The UK and Irish assets of BrewDog, the Scottish self-styled “punk” brewer, have been sold to the US cannabis and drinks firm Tilray for £33m, in a deal that will cost nearly 500 jobs and leave legions of the company’s early-stage crowdfunders empty-handed.
The cash out – such as it was – happened some years back. Without looking up the details there was some private equity money that came in. OK. But as part of that capital raising – or maybe it was payout to founder, not sure – there was an issuance of 18% cumulative preference shares. And you don’t need many years of 18% cumulative before that eats all the equity. Which is why other investors are geting nowt.
James Watt and Martin Dickie, who co-founded the business in 2007, are thought to have already made £100m between them – three times Monday’s sale price – by cashing out shares in 2017, when the private equity group TSG bought 22% of the company.
That’s the bunny with the 18% cumulatives…..
Yeah but 2017 was a long time ago. Have they been removing such large sums since ? Have the private equity guys been issuing huge dividends ?
Ah, no. The point of the cumulatives. How much must be paid to those – and I think they were equity linked, not just cash – increases by 18% each year. Over 9 years that’s going to be a big chunk of the company.
NO.
The amount paid out each year is 18% of the face value if there are enough profits or – if there aren’t – the unpaid balance is owed and added to the next year’s (or the year after’s) payout and no dividends may be paid on the ordinary shares until all the due but not yet paid pref deividends have been paid.
18% is far too high unless you are expecting the company to go bust in seven years or less.
18% is clearly bonkers, but, were there terms akin to converts or ZDPs? Such that unpaid divis could be taken in ords? That’d dilute ords away pretty bloody swiftly.
Don’t know.
Yup, john77 is right.
The 18% is the annual dividend, 18% of the nominal capital value when issued. That’s a fixed dividend, not profit-related.
Cumulative means that, if the dividend isn’t paid, it’s carried forward and has to be paid in the future.
That generally happens because a company can only pay dividends out of profits (current year or accumulated from previous years), so if there aren’t sufficient profits, the shareholders don’t get a dividend. For non-cumulative shares, tough, you don’t get this year’s dividend. But for cumulative shares, if you don’t get this year’s, you get 2 years’ worth next year (or, if there still aren’t enough profits, it keeps rolling up until there are).
Preference means that if there are some profits, but not enough to pay everyone a dividend, the preference shareholders get first dibs.
OK, ignore my earlier comment. Apologies. Tim is right.
These were very odd shares, not even normal preference shares. This is the best I can understand it from a few legal articles:
(this one is good – https://littlelaw.co.uk/p/the-1-billion-brewdog-deal-that-left-everyone-empty-handed)
Back in 2017 a private equity company paid £200 million (ish) for, supposedly, 20% ish of the company, resulting in rather optimistic claims that Brewdog was therefore worth £1 billion.
Of that £200m, roughly half went to the founders in return for part of their shares, and the other half went into the company to fuel its expansion.
But what the private equity boys got for their money wasn’t really 20% of the company. It was, as Tim says, some very special shares that increased by 18% (compounded) every year until the company is sold, in which case they get whatever that compounding has come to, before any of the ordinary shareholders get anything.
And it seems that the 18% was on their entire investment. No share premium to create a difference between nominal value and purchase price.
Back in 2017, Brewdog’s revenues were £111m. Brewery / pub businesses apparently sell for 1.5ish times earnings, possibly 2x. So at the time of the private equity investment the company was worth not £1bn but something like £200m, in other words roughly what the private equity firm put in.
On the face of it, that’s reasonable; the private equity boys handed over about what the company was worth, and they got shares that pretty much held all the company’s value (it would need some heroic growth to make more than the 18% compound return they were getting).
But it wasn’t obvious that that was what was happening. They seem to have got pretty much all the value in return for notionally 20% of the shares. All the ordinary shareholders had left was a forlorn hope that the company would grow by more than 18% p.a. compound.
Questions I’d be asking if I were involved:
1) did the 2017 investment treat all the then shareholders the same, or did the two founders get more of that £100m than their % shareholding would suggest they should get? It’s possible that it wasn’t proportionate, because apparently a lot of the shareholders other than the two founders had restricted shares that couldn’t easily be sold.
2) were subsequent, post-2017, share issues (to small investors and employees) based on a proper valuation, or on the rather dubious £1bn? Were the preference shares properly disclosed?
With an 18% compound return, the 2017 preference shares are now worth over £800m, so up about 4x. In that same time, the company’s revenues have grown about 3x (£111 to £350ish). Given the structure set up in 2017, it’s not surprising that the preference shares have all the value.
So they were not 18% Cumulative Preference shares – in which case my earlier comment was utterly irrelevant (and, in this case, wrong because
Can’t quite work out whether they were non dividend bearing, just with a payout on sale/flotation, or if they were more normal (so the company could pay them a dividend, which would come off that year’s 18% accumulation), just with the payout on sale as a collection mechanism.
