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Mercer Capital's Value Focus: Food & Beverage Industry | Q1 2016 | Segment: Alcoholic Beverages

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Mercer Capital's Food & Beverage Industry newsletter provides perspective on valuation issues. Each newsletter also typically includes a macroeconomic trends, industry trends, and guideline public company metrics.

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Mercer Capital's Value Focus: Food & Beverage Industry | Q1 2016 | Segment: Alcoholic Beverages

  1. 1. VALUE FOCUS Food & Beverage www.mercercapital.com Executive Summary: Alcoholic Beverages The alcoholic beverage landscape continues to grow worldwide and especially in the U.S. market. Within the beer segment, super premium beers have shown the strongest growth among pro- ducers and consumers, while sub-premium has declined. Since 2008, upstart craft breweries have increased 127% through 2014, while large breweries are merging and consolidating. Each trend is placing pressure on the supply of feed commodities which is a significant concern in the industry. Within the wine segment, the U.S. continues to lead the world in consumption. To quench the thirst, approximately 525 wineries began operations in the United States during 2014 alone. Following a similar form to beer, the spirits segment is consolidating into fewer, but larger, international conglomerates. First Quarter 2016 M&A Overview Alcoholic Beverage Segment 1 Segment Public Company Performance Overview 5 Beer United States 6 Current Litigation 10 Worldwide 11 Spirits United States 16 Worldwide 17 Wine United States 19 Current Litigation 22 Worldwide 23 Public Company Information Food Processors 24 Restaurants 25 Non-Alcoholic Beverages 26 Alcoholic Beverages 27 About Mercer Capital 28
  2. 2. © 2016 Mercer Capital // www.mercercapital.com 1 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 According to Capital IQ, the brewery segment of the alcoholic beverage industry had 57 closed transactions during 2015. Of the transaction values available, the largest transaction was Kirin Holdings’ acquisition of Myanmar Brewery Ltd, valued at $554 million, with a revenue multiple of 4.86x, and an EBITDA multiple of 13.71x. The table on page 2 displays closed transactions in which the acquirer was a major market player, save for the inclusion of Dogfish Head Craft Brewery, added due to its craft brewery status. On September 29, 2015, LNK Partners, a New York-based private equity firm, bought a 15% stake of Dogfish Head, the 13th largest craft brewery in the U.S. Although financial information for the transaction was not disclosed, LNK states that it typically invests between $50 million and $150 million. LNK will hold a seat on Dogfish Head’s board of directors. Dogfish Head’s goal is to use LNK’s investment to fuel enough growth so that it can repurchase LNK’s 15% stake and keep the brewery family controlled. 2015 also saw 23 brewery transactions announced (table on page 3). One notable transaction, announced September 17, 2015, is Anheuser-Busch InBev’s (ABInBev) planned acquisition of SABMiller PLC. As ABInBev remains the largest brewer and beer distributor not only in the United States, but also in the global market, the company’s potential acquisition of SABMiller PLC, the second largest brewer in the global market, poses a threat to the craft brewery segment of the industry. The Brewers Association notes that the transaction would make the market much less accessible for small brewers, who are becoming an increasingly profitable segment to the industry. According to Bob Pease, the CEO of the Brewers Association, the transaction would increase both ABInBev’s international footprint and scale, “Giving the company greater influence over commodities used in brewing and many other facets of the beer industry that could affect competition in the U.S. market.” MA Overview Alcoholic Beverage Segment
  3. 3. © 2016 Mercer Capital // www.mercercapital.com 2 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 MA Overview Alcoholic Beverage Segment (continued) Brewer Transactions Closed Acquirer Target Date Trans. Value ($mm) EV / Revenue EV / EBITDA Heineken NV Namibia Breweries Ltd 12/1/15 na na na Heineken NV DHN Drinks Limited 12/1/15 na na na Grupo Modelo Cerveceria Tijuana and Cerveceria Mexicana 11/10/15 na na na Heineken NV Lagunitas Brewing Company 10/15/15 na na na Heineken NV Pivovarna Lasko DD 10/15/15 340.64 1.94x 9.51x Heneken NV 49.99% Stake in GAPL Pte Ltd and 57.87% stake in Desnoes Geddes Ltd 10/7/15 na na na LNK Partners 15.0% Stake in Dogfish Head Craft Brewery, Inc. 9/29/15 na na na Kirin Holdings Ltd Myanmar Brewery Ltd 8/19/15 553.89 4.86x 13.71x Brown-Forman Corporation Slane Castle Irish Whiskey Ltd 6/2/15 na na na Ambev SA Beertech Bebidas e Comestiveis Ltda. 5/31/15 na na na Anheuser-Busch InBev SA Bogota Beer Company SAS 5/1/15 na na na Anheuser-Busch InBev SA Elsyian Brewing Company Inc. 4/13/15 na na na Molson Coors Brewing Company Thomas Hardy Burtonwood Ltd 3/25/15 na na na Anheuser-Busch InBev SA InBev India International Ltd 2/26/15 na na na Source: SP Capital IQ
