Friday, December 26, 2008

Rumors Abound Regarding Acquisition Of Labatt Beer and Wild Turkey by Drinks Americas

Drinks Americas has been very public about stating they will grow their business by acquisition going forward. So far, the company has announced, and will close by year end, the acquisition of Olifant Vodka. As such, the November and December shipments slated for delivery by Olifant will actually accrue to Drinks' balance sheet.

DKAM could be one of the very few companies listed on the OTC that follows all the rules just like an NYSE big board stock. They file all SEC forms accordingly and have always hosted a regular quarterly conference call with a Q&A to follow.

On this most recent conference call on 12/19/08, the Q&A had a caller who asked if the company was currently involved in the bid process for either Labatt USA or for Wild Turkey. While it is customary for any CEO to decline comment on current negotiations of any kind, it is rather notable how much detail was given by the CEO rather than just saying that NO negotiations of any kind currently exist regarding these two brands.

This past year saw the world's largest beverage buyout in history when InBev of Belgium acquired the USA's leading beer staple for 150 years in Anheuser Busch. That deal culminated on November 14 when the Dept. of Justice gave their stamp of approval to the merger. It came with one caveat though that InBev divest the one brand Labatt that held a market share foothold over Anheuser Busch in the NY area; particularly in the Buffalo, Syracuse, and Rochester areas. In all other areas of the country, Anheuser Busch holds the dominant market share over all brands.

As such, this $52 billion dollar deal has moved to closing but still hinges on InBev selling the Labatt brand as soon as practical with many feeling a deal will be announced by year end. Many would be suitors have been named including Diageo, Constellation, Crown Imports, City Brewing, High Falls(Genesee), and Boston. Not until now has Drinks Americas been named as a viable candidate. However, turning this brand over to DKAM makes powerful sense over the other would be suitors in that Drinks Americas is the only one that is currently going through a sustained growth phase, their distribution network is more perfectly aligned with InBev's, they have an iconic structure that brings the names of Kid Rock with his new beer to the equation along with the re-introduction of Rheingold beer that can fall under the Labatt umbrella, and the company will make best efforts to grow the brand where any other suitor will find it immediately diluted in their current product mix.

Important to note that this decision by the DOJ calls for the divestiture of the Labatt brand ONLY which is housed with the Labatt USA product offering. This includes some 12-15 various brands of Labatt Beer. The deal will call for a perpetual license to produce, sell, and distribute all Labatt products. Labatt will retain the brewery rights to the brand for three years. At the end of three years, the acquirer will have to have selected a brewery and at that point the formulations will be turned over to the acquirer.

Many articles have hinted that this current economy is not conducive to doing deals, especially in the beverage sector. In addition, InBev is mandating an all cash deal where cash is hard to come by for acquisitions in the financial sector. Therefore, it is expected a deal of this magnitude in a relative sense will go out at "fire sale prices."

Labatt USA is estimated to currently be doing $200 million in sales across more than a dozen product lines including Bass and Rolling Rock. Closely guarded is how much of this does the Labatt brand represent. This blogger estimates based on previous numbers that Labatt as a brand does roughly $125-$150 million a year in sales with roughly 15%-20% of that in cash flow. The majority of those sales comes from the NY area.

Those interested in following this story should realize the CEO has stated venture capital is available for acquisitions. They are raising their authorized shares, that once completed, could easily facilitate the issue of warrants to a venture capital firm in exchange for fronting a deal for this, or any other large purchase.

As far as Wild Turkey is concerned, Pernod Ricard owns the brand with their current distillery in Kentucky. The company just doubled the size and capacity of that facility in 2007. In 2007, the brand crossed 1 million cases in sales per year for the first time. That would equate to over $100 million a year in sales.

Drinks Americas' CEO has publicly stated he will make the company "a billion dollar company." In an October 8 conference call he stated the street is clearly undervaluing the stock of this company. Using several valuation methods, he showed where the stock should currently be trading at $1.40 - $2.57 a share. In an upcoming blog I will show how it should and will be valued at even higher prices. One only has to look at the stated increase in business for 2009 from $4.5 million to over $20million in sales and add to it the implications of a $78 million distribution contract in Israel, a $40 million distribution contract in Germany, the Labatt purchase for $150 mil a year in sales, the Wild Turkey purchase for a $100 mil a year in sales, and their current stated expansion plans to see that the CEO knows exactly why he stated what he did when he did about becoming a billion dollar company.

Hansen Naturals as the #1 beverage stock of the past 20 years rising from under 50 cents a share to in excess of a non split reflected $400+ per share. It too, went from the OTC to Nasdaq after seven years of negative earnings and then suddenly profits and a billion plus dollars in sales. There is no reason to suggest this little company could not repeat the same feat.

One last point of interest regarding this possible transaction with InBev. Drinks Americas has filed a number of trademarks recently all relating to their planned product introductions and expansion going forward. It seems more than important that one of those names applied for is the name "Blue." There is only one other company that currently has the name Blue as a beverage trademark and that is Labatt USA. Drinks currently holds the trademrk as "Live Without Oppostion."

Below is a copy of the transcript from the conference call regarding the Labatt and Wild Turkey acquisitions:

Caller: Hi Pat. I would like to say first of all congratulations on surviving this quarter while having to deal with the same credit limitations that the largest companies in the country and the world have had to deal with. And I appreciate mightily how you have set Drinks up to be lean and mean towards profitability in the coming growth in the next couple of quarters and beyond.

I have two questions. This is probably one of the greatest periods of consolidation we've ever seen in the beverage industry. Many opportunities out there for alot of different reasons of companies divesting and consolidating. In the wake of the InBev/Anheuser Busch merger one of the stipulations by the Dept. of Justice for that merger to go through was that InBev divest of the American portion of Labatts brewery. I heard from some sources that those proceedings are moving along towards a fairly swift conclusion. Is there any chance that Drinks might be one of the bidders in the mix there?

PK: Drinks wouldn't comment if it could or if it...we're not in a position to comment on that question whether we would be bidders or not bidders. We wouldn't offer comment. What I would generally say is that Drinks is in a position to be an acquirer for opportunities "generally like that" and in speculation in the press there's everything from parts of the major global companies up for sale in this economic environment through to something you just reviewed. So, Drinks obviously we have the management capacity; we have the ability to source capital to do transactions beyond well in advance of the size of the current company; and certainly has the management skill base with Jeff Daub, Fred Schulman, and Jason Lazo to "agressively" size up and move against any opportunities that do come on the market. We wouldn't comment on this particular question but we would point our shareholders to say that we believe we're positioned for growth both through internal brand development; growth of the brands we do have and acquisition both small and large. Olifant drew something that would be as big as something like what we're talking about. Drinks has the capacity to do that. We think that's a large part of the value. What was the other question?

Caller: Pat just one more quickie. Not sure whether you can comment or not. Another franchise that I have found out is available right now potentially would look awfully attractive in your product mix is Wild Turkey. Could you; would that be something you might be interested in?

PK: "Yeah"; I mean we consider The Turkey a qualified icon but you know again our formal position has to be no comment and any brands like that would ultimately be attractive to Drinks and within our capacity to move forward on given our access to equity with our partners; our investing partners. But, our official position obviously is no comment.

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