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Consolidation - the solid way to go: wholesalership mergers can result in strength, solidarity and growth.

Consolidation -- The Solid Way to Go

Wholesalership mergers can result in strength, solidarity and growth.

Mergermania is one of the major phenomenons of today's business climate. In the wholesale beer industry it is referred to as consolidation. By whatever name, though, companies seeking strength, solidarity and growth have often attained it by buying other companies.

The most common beer wholesaler consolidations are the acquisition of one wholesaler by another or the merger of two companies usually involving either competitors in the same market or same supplier wholesalers in adjoining markets. Most often one wholesaler sells out to another, resulting in one owner of the combined business. Occasionally, however, two wholesalers merge and both retain an ownership interest in the combined company.

Why consolidate?

Every beer wholesaler has two overriding business objectives: 1.) improving profits and 2.) increasing the value of his or her company. All other objectives are secondary and are contributory to these which are, of course, interrelated. Profit growth must be long term and large enough to increase company value. Profits and/or cash flow and their outlook are prime determinants of value. Obviously, the higher the profit or cash flow and the better the outlook, the more valuable the company.

Profit, therefore, is the primary factor motivating wholesalerships to consolidate. Improvement of profit and company value should make an acquiring company more SOLID. Sale of a company should make its owner more financially SOLID. Hence, conSOLIDdation is, appropriately, an objective for many beer wholesalers today.

Concentration of sales among a fewer number of brewers often results in declining profits for wholesalers whose suppliers are losing sales and market share. This is complicated by the reality that in many markets Anheuser-Busch has a greater-than 50-percent share. The remaining 50 percent is divided among several wholesalers whose individual low market shares do not generate strong enough sales and profits to effectively compete with A-B wholesalers. Consolidations among these "all other" wholesalers are now occurring, resulting in higher volume and market share and the ability to generate higher combined profits. While A-B wholesalers generally have little need to acquire other companies, almost all other wholesalers have potential to benefit from consolidation.

Ideally, all parties (the selling wholesaler, the buying wholesaler, and the brewer) benefit from consolidation. Specifically, it is profit, again, which is the criteria for determining if there is a benefit.


Benefits to the seller include: 1.) Elimination of the prospect of declining profits or greater losses. 2.) Avoidance of the decline in value of the company. 3.) Income from sale may be invested elsewhere. 4.) The best possible price is received usually when selling to another wholesaler rather than to an independent buyer.

Benefits to the buyer include: 1.) Increased profit because of higher sales and economies of scale in expenses. 2.) Increased value of company. 3.) More effective competition. 4.) Buyer can "get his investment back" or pay off debt in a reasonable time span.

Benefits to brewer include: 1.) The acquisition of a new wholesaler who is, or will become, financially stronger and able to invest in brewer's brands. 2.) New wholesaler brings new enthusiasm. 3.) New wholesaler should be able to restructure organization so brewer's brands get desired attention. 4.) Before approval of sale, brewer can get commitments from new wholesaler that it did not have from selling wholesaler.

Reasons not to consolidate

A wholesaler who decides to sell may not always find that consolidation is the best way to do it. After analyzing his options he may find that a sale to an independent buyer may better realize his objectives. There is the potential for a sale among buyers not now in the business and among wholesalers of the same brands from other parts of the country. Within this latter group fall the offspring of distributorship owners and other wholesaler managers who can be approved by suppliers.

Particular reasons not to consolidate include: 1.) The possibility that the seller may be left with certain assets that the buyer does not want, i.e., warehouse, equipment. 2.) All suppliers may not approve the buyer; hence, some brands may have to be sold to a different wholesaler, possibly at a lower price. The supplier may also attempt to appoint a new wholesaler with no payment to the selling wholesaler. 3.) The "right" buyer may be willing to pay as much for a "turnkey" operation as a consolidating wholesaler will pay.

Possible glitches to a buyer include: 1.) A continuing down trend on the acquired brands so that profit and market share gains disappear before the investment is recaptured. 2.) New relationships with more suppliers, which often mean more pressures for attention and expenditures.

Additionally, supplier concerns can arise, especially if the brewer's brands are secondary to the wholesaler and, after the honeymoon, receive less attention when sales and profits do not meet objectives. The brewer is then in a worse position than before the consolidation.

How to consolidate

Certain procedures should be followed when consolidating and thorough analysis with professional help should accompany any potential transaction. This applies to buyer and seller.

Specifically: 1.) Analyze your sales and profitability outlook. Project where you will be in a targeted period of time; for example, in five years. Consider all business and personal factors to determine if your best move is to sell your company, buy a competitor in your market or a neighboring market, or to do nothing. Doing nothing is an option for a minority of wholesalers--those who are profitable and who will be stronger in five years without a change. 2.) Whether the decision is to sell or buy, select the best prospect for a sale or purchase. Among the factors to consider if you decide to buy are: (a) which company affords the best potential for long-range growth in profit and value, (b) compatability of acquired brands with your business, (c) approval possibilities and problems, and (d) organization restructuring and personnel decisions.

If your decision is to sell, some of the same factors apply in determining the best prospective buyer, whether an "independent" or another wholesaler. Consideration should be paid to the party with the best potential for paying your desired price, brand compatability, supplier approval and the need for your warehouse and equipment.

In either case of buying or selling, a preliminary "ball park" price should be determined. This, of course, can be fine-tuned when more facts are known. 3.) Contact the wholesaler who you have decided is your best prospect. Depending on your relationships and your desire to open discussions on a confidential basis, you may be best served by having this contact made by another party, such as a broker or attorney, on your behalf.

In some instances, this contact can approach the subject from both sides, i.e., to determine if the other wholesaler is interested in buying or selling. If you could go either way, the door is open for thorough exploration for consolidation in whichever direction works best for both of you. 4.) Getting from the point of initial contact to making the deal involves access to detailed sales and financial information, determining the specific assets that are included, making an offer, negotiating, reaching an agreement in principle, drawing up contracts, getting approvals, and closing. While these steps can be easily summarized in a sentence, they involve a considerable amount of work which is similar to any other dealings between buyers and sellers in a transaction independent of consolidation. These steps should be undertaken with professional guidance to assure that the final terms are best for you. Careful consideration must also be given to the after-tax profit if you are a buyer and to after-tax proceeds if you are a seller.

In summary, consolidation must be considered when a beer wholesalership does not have a dominant market share and a positive outlook for sales growth. Increasing profit and future value, any beer wholesaler's prime objectives, need to be satisfied for the merger to be successful. Under these conditions, conSOLIDdation is the SOLID way to go, whether you are the buyer or seller.

Robert and Paul Pohle are the principals of Pohle partners, Inc., Excelsior, MN, and Madison, WI. Their firm provides services in brokering and appraising beer distributorships and brands. Robert Pohle has 17 years banking experience, in addition to a law practice which specialized in business and estate planning matters. Paul Pohle was formerly employed by the Jos. Schlitz Brewing Co. where he held the positions of director of market research, director of western sales, brand director of Schlitz beer and brand director of Old Milwaukee beer. Paul Pohle was also formerly the co-owner of Pohle Sales, Inc., a Minnesota beer distributorship.
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Title Annotation:beer industry
Author:Pohle, Paul; Pohle, Robert
Publication:Modern Brewery Age
Date:Sep 11, 1989
Previous Article:Key indicators for beer wholesaling executives.
Next Article:Turnkey systems prove worry free.

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