  4. 4. © 2016 Mercer Capital // www.mercercapital.com 3 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Brewer Transactions Announced MA Overview Alcoholic Beverage Segment (continued) Acquirer Target Date Trans. Value ($mm) EV / Revenue EV / EBITDA Constellation Brands, Inc Home Brew Mart, Inc 11/16/15 1,021.32 9.95x 32.08x Molson Coors Brewing Company MillerCoors LLC 11/11/15 12,019.10 2.67x 12.41x Anheuser-Busch InBev SA SABMiller PLC 9/17/15 116,285.61 7.44x 20.27x Source: SP Capital IQ
  5. 5. © 2016 Mercer Capital // www.mercercapital.com 4 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 The following tables display closed transactions in the distiller and vintner segments of the market during 2015. There were 46 distiller transactions and 74 vintner transactions. One distiller transaction included Diageo PLC, which holds 30.8% of the U.S. market share. Diageo PLC is also a top global market player in the brewer segment of the industry. One top market player in the vintner segment, EJ Gallo Winery, Inc., had two transactions during 2015, though financial information for the transactions was not available. Distiller Transactions Closed Vintner Transactions Closed Acquirer Target Date Trans. Value ($mm) EV / Revenue EV / EBITDA Diageo PLC Brandhouse Beverages Ltd 12/1/15 na na na Tequila Cuervo La Rojena, SA The Old Bushmills Distillery Co. Limited 2/27/15 703.67 na 7.25x Source: SP Capital IQ Acquirer Target Date Trans. Value ($mm) EV / Revenue EV / EBITDA Accolade Wines Australia Limited Agricola y Forestal Arco Iris SA 9/14/15 24.99 na na EJ Gallo Winery, Inc. Asti Winery 7/31/15 na na na Union INVIVO Cordier Mestrezat Grands Crus SA 6/5/15 34.48 0.994x na Macro-Link International Land Limited New Silkroad Culturaltainment Limited 5/19/15 87.74 3.52x na EJ Gallo Winery, Inc. J Vineyards Winery LLC 3/31/15 na na na Source: SP Capital IQ MA Overview Alcoholic Beverage Segment (continued)
  6. 6. © 2016 Mercer Capital // www.mercercapital.com 5 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Both year-over-year and Q4 2015 performance were generally positive for U.S. publicly traded alcoholic beverage companies. The top year-over-year performer was Constellation Brands, rising 46.0%. In the fourth quarter of 2015, Anheuser-Busch InBev had the largest improvement, rising 19.0%. Despite success in overall craft beer sales, one member of the craft beer segment of the market—Boston Beer Company—fell approximately 30.0% since year-end 2014 and approximately 4.0% since the fourth quarter of 2014. Diageo PLC, the top market share holder of the global distiller segment, declined by a slight 1.5% between year-end 2014 and year-end 2015, though rose 1.2% in Q4 2015. Molson Coors improved 13.6% quarter over quarter; Altria Group and Brown-Forman improved 8.0% and 2.8%, respectively. Despite significant year-over-year success, Constellation Brands increased a mere 0.9% quarter-over-quarter. Segment Public Company Performance Overview -100% 0% 100% 200% 300% 400% 500% 600% 700% 1/4/12 3/4/12 5/4/12 7/4/12 9/4/12 11/4/12 1/4/13 3/4/13 5/4/13 7/4/13 9/4/13 11/4/13 1/4/14 3/4/14 5/4/14 7/4/14 9/4/14 11/4/14 1/4/15 3/4/15 5/4/15 7/4/15 9/4/15 11/4/15 Constellation Brands, Inc. Brown-Forman B Molson Coors-B Diageo PLC Anheuser-Busch InBev Altria Group Inc Craft Brew Allia Boston Beer-A Source: Bloomberg 4-Year Change in Stock Prices for Publicly Traded Alcoholic Beverage Companies
  7. 7. © 2016 Mercer Capital // www.mercercapital.com 6 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Since 2010, industry revenue has risen consistently; beer production, on the other hand, has fluctuated. Year-to-date production as of November 2015 was 2 million barrels less than YTD November 2014, suggesting that overall 2015 production will be on par with 2013 levels. While premium beer (commonly sold “flagship” brands) is the largest con- tributor to brewery revenue; craft beer, a fast-developing segment, has significantly driven the estimated 5.8% annual growth rate over the past five years. At the end of the second quarter of 2015, craft brewers sold 12.2 million barrels, up from the 10.6 million barrels sold during the first half of 2014. Furthermore, according to the Brewers Association, 42 of the top 50 overall U.S. brewing companies in 2014 (based on sales volume) were craft breweries. Premium beer consists of the largest, most widely available, and most frequently sold “flagship” brands in the beer industry. Examples include Budweiser (Anheuser-Busch), Coors (Coors Brewing Company), and Miller High Life (Miller Brewing Company). The “light” varieties of these beers (i.e. Bud Light) are also included in this category. Sub-premium beers are also widely available, but are known primarily by their affordability. This category of beer is typically the cheaper brews offered by major brewers, and is sold in bulk packaging. Natural Light, Busch Light, and Keystone Light are a few of the brands in the sub-premium beer category. Brewers are able to charge lower prices for these brands because they do not devote much advertising to the brands. The brewers’ incentive to sell sub-premium beer is to diversity product offerings. Super-premium beers are marketed as the brewers’ most esteemed brand offerings, sometimes with altered flavorings to distinguish them from the rest of the brewers’ products. Super- premium brands include Michelob Ultra and Budweiser American Ale. Beer United States 15600 15700 15800 15900 16000 16100 16200 16300 16400 LTM 2010 LTM 2011 LTM 2012 LTM 2013 LTM 2014 LTM 2015 Thousands Source: Alcohol and Tobacco Tax and Trade Bureau 0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 30,000.00 35,000.00 40,000.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* $millions Source: IBISWorld | * estimate Average Monthly U.S. Beer Production U.S. Breweries Revenue
