To say that the announcement on Friday came as a surprise to the brewing media and the wider community of beer lovers would be an understatement.
When news of Asahi Europe’s acquisition of Fuller Smith & Turner’s brewing and drinks business broke on the London Stock Exchange at 07.15 that morning, it seemed to come out of nowhere. Even senior employees took to social media to express shock and disbelief. But of course, the fact that the news broke on the Stock Exchange tells us not only why it blindsided everyone, but also why the deal was sealed.
The better part of £340m worth of Fuller’s equity is publicly owned and traded. The fact that 45-times as many trades in FSTA occurred on Friday as on Thursday, and that the shares soared in value by 15%, makes it obvious why absolute discretion around the deal was necessary. It also reminds us that this “independent family-run brewery” was, in very important ways, not really independent at all.
For all the history and iconography, for all the interesting recent craft-beer experiments and collaborations, for all the excitement that met the promotion of Georgina Young to the position of Head Brewer two years ago, and for all the years that a commitment to brewing had trumped the obvious commercial incentives to get out of that business—if the right offer came along it was always clear that the board would have to act in the interests of its wider shareholders.
And what an offer this is.
Asahi Europe, which is fast becoming a serious regional player, is set to pay £250m for the entirety of Fuller’s beer, cider and soft drinks brewing, production, wholesaling and distribution business, including the historic Griffin Brewery and the Dark Star Brewing brand.
That represents a multiple of almost 24-times the business’s 2017-18 earnings. For comparison, the most recent peak in the earnings multiple for FSTA as a whole was just under 19-times, back in 2015. Since then it has plummeted, and today stands at barely 11-times. The FTSE All-Share Index, of which FSTA is a constituent, trades at around 14-times earnings, while the Travel & Leisure sector into which it is categorised trades at some 20-times.
In short, Asahi’s offer is one that Fuller’s board simply could not refuse.
The sale will result in a chunky return of capital to Ordinary Shareholders, but it will also fund a one-off contribution to the company’s pension scheme and, most importantly, free up cash to invest in Fuller’s pub, inn and hotel estate, which is really its main business.
The fact that the pubs and hotels generate 75% of revenues but 87% of operating profits gives an indication of what a drag brewing has become on the company. Under the terms of the deal with Asahi, Fuller’s gets to retain ownership of its trademarks while Asahi gets to use them on a “perpetual, global, exclusive and royalty-free basis”, and the two companies enter into a strategic alliance supported by a long-term supply agreement, which means that Fuller’s pubs and hotels will still sell beers branded with Fuller’s trademarks, which will be owned by the Fuller’s business.
A year ago, coincidentally in response to the Fuller’s takeover of Dark Star Brewing, I wrote about the importance of the business cycle, and especially long-term interest rates, behind brewery merger-and-acquisition dynamics.
I predicted that “the window for deal making in the brewing industry could be small and closing”, because by 2019 bond yields, which to some extent determine equity valuations, could be “back at levels last seen before the latest round of consolidation began”, and by 2020 they might be high enough to “finally choke this exceptionally long business cycle and tip us into the next recession”.
Well, this business cycle is another year older, and it is now just a few months away from being the longest in modern history. But the yield on a 10-year UK Gilt, at just 1.3%, is actually lower than it was when I wrote a year ago. Just as we see with the multiple paid by Asahi for the Fuller’s beer business, private equity investors worldwide are paying acquisition prices that are higher even than they were during the euphoria of 2006 and 2007—while the sense that the current economic expansion is on borrowed time grows and grows.
This is a sweet deal for Fuller’s, then. It is a once-in-a-generation, perhaps even a once-in-a-lifetime opportunity to realise such a rich valuation for its brewing business—and that is saying something, given that Fuller’s lifetime stretches back 174 years. It also removes exposure to a business that, for various reasons, has been unable to capture much of the premium-beer growth of the past 15 years, but which nonetheless looks vulnerable to the substantial downturn that premium beer, untested by recession for a decade, will inevitably endure over the coming three-to-five years.
What’s in it for Asahi?
To me this looks like a very rich valuation. Nonetheless, Asahi clearly feels that it can grow the earnings of Fuller’s brewing enough to justify at least some of the significant premium it has paid for the business.
Asahi’s Chief Executive, Akiyoshi Koji, indicated how it can achieve that growth in his statement, and it follows a well-thumbed playbook that looks to exploit “untapped international potential”.
That means using Asahi’s global distribution network, but it must also mean growing volumes and shortening supply chains by brewing Fuller’s recipes at other sites, in addition to the historic Griffin Brewery in Chiswick. Simon Emeny, Fuller’s Chief Executive, insists that Asahi is “an appropriate custodian” of the Griffin Brewery, which has functioned continually for 365 years, and that the deal protects that “heritage”. That is an important consideration for lovers of beer, brewing and London’s industrial traditions.
Will it affect quality? Probably not—but often, in these circumstances, maintaining quality in the key brands that are taken international requires a slimming down of the product range as a whole. London Pride, ESB and most likely Vintage Ale and Frontier lager might be expected to go from strength to strength. Lovers of Chiswick Bitter, the Gales brands and great beers such as London Porter or 1845—a personal favourite of mine—arguably have more reason for concern.
On the whole, I believe that the rational beer lover should prefer to see Fuller’s brewing heading into the next recession under the aegis of a successful global beer corporation rather than attached to a struggling, mid-sized hotel business. No brewing business, not even one with 174 years of history, should assume that it will survive the coming downturn, which is likely to be long, grinding and brutal.
This tends to be the view I take about most brewery acquisitions. I cannot get as emotionally riled as some do when a craft-beer outfit established five or six years ago decides to take up a global megabrewer’s offer to pay them 10 years of future profits today. Bloody well done, I say. These are businesses, after all, not football teams.
Fuller’s is a bit different.
It’s not just the heritage, the iconography, or even the leadership in traditional cask ale that Fuller’s represents. It’s the fact that this brewery has been around for all of my life, during much of which it seemed to stand for “proper beer” before I understood or even cared that much about what “proper beer” might mean. After a visit to Guiness’s St. James’ Gate Brewery in Dublin in my early twenties switched me on to the possibilities of beer, Fuller’s was one of the handful of brands that I looked for when I was at that “I-don’t-know-much-about-beer-but-I-know-I-want-to-try-something-interesting” stage, which really persisted until I discovered Belgian ales some years later. The sweet, malty, toast-and-marmalade Fuller’s house style did so much to influence my idea of what flavoursome beer was—an influence that guides my preferences even to this day.
And so, while I accept that it would have been utterly negligent for Fuller’s board members to spurn Asahi’s advances, and acknowledge that it could have had much worse suitors, I still greeted Friday’s news with a real tinge of regret.
It does feel like the end of an era, for brewing and for London.