An upcoming reality TV show starring BrewDog founder James Watt promises “the unfiltered truth of what it takes to build a unicorn”.
A showcase for the beer entrepreneur, House of Unicorns is a Dragons’ Den meets The Apprentice mash-up that will give start-ups a crash course in how to reach that fabled $1bn valuation.
What we’re hoping for is an episode on liquidity preference, given its central role in the 2017 deal with private equity outfit TSG Consumer Partners that established Watt as a unicorn founder and made his fortune.
Because, with hindsight, the terms of that transaction turned what was long regarded as the poster child for crowd funding success into a cautionary tale: all the shares sold to retail investors, the 130,000 so-called “Equity Punks”, will probably be worthless unless a generous buyer suddenly appears for the lossmaking BrewDog.
Watt’s own remaining stake also looks like a zero, which puts his 2022 pledge to give what was then described as £100mn worth of stock to staff in a new light. They too are likely to get nothing.
He made the commitment after being accused in a letter signed by almost 300 former employees of creating “a residual feeling of fear” in the company and a misogynistic culture. BrewDog apologised and promised to “listen, learn and act”.
At the time prospects for a stock market listing were receding, and it raises a question about when the company and Watt, who stepped down as chief executive last year, realised the full implications of the deal he signed with TSG.
Founded in 2007, BrewDog grew rapidly into a household name through a series of publicity stunts and crowdfunding campaigns. Then in 2017 it unveiled an investment from the Californian private equity firm.
To do the deal, Watt and his fellow founder Martin Dickie first changed the company bylaws and removed a key investor protection, so-called pre-emption rights.
Next they transmuted some of their own stock into a new class of preferred shares, which they sold to TSG for about £110mn. BrewDog also raised £102mn by issuing more of these preferreds, plus some warrants.
TSG ended up with 22.3 per cent of the company at an enterprise value of £895mn or, in dollar terms, a round unicorn billion.
Geof Collyer, a former investment bank analyst turned consultant at Lavender Bank Partners (which is not a bank), has questioned whether TSG really believed that valuation:
Otherwise, why would it insist on an 18 per cent compounding coupon? That is one of the highest, if not the highest quasi-equity compounding pref coupons we have ever come across.
Punk shareholders were given a chance to sell a small portion of their stock at a huge profit, to much fanfare, but only a tiny minority did so.
Indeed, the transaction that would destroy their investment was a selling point (its terms drily disclosed) that helped BrewDog to supersize its fundraising. Prior to TSG the group had raised £26mn from share sales. Afterwards it reaped £67mn as it pursued an unusual strategy of global expansion, opening flagship bars in places like Las Vegas and Mumbai.
The last “Equity for Punks” round that closed in 2021, a year and a half into the Covid pandemic, raised £30mn at £25.15 per share, implying a valuation of around £2bn. Top “referrers” who put friends and associates into the stock won electric bicycles.
In what is perhaps a reminder of the thin basis for some private market values, Watt preferred to keep using that large figure when he announced his gift of stock to staff in May 2022.
A quick bull-market public offering might have delivered a hefty valuation and shareholder payday. However, a small auction of privately held stock on the platform Asset Match in September 2022 indicated a market price of £6.50 per normal share.
The change highlights the effect of the prefs’ entitlement to a compound annual return of 18 per cent at the moment of any sale, initial public offering, or liquidation, ahead of the other shareholders.
BrewDog’s equity value had fallen to about £900mn, but TSG could then claim £520mn of that amount. The value of everyone else’s equity had fallen by three quarters.
The theoretical value of the £213mn spent by TSG in 2017 has continued to grow at 18 per cent, passing the £800mn ($1.1bn) mark in April. It might be said that the second unicorn Watt created was the contract he signed with TSG.
Except, of course, that would require an optimistic buyer for a brewer which lost £64mn in 2023 on sales of £281mn. Even adjusted ebitda, which measures profits before the bad stuff, was negative.
According to a recent interview with new chief executive James Taylor in the Times, the second to take the helm since Watt left, BrewDog’s yet to be published figures for 2024 will show it crept back into the black on an adjusted-ebitda basis, but sales have stalled.
So what might someone pay for an 18-year old, ex-growth beer business?
In 2020 AB Inbev paid around 1.5 times sales for Craft Brew Alliance. A private equity specialist in consumer businesses told us they might put a 1.5 to 2 times sales multiple on something like BrewDog — so a £420mn to £560mn ballpark, including net debt — if they were confident it could get to a 10 per cent operating margin.
BrewDog has reported operating losses since 2019. Back in 2016 it managed a 6 per cent margin, when it was a quarter of the size. Scale has not wrought economies.
An industry insider said they thought in volume terms. Carlsberg paid £6bn for Britvic’s 20mn hectolitres of production. That works out to around £300mn for Brewdog’s 1mn hectolitre output, but the person cautioned that soft drinks are more profitable than beer.
Brewdog also runs more than 100 bars, including flashy sites at Waterloo and on the Vegas Strip.
A trade buyer might pay up for the chance to strip out costs. While the differences in brewers’ trading estates can make comparisons challenging, recent deals for Marston's (brewing only) and Fuller's (with a huge plot of valuable West London property) suggest around 14 times ebitda is a plausible end point.
This seems like the appropriate moment to mention that Brewdog’s £239mn of net debt is equivalent to 10 times the peak adjusted-ebitda of £24mn reported in 2021.
(We’ve included £166mn of lease obligations in the net debt figure there, feel free to go down the rabbit hole discuss the appropriate way to deal with the IFRS 16 accounting standard for leases and rents in the comments.)
However you cut it, the compounding appreciation of TSG’s stock is remorseless. On our numbers, for there to be anything left for other shareholders, BrewDog would need a buyer to complete a purchase by April next year at more than 3 times sales, which some might consider heroic.
The curious wrinkle is that TSG can’t, on its own, cash out. It controls just 23 per cent of the voting shares.
Control still has value, so it would need to persuade some other stakeholders plus at least one of the founders or all of the small shareholders to back a transaction. Presumably that persuasion would involve money or, given that Equity Punks get BrewDog perks and discounts with their investments, a considerable amount of free beer.
Watt and Dickie did not respond to requests for comment. BrewDog and TSG declined to do so.
Perhaps when the show airs Watt will talk his students and audience through the reasons for his fateful decision. At the time, tonic-maker Fevertree’s share price was flying. Were he and Dickie persuaded by their bankers that a bonanza IPO was just around the corner, only for Covid to dash their plans?
Or was the pile of ready cash after 10 years of hard work too good to resist, other shareholders be damned?
Watt has described in a Linkedin post how in April 2017 he “made the most expensive mistake of my professional life.” However he was referring to a typo in a sort code which meant the “life changing” sum of £52.1mn from TSG didn’t appear in his bank account as expected and had to be chased down.
He said, “sometimes the tiniest mistakes can cost you the most.”