  8. 8. © 2016 Mercer Capital // www.mercercapital.com 7 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 42.1% 16.9% 15.0% 14.0% 6.4% 5.6% Premium beer Sub-premium beer Craft beer Super-premium beer Progressive Adult Beverages Malt Liquior Source: IBISWorld Brewery Revenue Segments (2016*) 2015 Brewery Highlights There were a total of 4,144 breweries, breaking the previous record from 1873. Brewery openings exceeded 2 per day. 15 states are now home to more than 100 breweries. IPA was the top style sold by inde- pendent craft brewers, growing faster than the overall craft category. Craft beer, now one of the fastest growing alcoholic beverage segments in the U.S., has been defined by the Brewers Association according to the size of the brewery and the methods in which these breweries make beer. A craft brewer generally sells less than 6 million barrels per year, and is at least 75.0% independently owned. Craft beer should be made with high quality hops, barley, water, and other additives, though craft beers do not have strict quality standards. Nevertheless, the Brewers Association’s goal is for industry operators to produce superior beer. Progressive adult beverages are defined as products manufactured by industry brewers that do not follow the general process associated with brewing beer. Boston Beer Company’s Twisted Tea and Mike Hard’s Lemonade are two such brands in this category. Hard cider is not considered a progressive adult beverage. Malt liquor is a beer product that has an alcohol content exceeding its jurisdiction’s local limit on which products are legally considered “beer.” The typical alcohol by volume (ABV) limit is 5.9%, though this varies by state. Much of malt liquor’s increasing share of industry revenue is due to iffy classification: some local laws have rashly classified many craft brewers’ stronger products as legally being malt liquor. The Brewers Association has been in the process of lobbying state governments to make distinct laws and/or exceptions for craft brewers whose beers are categorized as malt liquor. The Brewers Beer United States (continued)
  9. 9. © 2016 Mercer Capital // www.mercercapital.com 8 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Top 10 U.S. Overall Brewing Companies* (2014) Top 10 U.S. Craft Brewing Companies* (2014) Association also wants there to be a distinction between traditional malt liquors (such as Olde English 800), extra- strength beers (Volt 45), and stouts/porters from craft breweries. Although the domestic beer industry is generally a net importer, foreign demand for craft beer has risen as U.S. microbreweries have gained a better reputation internationally. While Canada accounted for 53.0% of U.S. exports, Brazil was the fastest-growing export market, exhibiting growth of 63.9%. The largest craft brewery is Boston Beer Company, which is expected to have a market share of 3.6% in 2016. By the end of 2017, however, Boston Beer Co. is projected to size out of “craft brewer” status. By the end of 2016, industry revenue is projected to reach a total of $37.8 billion. Beer United States (continued) Brewing Company Location Anheuser-Busch, Inc St. Louis, MO Miller Coors Chicago, IL Pabst Brewing Co Los Angeles, CA D.G. Yuengling and Son, Inc Pottsville, PA Boston Beer Co Boston, MA North American Breweries Rochester, NY Sierra Nevada Brewing Co Chico, CA New Belgium Brewing Co Fort Collins, CO Craft Brew Alliance Portland, OR Gambrinus Shiner, TX *based on 2014 beer sales volume Source: Brewers Association (BA) Brewing Company Location D.G. Yuengling and Son, Inc Pottsville, PA Boston Beer Co Boston, MA Sierra Nevada Brewing Co Chico, CA New Belgium Brewing Co Fort Collins, CO Gambrinus Shiner, TX Lagunitas Brewing Co Petaluma, CA Deschutes Brewery Bend, OR Bell's Brewery, Inc Comstock, MI Stone Brewing Co Escondido, CA Minhas Craft Brewery Monroe, WI *based on 2014 beer sales volume Source: Brewers Association (BA)
  10. 10. © 2016 Mercer Capital // www.mercercapital.com 9 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Despite craft beer’s growing contribution to the brewery industry, Anheuser-Busch InBev—a single brewer—held a 45% share in the U.S. market in 2015 while the entire craft segment held an 11% share. Imported beer held a 29% market share. In 2014, Mexican beer sold solely in grocery stores equaled all of the craft beer sold from both grocery and convenience stores. Craft breweries lack access to the mass production techniques of traditional breweries, as well as the power to negotiate with large supply contracts. Craft breweries thus have to charge higher prices to pay for their inputs. In spite of the recent consumer preference shift towards craft beer, overall demand for the brewery industry is projected to plateau over the next five years as an increasing number of microbreweries enter the market, and as consumers’ preferences widen to demand substitutes, such as wine and spirits. Beer United States (continued)
