02/09/2021

Is beverage alcohol an attractive investment for private equity?

Private equity involvement in beverage alcohol has been limited. Will this change going forward?

Despite CVC Capital Partners’ £767m acquisition of Stock Spirits Group in August 2021, private equity involvement in beverage alcohol remains limited – with established spirits brand owners typically able to offer the benefits of enhanced routes to market and specialist experience in the sector.

Nonetheless, some industry observers believe that private equity players may possess the kind of capital, expertise and focus that is often needed to drive growth for neglected local and regional spirits brands, as well as encouraging nimble and speedy decision-making.

Bernstein analyst Trevor Stirling, for example, does not expect the CVC move for Stock – a spirits company with a strong focus on central and eastern Europe – to spark a wave of beverage alcohol M&A activity in beverage alcohol.

“A trade buyer can beat private equity because of the synergies they can bring to the table,” he says. “An investment by a multinational spirits brand owner could bring additional distribution channels and routes-to-market, for example, which simply wouldn’t be possible by a PE [private equity] firm.

“This is why PE, in general, is more involved in deals where there isn’t an obvious trade buyer, or if the company is an early-stage business where distribution isn’t so much an issue. PE can then nurture and grow the business until it’s ready to be sold to a trade buyer.”

For others, private equity can play an effective role in helping to develop local and regional brands that are sometimes neglected in investment terms by the bigger players. In these cases, private equity can help to drive growth, modernise operations and streamline decision-making.

For example, Terry Huffine, director of investment bank Raymond James’ retail and consumer division, says, “beyond capital (which is important), these investors typically bring expertise in the form of executives from both within and outside the spirits sector, deep operational experience and considerable ‘best practice’ know-how from their other investments, experience and relationships.”

Huffine contrasts the private equity approach with that of the larger strategic beverage alcohol companies. “Often, companies taking investment from strategics find … that bureaucracy and slow decision-making stifle growth, and that their brands take a back seat to higher-volume – and higher-priority – owned brands of the investor,” he says. “Outside investment, on the other hand, can provide clarity of focus, speed and agility, and free companies from impositions inherent in having a strategic investor.”

However, Stirling questions whether the central mission of private equity firms to secure a sometimes speedy return on their investment is compatible with an industry that often demands a long-term approach to category and brand development.

“When investing in a spirits company – or any company, for that matter – PE needs to have an exit strategy,” he says. “They will be looking to accelerate and streamline business practices in order to grow the business for future exit.

“A trade buyer, however, will be looking to keep the brand for the longer term … The primary goal of PE investment will likely not be to reinvigorate a spirits category. PE invests where there is momentum already, and will look for businesses that can be made more efficient and support higher levels of debt.”

This perceived gap between the respective approaches of strategic spirits brand owners and private equity firms can be partially bridged by investment from specialist private equity firms and incubator funds supported by larger beverage alcohol players.

Ventures such as consumer goods private equity firm L Catterton (backed by Moët Hennessy owner LVMH) and spirits incubator fund Distill Ventures (funded by Diageo) often retain a large degree of operational independence and decision-making – but benefit from the wealth of drinks experience offered by their major investor, who will be eyeing the incubator’s brands with a view to future acquisition.

It remains to be seen if private equity starts to view the resilience of the beverage alcohol market, as well as the strong cash flows of many of the companies in this sector, as attractive investment opportunities. Vodka currently does not show the same growth trajectory as some of the more vibrant spirits categories. IWSR data shows that vodka, for example, declined by volume CAGR -0.7% (2016 -2020) and is expected to see a decline of -0.1% volume CAGR (2021-2025). Whisky, gin and Tequila, by contrast, have been growing over the past 5 years and are expected to continue on their growth trajectories, each with volume CAGRs of between +4% and +5% (2021-2025). In light of this, it will be interesting to see if CVC revitalises the vodka market over the next few years.

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