From that article, they look like zeros, the return being capital not income, but undated, payout triggered by a future corporate event. Which then looks like there’s an option in there, TSG long a call on the underlying with an 18% compounded strike, but the holders of ords are short a put.
If that’s right, then the 18% (or a bit of it) is partially explained by the option premium, and Brewdog would have additional leverage on the balance sheet from the zero coupon prefs. So, they’re over-geared with £240m actual debt plus the £800-ish equivalent debt from the prefs.
The ords would be pretty much worthless, so TSG could force an equivalent debt (the ZDPs) to equity swap, and take control. Then renegotiate with the lender(s), so the re-capitalised firm can be sold for the £500-£600m top end valuation, giving TSG a 2x-3x multiple.
Seems at least questionable to me. The founders must have known what the end game was at these cumulative rates but didn’t GAF so long as they made their pile?
I did consider buying shares in this when they launched the crowdfunder and I know someone who did. Pretty happy with my decision not to bother.
Likewise. For some reason I was on the mailing list when the crowdfunder was launched (I think I might have bought something from their online shop.) “Thanks, but no thanks” turns out to have been a good decision!
I did buy shares – but for the same reason most people did, to get the discount for the online shop during COVID. P/E ratio at the time was an order of magnitude out from equivalent nearest brewer, so it was clear they were never going to make any money for investors particularly with them not being listed on any exchange anyway. I think only the initial 2 equity releases (way back in 2006 or thereabouts) actually made their investors any money during the handful of times an opportunity for sale was arranged.
But it’s wiped out now. I wasn’t aware of cumulative preference shares but I was aware the staff mutinied against the founders during the height of woke cancel culture, plenty of guardian articles about how ‘nastily’ the bar staff were treated by the ‘capitalist corporate’ founders not paying them 6x minimum wage or something. For me writing was on the wall from that point, has been a free fall decline ever since they stepped back.
Pity as, love or hate them, they did their bit to put craft beer on the map last couple of decades.
Did you manage to drink enough of their beer for the discount to cover what you paid for the shares?
Because it doesn’t look like you’re going to get any other return on them.
Shares were about £25 each at the time, min 2 for the discount, which was 10% off – break even was £500, and it was about £2.50-£10 a pint depending on whether you went for their mainstream supermarket stocked beers or their more expensive specialist DIPA/collaborations with other breweries.
As someone who tended towards the latter, yes I made a saving, though not a huge one. If you were drinking the former you’d have had to have been buying several hundred cans a year
So in layman’s terms they took out an equity release loan on the company, and the lender ends up owning the company as a result? Thus stiffing all the existing shareholders?
See, this is why I keep banging on about people using limited liability to basically defraud people.
!8% cum pref? Good grief! Why? They redemption dated…?
Redemption only on sale of the company, from what I’ve now read.
Rolls up at 18%, compounded, until then.
This is being pitched as a “boo! private equity” story but TSG must have lost a packet. They paid £213m in 2017. At the time, the Guardian reported:
Right, 140x earnings for a brewery. OK. And it’s been making substantial losses for the past five years. £33m less the cost of the sale process is the absolute max that TSG has recouped, so at best they lost 85% of their investment, rather than 100%.
The smart money was clearly the co-founders, who cashed out £100m. No wonder if they were happy to wave through the preference shares.
Hmm.
TSG took 22% at a billion quid, so £220m. If they took all the cum prefs, they get just shy of 40m quid in divis pa, assuming the firm could pay them. That’d be about a third of a billion over the nine years, so they’d be up by over 100m, plus the 33m sale price. The IRR would look pretty good, if the cashflows were all at the front end.
I wonder who has/had the other 78% of the firm though.
Seems to be 20% ish for each of the two founders, 5% for another very early investor, and the rest lots of customers, employees and other small investors. I think CAMRA’s investment club had a bit of it.
I would not touch a business like this because it’s OK beer with a ton of marketing. Which means that tomorrow, the people can stop buying it and drink another OK beer. Like various fashions around Grolsch, San Miguel.
I don’t think I’ve ever seen an ad for either Timothy Taylor or Chimay. People find out about this by word of mouth. And are then customers for decades.
Yes, one of my reasons for not investing. There was a lot of hype about them that seemed unlikely to last.
TT do advertise, I’ve seen them at tube stations, which no doubt makes Khan unhappy. Cheers!
I’m pretty sure TT advertise in the Spectator magazine too.
The Eye as well (same, quite amusing, ads).
To be fair some of their early advertising was brilliant at upsetting all the right people.
A 30% alcohol beer in a presentation case made from a taxidermed fox.
(Puritans and animal rights mob duly go ballistic)
Wouldnt want to drink it though
This share-peddler’s commentary hasn’t aged well:
No mention of the value sucked out by 18% cumulative preference shares.