  11. 11. © 2016 Mercer Capital // www.mercercapital.com 10 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Congress currently has two bills in motion to revamp the federal excise tax, the most expensive ingredient in beer. The Craft Beverage Modernization and Tax Reform Act (also referred to as the “Small Brewer Reinvestment and Expanding Workforce Act,” or “Small BREW Act”), originally introduced in 2013, proposes to do the following: »» Reduce the federal excise tax to $3.50 per barrel on the first 60,000 barrels for domestic brewers producing less than 2 million barrels per year »» Reduce the federal excise tax to $16.00 per barrel on the first 6 million barrels for all other brewers and beer importers »» Keep the current excise tax at $18.00 per barrel for barrelage over 6 million »» Simplify label approvals and repeal unnecessary restrictions on inventory On February 23, 2016, a “sister act” was introduced. The Fair Brewers Excise and Economic Relief Act of 2015 (referred to as the “Fair BEER Act”) proposes the following: »» No federal excise tax on the first 7,143 barrels produced »» A federal excise tax of $3.50 per barrel on the production of 7,144 through 60,000 barrels »» A federal excise tax of $16.00 per barrel on the production of 60,001 through 2 million barrels »» An $18.00 per barrel excise tax on the production of over 2 million barrels The current law in place defines small brewers as producing up to 2 million barrels. They are taxed $7.00 per barrel on the first 60,000 barrels and $18.00 on every barrel after that. For brewers who supply greater than 2 million barrels every year, the federal excise tax is $18.00 per barrel. According to the Beer Institute, more than 90% of brewers produce 7,143 barrels or less. The Small BREW Act would reduce excise taxes from $7.00 per barrel to $3.50 per barrel for these small brewers. The Fair BEER Act would eliminate these small brewers from paying any excise tax. Beer Current Litigation
  12. 12. © 2016 Mercer Capital // www.mercercapital.com 11 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 According to a Kirin Beer University report, global beer production fell in 2014 for the first time in 30 years. 191 million kiloliters were produced in 2014, a 0.5% decline since 2013. Asia remained the top producing region for the sixth year in a row, with a global market share of 33.9% in 2014. Africa, ranked fifth in regional beer production, saw another year of growth, marking 14 consecutive years. China was the top beer producing country in 2014, holding the spot now for 13 years, despite a year-over-year decline in production of 3.1% due to poor weather conditions in the summer, the highest beer consuming season. In the United States, beer production rose 0.2% in 2014, ranking it second, and Brazil’s production grew 5.0%, ranking it third. The increase in the U.S. can be attributed to craft beer’s growing popularity with the younger U.S. generation and subsequent increasing market share (in 2014, the craft beer segment had a market share of 11.0%). Brazil’s production increase was the result of hosting the World Cup soccer tournament. China held 23.5% of the global market share in 2014; the U.S. held 11.8% and Brazil held 7.4%. Also notable was that for the first time in 14 years, Russia (number 6) ranked lower than Mexico (number 5). Russia’s 8.2% decline in 2014 production was due to a weakened economy and increased taxes, while Mexico’s production levels remained unchanged. Beer Worldwide Production Asia 33.9% Europe 27.0% South America 17.2% North America 12.8% Africa 7.3% Oceania 1.1% Middle East 0.7% Source: Kirin Beer University Global Beer Production by Region in 2014
  13. 13. © 2016 Mercer Capital // www.mercercapital.com 12 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Global beer consumption, on the other hand, rose 0.4% to 189.06 million kiloliters in 2014, continuing the 29-year trend of growth. The Kirin Beer University report notes that this consumption level equates to filling up the Tokyo Dome approximately 152 times. In addition to producing the most beer, Asia remained the top consuming region in 2014 for the seventh year in a row, despite a 1.3% consumption decline in the region. In 2014, Asia still held a 34.0% share of the global beer market. Likewise, China marked its twelfth year as the largest beer- consuming country, holding a market share of 23.7%. The United States and Brazil consumed 0.5% and 5.0% more beer in 2014, respectively, ranking two and three. The determinants of consumption levels around the world exactly mirrored the determinants of production: poor summer weather in China; the rising popularity of craft beer in the United States; and the World Cup soccer tournament in Brazil. Beer Worldwide Consumption Asia 34.0% Europe 27.0% South America 16.6% North America 13.9% Africa 6.8% Oceania 1.1% Middle East 0.6% Source: Kirin Beer University Global Beer Consumption by Region in 2014 Photo Credit: Tokyo Dome Corporation
  14. 14. © 2016 Mercer Capital // www.mercercapital.com 13 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Global Beer Production and Consumption by Country in 2014 (Top 25 Countries) Production Consumption Rank* Country Volume (thousand kiloliters) Growth Rate (2013- 2014) Global Market Share (%) Volume (thousand kiloliters) Growth Rate (2013- 2014) Global Market Share (%) Net Supply / (Demand) (thousand kiloliters) 1 / 1 China 44,933 -3.1% 23.50% 44,853 -3.1% 24.6% 80 2 / 2 United States 22,547 0.2% 11.80% 24,172 0.5% 12.8% (1,625) 3 / 3 Brazil 14,147 5.0% 7.40% 13,146 5.0% 6.6% 1,001 4 / 5 Germany 9,560 1.3% 5.00% 8,441 0.1% 4.5% 1,119 5 / 6 Mexico 8,200 0.0% 4.30% 6,908 2.5% 3.6% 1,292 6 / 4 Russia 7,636 -8.2% 4.00% 10,012 -0.5% 5.3% (2,376) 7 / 7 Japan 5,469 -1.1% 2.90% 5,407 -1.5% 2.9% 62 8 / 8 United Kingdom 4,120 -1.8% 2.20% 4,375 3.1% 2.3% (255) 9 / 9 Poland 3,987 0.8% 2.10% 3,776 1.1% 2.0% 211 10 / 11 Vietnam 3,890 9.0% 2.00% 3,640 6.4% 1.8% 250 11 / 10 Spain 3,354 2.6% 1.80% 3,729 3.4% 1.9% (376) 12 / 12 South Africa 3,150 0.0% 1.60% 3,150 0.0% 1.7% 0 13 / na Nigeria 2,700 1.9% 1.40% na na na nm 14 / 13 Ukraine 2,420 -10.7% 1.30% 2,420 -10.7% 1.4% 0 *Production rank is listed first. Consumption rank is listed second. Source: Kirin Beer University Report Beer Worldwide
