is Managing Director, Food & Beverage Investment Banking for Truist Securities.

It’s been a fascinating and dynamic couple of years in the beverage industry. Changes brought on by the pandemic and shifts in consumer tastes have played out in a way that sets the stage for a record number of M&A deals.^{Disclosure 1}

For many, it’s been an unprecedented sellers’ market. High valuations propelled by plentiful capital have created a fertile market for M&A to reshape the beverage industry. Opportunities vary depending on whether you’re in the spirits, wine, or beer sectors and whether you’re concentrated in manufacturing or distribution. But with some leaders looking to cash out after a growth surge and others feeling more battle-weary, the conditions are right for most business to find where they fit in as M&A resets the industry.

Even with temporary throttling of activity because of labor shortages and supply chain disruptions, there’s still tremendous energy in the market. Potential transactions are attracting high interest from investors and driving multiples to all-time highs, giving owners in this space much to consider as they ponder what’s next for themselves, their teams, and their families.

Key drivers of M&A activity

The beverage industry. For those who questioned the resiliency of the beverage industry, the pandemic offered a challenging test, and the industry got high marks for its performance. Businesses broadened distribution strategies to deal with pandemic restrictions and adjusted to revenue and profit pressures. Consumers grew their category spending in a time of shrinking GDP, and the industry showed promise that beverage demand will be resilient in the face of future price increases and inflation.                                                                                                                   

The economy. Macroeconomic factors have converged to stir up the market. Interest rates are low, the economy is strong, and with equity investors being held on the sidelines since 2020, there’s pent-up private equity in search of returns. They can still use low-interest-rate debt very economically, and they’re being aggressive in their quest for deals.

Strategic plays as buyers seek growth and sellers seek the exits. Strategic buyers have been hunting for alternative sources of revenue, including diversification and growth through expansion into new trade channels such as off-premise and ecommerce. On the sell side, some companies are shedding brands that have plateaued or are off trend as brands perceived as premium or as having high growth prospects have rapidly gained popularity. At today’s activity levels, even brands that have been cast off have buyers looking to pick them up as value plays.

Notable trends in the sub-sectors

Distributors are selling at all-time highs. With off-premise alcohol consumption at sustained highs, distributors have performed exceptionally well during the pandemic. Valuations are higher than ever, investors are willing to pay top dollar, and many of the multigenerational families who own them are ready to sell. And while soft drink and wine and liquor distributors have been consolidating for years, the more fragmented beer segment is now following suit. It’s no surprise, as owners find their businesses increasingly difficult to manage and grow and have investors willing to pay a premium. For many owners, there’s never been a better time to exit and move to the next phase of their lives.

Spirit manufacturers and distillers have strong momentum and growth trajectories. With consumers leaning toward this segment at even higher rates than beer or wine, both strategic and private equity investors are creating a lot of movement within this sector. Valuations are rising, a direct reflection of the almost double-digit growth this segment has seen over the past couple of years.

Wine has continued to attract strategic buyers. Sales are up 3-5%, making wines a way for strategic buyers to expand or refine their overall portfolios. Some winemakers have gone public, others have sold, and activity in this segment remains solid.

Craft beer has trended down, after years of being one of the industry’s darlings. The craft beer model had increasingly relied on taproom sales, but COVID interrupted that business and depressed revenues and profits in the sector. Strategic buyers are being cautious, but opportunistic, in an industry that had become crowded in its pre-pandemic run up. Private equity investors have shied away from the sector and valuations have suffered. But some unicorns remain in the space.

Specialty and crossover beverages. From kombucha and specialty coffees to healthy sodas, these companies are attractive to investors such as venture and private equity groups who are looking for promising targets with high growth potential. Brands with established distribution channels and necessities like liquor licenses can be leveraged quickly for add-on products.

What’s on tap next

Aggregate materials – With its high-energy-use Below are key issues to consider as you think about your next move:

Watch interest rates. They’ll have a direct impact on cost of capital and the breadth of opportunities available to potential investors. As rates rise, investors’ options widen while the seller’s market owners are currently enjoying will cool.

Think through your timeline. If you’re planning to exit within three to five years, now may be the time to consider selling. If you have a longer time horizon and are committed to staying in the game another 10–15 years, you may have a different view, preferring instead to focus energy on growing your business and on getting ahead on succession and personal wealth planning.

Give yourself adequate time to prepare your business for sale. Virtually every business could use time to prepare for a sale at the highest value. Sellers who are more methodical and ready have a smoother process and usually realize a better result. The last thing any owner wants is to be caught flat footed, explaining to a buyer why your business could be more profitable if only you had run it better.

Talk to others who’ve been there. Connect with owners who sold their business or are well into the sales process. Talk to bankers and other professional advisors who have been through the process. Their perspective can be invaluable and can help you focus your energies and feel confident in whatever course you choose. They can tell you what to expect during due diligence, can offer insight into the emotional side of the process, and help you be proactive as you think through your plans.