  15. 15. © 2016 Mercer Capital // www.mercercapital.com 14 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Global Beer Production by Country in 2014 (Top 25 Countries) Production Consumption Rank* Country Volume (thousand kiloliters) Growth Rate (2013- 2014) Global Market Share (%) Volume (thousand kiloliters) Growth Rate (2013- 2014) Global Market Share (%) Net Supply / (Demand) (thousand kiloliters) 15 / na Netherlands 2,370 0.3% 1.20% na na na nm 16 / 22 Thailand 2,235 -3.2% 1.20% 1,794 -2.4% 1.0% 441 17 / 15 South Korea 2,075 -1.4% 1.10% 2,292 11.7% 1.1% (217) 18 / 16 Venezuela 2,065 -7.9% 1.10% 2,173 2.0% 1.1% (108) 19 / 17 Colombia 2,020 -2.9% 1.10% 2,155 1.9% 1.1% (135) 20 / 14 India 2,000 0.5% 1.00% 2,350 6.4% 1.2% (350) 21 / 18 Canada 1,894 -1.2% 1.00% 2,026 -2.4% 1.1% (132) 22 / 19 France 1,875 1.4% 1.00% 1,924 2.8% 1.0% (49) 23 / 20 Czech Republic 1,851 -0.6% 1.00% 1,879 -1.6% 1.0% (28) 24 / na Belgium 1,821 0.4% 1.00% na na na nm 25 / 23 Australia 1,691 -2.6% 0.90% 1,753 0.5% 0.9% (62) na / 21 Argentina na na na 1,826 -1.0% 1.0% nm na / 24 Romania na na na 1,689 -3.5% 0.9% nm na / 25 Italy na na na 1,678 0.2% 0.9% nm *Production rank is listed first. Consumption rank is listed second. Source: Kirin Beer University Report Beer Worldwide (continued)
  16. 16. © 2016 Mercer Capital // www.mercercapital.com 15 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 In addition to holding the largest share of the U.S. market, Anheuser-Busch InBev held an approximate 21% share of the global market in 2014; Anheuser-Busch has been the top market player since 2008 (the earliest period shown in the chart below), dominating the global beer market despite a declining market share between 2008 and 2012. SAB- Miller PLC ranked second in 2014 with a 9.7% global share. Heineken NV was close behind, holding a share of 9.1%. Beer Global Market Share (%) Company 2014 2013 2012 2011 2010 2009 2008 % Change 2008-2014 Anheuser-Busch InBev NV 20.73 19.87 18.01 18.15 18.48 18.63 19.99 3.70 SABMiller PLC 9.71 9.58 9.61 9.73 9.18 8.83 9.10 6.65 Heineken NV 9.09 9.00 9.10 8.62 8.48 6.56 6.80 33.65 China Resources Enterprise Ltd 5.97 6.16 5.42 5.31 4.94 4.51 3.94 51.63 Carlsberg A/S 6.11 6.33 5.58 5.62 5.84 5.88 5.86 4.24 Tsingtao Brewery Co Ltd 4.74 4.42 4.03 3.71 3.37 3.18 2.90 63.28 Molson Coors Brewing Co 3.18 3.24 3.28 2.67 2.73 2.67 2.65 20.22 Beijing Yanjing Brewery-A 2.76 2.89 2.74 2.86 2.68 2.52 2.29 20.34 Kirin Holdings Co Ltd 2.26 2.39 2.53 2.58 1.76 1.86 1.37 65.35 Asahi Group Holdings Ltd 1.16 1.17 1.29 1.35 1.40 1.50 1.60 -27.81 Others 34.29 34.95 38.39 39.40 41.14 43.87 43.49 -21.16 Source: Bloomberg Beer Worldwide (continued)
  17. 17. © 2016 Mercer Capital // www.mercercapital.com 16 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Since the recession, the distillery industry has performed well primarily due to the “premiumization trend” (the increase in consumption of high-grade liquors/spirits) and the success of craft spirits. IBISWorld expects industry revenue to have grown 7.8% annually between 2010 and 2015, reaching a 2015 revenue level of $11.7 billion. Other contributors to increasing demand for spirits include the rising popularity of cocktails, which have become a symbol of class and sophistication; higher per capita disposable income (and thus more discretionary spending on higher-priced spirits); and the rising population of legal drinkers. Despite increasing revenue, higher input costs (specifically grains and sugar) limited industry profit between 2010 and 2015. The distillery industry is somewhat concentrated, with three companies accounting for approximately 59.0% of domestic production. Diageo PLC holds a market share of 30.8%, Brown-Forman Corp. holds a market share of 15.1%, and Suntory Beam Inc., 12.9%. Yet, craft spirits are increasingly becoming more competitive with these traditional distillers. As of 2015, over 500 craft distillers were open, compared to a mere 60 in 2000, as craft spirits have become trendy among the millennial generation. Popular craft spirits include bourbons, straight whiskeys, rye whiskeys, and blended whiskeys—unsurprising since whiskey accounts for 32.5% of overall industry revenue. Spirits United States 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 LTM 2010 LTM 2011 LTM 2012 LTM 2013 LTM 2014 LTM 2015 Thousands Source: TTB.gov 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* $millionsSource: IBISWorld | * estimate Average Total Monthly U.S. Spirits Production in Proof Gallons U.S. Distilleries Revenue
  18. 18. © 2016 Mercer Capital // www.mercercapital.com 17 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Asia-Pacific has dominated the global spirit market due to rising consumption in China and India. In 2013, China consumed 1.2 trillion 9-liter cases of spirits, solidifying itself as the top spirit-consuming country. India followed second, consuming 310 million 9-liter cases. Russia and the U.S. were the third and fourth countries in spirit consumption. The global recession hindered the global spirit market, but since 2013, the industry has seen growth due to heightened demand from Brazil, Russia, India, and China. Rising disposable incomes and growth in younger populations are expected to contribute future boosts to the spirit market. In 2014, global spirit volume increased 1.7%, primarily driven by whiskies and baijiu (a Chinese white spirit). Each year into 2018, the global spirits market volume and value is projected to increase by 1.5% and 3.16%, respectively. Vodka and whiskey are expected to be the largest drivers, increasing by 0.08% CAGR and by 17.1% CAGR, respectively, through 2018. Spirits Worldwide 32.5% 25.0% 10.6% 10.3% 9.1% 8.8% 3.7% Whiskey Vodka Cordials Rum Tequila Other Spirit Gin Source: IBISWorld | * estimate Distillery Revenue Segments (2015*)
  19. 19. © 2016 Mercer Capital // www.mercercapital.com 18 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 In the global market, Diageo PLC held the largest share at 9.3%. It surpassed UB Group in 2012 to become the leading market player. The UB Group held 4.6% of the market in 2014, following the second-ranked Pernod-Ricard SA with a market share of 4.5%. Spirits Global Market Share (%) Company 2014 2013 2012 2011 2010 2009 2008 % Change 2008-2014 Diageo PLC 9.27 4.86 4.86 4.58 4.38 4.38 4.41 110.14 UB Group 4.60 4.30 4.60 4.68 4.51 4.10 3.60 27.83 Pernod-Ricard SA 4.49 4.41 4.39 4.41 4.43 4.32 4.47 0.40 Hite Jinro Co Ltd 2.82 na na na na na na nm Thai Beverage PCL 2.78 2.76 2.66 2.56 2.52 2.43 2.23 24.56 Bacardi Corp 1.51 1.55 1.55 1.60 1.62 1.64 1.65 -8.37 Alliance Global Market Group Inc 1.43 1.39 1.55 1.13 0.68 0.50 0.54 166.54 Beam Inc 1.42 1.37 1.42 1.30 na na na nm Russian Standard Corp 1.16 1.25 0.09 0.08 0.07 0.07 0.06 1687.23 Lotte Chillsung Beverage Co Ltd 1.13 1.10 1.13 1.20 1.18 1.15 na nm Others 69.39 77.02 77.75 78.48 80.60 81.41 83.04 -16.43 Source: Bloomberg Spirits Worldwide (continued)
  20. 20. © 2016 Mercer Capital // www.mercercapital.com 19 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 The wine industry has seen a growing number of consumers, particularly millennials who have shifted their prefer- ences to domestic wine versus premium beer. The main driver behind this shift is consumers’ rising emphasis on health. Over the past ten years, medical studies have shown that moderate consumption of wine and spirits can lead to overall heart health. Wine also provides a lower-calorie option compared to beer. Wine consumption rose to 2.8 gallons for 2014, continuing the decade-long increase in consumption. This has been encouraging new wineries to enter the industry at a projected annual rate of 6.3% between 2010 and 2015. In 2015 alone, rising wine consumption is predicted to increase revenue by 4.2% to reach $18.7 billion. Yet, the U.S. consumes less wine than France and Italy, which, in addition to being major consumers, are major exporters of wine to the U.S. market. The U.S. is a net importer of wine, although large companies such as EJ Gallo Winery and Constellation Brands are involved in a lot of international trade. Imports are expected to grow as countries with suffering economies look to export their products to our strong economy. U.S. wine exports have doubled in the last ten years, with the majority of exports going to the Canadian market (34.0%), the result of our improved international reputation in the wine industry. 90% of U.S. wine is produced in California, the 4th leading wine producer behind Italy, Spain, and France. California vineyards have become globally renowned due to the state’s diverse range of grapes. Northern San Francisco has 400 of the industry’s wineries. A potential threat to every wine producer is climate change (such as soil erosion, drought, and wildfires), which affects production and costs. Because California essentially is the U.S. market, its recent series of dry spells could make the U.S. wine industry very vulnerable in the future. Wine United States
  21. 21. © 2016 Mercer Capital // www.mercercapital.com 20 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Wine United States (continued) 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 LTM 2010 LTM 2011 LTM 2012 LTM 2013 LTM 2014 YTD Nov 2015 Thousands Still Wines (Bulk) Still Wines (Bottled) Effervescent Wines (Bulk and Bottled) Special Natural Wines Other Special Natural Wines Wine Coolers Source: TTB.gov Average Monthly U.S. Wine Production in Wine Gallons 720 740 760 780 800 820 840 860 880 900 920 2010 2011 2012 2013 2014 TotalWineGallons(Millions) Source: TTB.gov Wine Consumption in the U.S.
  22. 22. © 2016 Mercer Capital // www.mercercapital.com 21 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 A growing trend in the industry is direct-to-consumer wine sales. 42 states have passed deregulation to allow wineries to skip wholesalers and sell directly to consumers via online retail. This has primarily benefitted smaller wineries, helping them to combat the relative disadvantages of increasing consolidation among the large wineries in the market. Consolidation, paired with lower price points, has helped large wineries produce, distribute, and market wine over the past 5 years. Small wineries, on the other hand, have struggled to provide these same ser- vices at the same low prices. Through 2020, industry revenue is expected to rise 3.8% annually. Currently, chardonnay and cabernet sauvignon are the biggest revenue contributors. Wine United States (continued) 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 16,000.00 18,000.00 20,000.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* $millions Source: IBISWorld | * estimate Winery Revenue Segments (2015*) 27.0% 20.0% 17.0% 11.0% 11.0% 8.0% 6.0% Chardonnay Cabernet Sauvignon Zinfandel, Riesling, and other blends Merlot Pinot Grigio Pinot Noir Sauvignon Blanc Source: IBISWorld | * estimate U.S. Wineries Revenue
  23. 23. © 2016 Mercer Capital // www.mercercapital.com 22 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 On June 24, 2015, Congress passed the Bipartisan Congressional Trade Priorities and Accountability Act, aimed at facilitating new free trade agreements and at growing exports of U.S. products, including California wines, which account for 90% of U.S. wine exports. Wine Institute President and CEO Robert P. Koch noted that trade agreements have increased U.S. wine exports to $1.5 billion as of 2014. The U.S. is also in the process of nego- tiating trade agreements with 11 countries under the Trans-Pacific Partnership (TPP), and with the European Union under the Transatlantic Trade and Investment Partnership (TTIP). According to Koch, the trade agreements will open new markets and set “enforceable” trade rules with other countries. In October 2015, the U.S. and 11 other Pacific Rim nations completed the Trans-Pacific Partnership (TPP) negoti- ations, aimed at getting rid of the tariffs faced by California wineries abroad, removing non-tariff barriers, and setting enforceable trade rules. The TPP countries include Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. In December 2015, Congress passed the Omnibus Bill, which repealed the U.S.’s Country of Origin Labeling (COOL) requirements for beef, pork, and poultry. In May of 2015, the World Trade Organization had deemed the U.S. regulation as discriminating against Canadian and Mexican producers. Canada and Mexico thus sought to enforce retaliatory tariffs (totaling $1 billion) on U.S. exports, including wine. This would have been especially devastating to the wine industry, as U.S. wine producers export over $500 million of wine to both Canada and Mexico every year, with the retail value of California wine sales in Canada reaching over $1 billion annually. The Bill also increased the Alcohol and Tobacco Tax and Trade Bureau (TTB) annual budget by 5%, allowing the TTB— the regulatory agency over the wine industry—to expand its previously shrunken workforce. Wine Current Litigation
  24. 24. © 2016 Mercer Capital // www.mercercapital.com 23 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 France produced 16.54% of the world’s wine in 2014; its 4.6 billion liters of wine ranked it first. Italy, which produced 4.4 billion liters, accounted for 15.85% of total world production. Spain and the United States ranked third and fourth, respectively producing 3.8 billion liters (13.53%) and 3.0 billion liters (10.7%). Globally, world wine production totaled 28.2 trillion liters in 2014. The United States, France, and Italy also had the top three ranks for global wine consumption in 2014. Of the 24.7 trillion liters of total wine consumed, the U.S. accounted for 13.03% of consumption; France and Italy accounted for 11.29% and 8.26% of consumption, respectively. Germany ranked fourth, consuming 8.18% of total consumption, and China ranked fifth at 6.40%. The United States was the only country in the top five that consumed more wine year-over-year (between 2013 and 2014). Globally, world consumption of wine increased 0.5%. The global wine market is less concentrated than the markets for beer and spirits. In 2014, EJ Gallo Winery held a 2.7% market share, only one percentage point higher than Constellation Brands, Inc. at 1.7%. Wine Group Inc. accounted for 1.5% of the market. Wine Worldwide Wine Global Market Share (%) Company 2014 2013 2012 2011 2010 2009 2008 % Change 2008-2014 EJ Gallo Winery 2.71 2.67 2.63 2.59 2.53 2.49 2.54 6.55 Constellation Brands Inc. 1.71 1.68 1.58 1.67 2.71 2.74 2.88 -40.85 Wine Group Inc 1.50 1.55 1.58 1.69 1.59 1.62 1.62 -7.49 Accolade Wines Ltd 1.12 1.12 1.14 1.04 0.01 na na nm Vina Concha y Toro SA 1.04 0.94 0.93 0.92 0.90 0.89 0.84 23.31 Castel Group 1.03 0.98 0.94 0.93 0.93 0.95 0.96 7.56 Grupo Penaflor SA 0.97 1.00 0.87 0.84 0.85 0.89 0.82 18.87 Treasury Wine Estates Ltd 0.97 0.97 0.99 1.02 na na na nm Pernod-Ricard SA 0.90 0.92 0.92 0.92 0.93 1.00 1.07 -16.07 Caviro Distillerie Srl 0.60 0.60 0.60 0.61 0.62 0.63 0.64 -6.13 Others 87.45 87.58 87.81 87.77 88.94 88.77 88.62 -1.32 Source: Bloomberg
  25. 25. © 2016 Mercer Capital // www.mercercapital.com 24 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Company Name Ticker Price at 12/31/15 High Price as of 12/31/15 % of High as of 12/31/15 EV/ Revenue EV/ EBITDA Enterprise Value LTM Revenue LTM EBITDA PepsiCo Inc PEP $93.09 $94.21 98.8% 2.6 13.9 173,548.0 66,544.00 12,521.00 ConAgra Foods Inc CAG $33.04 $33.95 97.3% 1.3 14.7 22,933.7 17,742.20 1,561.20 Grupo Bimbo SAB de CV GRBMF $2.91 $3.45 84.3% 0.4 4.6 74,262.8 179,151.42 16,310.56 Tyson Foods Inc TSN $39.37 $44.07 89.3% 0.4 7.6 15,683.2 36,369.00 2,054.00 Hormel Foods Corp HRL $51.39 $51.52 99.7% 1.5 14.0 13,813.3 8,970.27 990.18 Sanderson Farms Inc SAFM $87.95 $102.82 85.5% 0.8 5.6 2,058.9 2,711.63 369.81 Darden Restaurants Inc DRI $51.46 $53.08 96.9% 1.2 11.8 9,564.2 8,091.60 811.30 Unilever NV UN $39.68 $43.99 90.2% 2.6 13.9 126,127.2 48,395.00 9,096.00 Nestle SA NESN $70.25 $71.70 98.0% 2.8 14.4 249,920.2 90,166.00 17,307.00 Average $52.13 $55.42 93.4% 1.5 11.2 76,434.6 50,904.6 6,780.1 Median $51.39 $51.52 96.9% 1.3 13.9 22,933.7 36,369.0 2,054.0 Source: Bloomberg FOOD BEVERAGE INDUSTRY Public Company Information Food Processors
  26. 26. © 2016 Mercer Capital // www.mercercapital.com 25 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Company Name Ticker Price at 12/31/15 High Price as of 12/31/15 % of High as of 12/31/15 EV/ Revenue EV/ EBITDA Enterprise Value LTM Revenue LTM EBITDA Frisch's Restaurants Inc FRS $28.30 $30.69 92.2% 0.8 7.1 159.2 209.17 22.40 Ruby Tuesday Inc RT $5.89 $8.22 71.7% 0.5 29.6 620.7 1,168.75 20.97 Darden Restaurants Inc DRI $51.46 $52.68 97.7% 1.2 11.8 9,564.2 8,091.60 811.30 Denny's Corp DENN $7.03 $7.51 93.6% 1.7 11.3 783.0 458.07 69.12 Bob Evans Farms Inc/DE BOBE $47.34 $57.48 82.4% 1.2 12.6 1,570.5 1,328.55 124.96 DineEquity Inc DIN $81.59 $84.23 96.9% 4.5 11.5 2,920.2 646.91 254.00 Red Robin Gourmet Burgers Inc RRGB $56.90 $86.83 65.5% 0.9 8.3 900.2 1,051.38 108.08 Cracker Barrel Old Country Store Inc CBRL $103.19 $115.71 89.2% 1.1 10.6 2,858.0 2,665.03 270.72 Average $47.71 $55.42 86.1% 1.5 12.8 2,422.0 1,952.4 210.2 Median $49.40 $55.08 90.7% 1.1 11.4 1,235.4 1,110.1 116.5 Source: Bloomberg FOOD BEVERAGE INDUSTRY Public Company Information Restaurants
  27. 27. © 2016 Mercer Capital // www.mercercapital.com 26 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Company Name Ticker Price at 12/31/15 High Price as of 12/31/15 % of High as of 12/31/15 EV/ Revenue EV/ EBITDA Enterprise Value LTM Revenue LTM EBITDA PepsiCo Inc PEP $93.09 $94.21 98.8% 2.6 13.9 173,548.0 66,544.00 12,521.00 Dr Pepper Snapple Group Inc DPS $64.31 $65.43 98.3% 2.5 10.8 15,183.5 6,035.00 1,408.00 National Beverage Corp FIZZ $19.50 $22.26 87.6% 1.5 12.2 930.6 641.14 76.14 Coca-Cola Co/The KO $42.66 $42.81 99.6% 4.9 18.8 227,307.1 46,220.00 12,120.00 Monster Beverage Corp MNST $91.67 $94.93 96.6% 6.5 22.7 15,324.6 2,354.60 676.28 Starbucks Corp SBUX $75.46 $81.48 92.6% 3.7 17.6 58,718.6 16,062.10 3,340.30 Average $64.45 $66.85 95.6% 3.6 16.0 81,835.4 22,976.1 5,023.6 Median $69.89 $73.46 97.4% 3.1 15.7 37,021.6 11,048.6 2,374.2 Source: Bloomberg FOOD BEVERAGE INDUSTRY Public Company Information Non-Alcoholic Beverages
  28. 28. © 2016 Mercer Capital // www.mercercapital.com 27 Mercer Capital’s Value Focus: Food Beverage Industry First Quarter 2016 Company Name Ticker Price at 12/31/15 High Price as of 12/31/15 % of High as of 12/31/15 EV/ Revenue EV/ EBITDA Enterprise Value LTM Revenue LTM EBITDA Constellation Brands Inc STZ $142.14 $144.56 98.3% 5.9 20.0 35,379.71 6,028.00 1,766.00 Craft Brew Alliance Inc BREW $8.37 $14.32 58.4% 0.9 11.9 174.36 200.00 14.60 Boston Beer Co Inc SAM $201.91 $325.00 62.1% 2.6 12.6 2,514.31 959.90 199.10 Molson Coors Brewing Co TAP $93.92 $95.51 98.3% 5.6 23.7 19,853.39 3,567.50 836.20 Brown-Forman Corp BF/B $99.28 $110.33 90.0% 6.9 20.2 21,723.20 3,134.00 1,078.00 American Brewing ABRW $0.39 $0.51 76.5% na na na 1.00 na Willamette Valley WVVI $7.08 $8.20 86.3% 2.7 10.3 40.31 15.20 3.90 Anheuser-Busch InBev NV ABI $114.40 $124.20 92.1% 4.7 12.0 222,601.09 47,063.00 18,489.00 SABMiller PLC SAB $4,069.50 $4,090.00 99.5% 4.5 12.9 74,107.30 16,534.00 5,723.00 Ambev SA ABEV3 $17.73 $20.15 88.0% 7.2 15.0 274,102.14 38,079.80 18,219.10 Diageo PLC DGE $1,856.50 $1,992.18 93.2% 5.3 16.7 57,503.08 10,813.00 3,452.00 Heineken NV HEIA $78.77 $85.90 91.7% 2.8 12.5 58,344.73 20,511.00 4,669.00 Average $557.50 $584.24 86.2% 4.5 15.3 69,667.6 12,242.2 4,950.0 Median $96.60 $102.92 90.8% 4.7 12.9 35,379.7 4,797.8 1,766.0 Source: Bloomberg FOOD BEVERAGE INDUSTRY Public Company Information Alcoholic Beverages
  29. 29. Contact Us Copyright © 2016 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our web site at www.mercercapital.com. BUSINESS VALUATION FINANCIAL ADVISORY SERVICES Services Provided • Valuation of food and beverage industry companies • Transaction advisory for acquisitions and divestitures • Valuations for purchase accounting and impairment testing • Fairness and solvency opinions • Litigation support for economic damages and valuation and shareholder disputes Mercer Capital Food Beverage Industry Services Mercer Capital has expertise providing business valuation and financial advisory services to companies in the food and beverage industry. Industry Segments Mercer Capital serves the following industry segments: • Food Processing • Restaurants • Nonalcoholic Beverages • Beer, Wine, and Spirits Contact a Mercer Capital professional to discuss your needs in confidence. Grant M. Farrell, ASA, CPA, ABV, CFF, CGMA 214.468.8400 farrellg@mercercapital.com Timothy R. Lee, ASA 901.685.2120 leet@mercercapital.com Chelsea E.Temple 901.322.9741 templec@mercercapital.com MERCER CAPITAL Memphis 5100 Poplar Avenue, Suite 2600 Memphis, Tennessee 38137 901.685.2120 Dallas 12201 Merit Drive, Suite 480 Dallas, Texas 75251 214.468.8400 Nashville 102 Woodmont Blvd., Suite 231 Nashville, Tennessee 37205 615.345.0350 www.mercercapital.com

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