Alcohol industry consolidation and regulatory concerns

July 2016 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The alcohol beverage industry is a valuable staple in the US economy with direct economic impact on employment and billions of dollars in overall tax contribution as one of the most highly taxed industries.

Throughout the past decade, the alcohol industry’s growth trajectory has been supported by a series of mergers and acquisitions that have significantly impacted all industry segments with the consolidation of key industry members and rising stars.

One of the largest acquisitions in the beer segment is proposed to be consummated later this year with Anheuser-Busch InBev’s purchase of SAB Miller. The industry’s merger and acquisition spree may likely continue throughout the coming years as competition within industry segments, in particular the beer segment with the growing craft beer market, presents opportunity for further consolidation and partnerships.

Mixing premium ingredients, however, does not always result in a marketable product. The potential success or failure of these opportunities should be considered not only based on the commonality of economic interests but also with respect to the viability of integration of operational models and regulatory compliance requirements.

Any sophisticated merger or acquisition transaction is guided in part by phases of due diligence and investigation into the acquired business’ assets and liabilities. Unfortunately, traditional due diligence investigation often neglects the industry specific regulatory consideration of acquiring an ongoing business. The alcohol industry is one of the most regulated industries in the US with dual licensing and taxation on the federal and state levels and even local municipal and county licensure or registration requirements.

Assessment of these regulatory requirements is a critical step not only in the negotiation and closing of a transaction but also in post-closing integration and business operation. For example, with respect to acquisition of retail businesses, licensing and local permitting is often a result of negotiation and accommodation.

Accordingly, although not necessarily a traditional liability, it would be important for an acquiring industry member to be aware of operational restrictions previously agreed to as a condition of licensure. The result of such due diligence could reveal a restriction that significantly burdens integration of a business or creates a significant barrier for the intended future operations of an establishment.

Suppliers and wholesalers are not as heavily burdened with local municipal and county regulations but can just as easily encounter obstacles to intended integration and future operation of an acquired business. This concern is of particular interest when entering new markets or industry sectors as a result of an acquisition. Larger industry leaders often engage in diverse enterprises that can add to or detract from their overall value. This is often the case with foreign enterprises that may not necessarily be regulated by a three-tier system that generally bars cross-tier investment and business models.

Aside from specific licensing and corporate disclosure requirements, another concern is in the area of distribution and franchise regulations as well as specific product regulations which may impact the intended expansion or development of an acquired supplier, specifically smaller local suppliers, or distributors. In particular, state regulations, both domestic and foreign, generally regulate the manner in which a product can be packaged, advertised and sold. Exemptions to these regulations that may exist for a small producer may no longer be applicable if acquired by a larger industry member governed by a different set of regulations.

While the immediate effect of an acquisition is usually to continue business as usual, the long term goal often requires some redevelopment or changes in infrastructure. Consideration of the underlying regulations and restrictions that impact the future operational plan for an acquired asset can alter valuation of that asset and perhaps change the terms of a deal or interest in a particular asset. This area is of particular importance with respect to anticipated changes in corporate structure that generally require disclosure and qualification on both a federal and state level.

Understanding the operations of a business and its own infrastructure is equally as important as understanding the regulatory framework in which it operates. Some of the most common obstacles to true integration and merger stem not necessarily from regulatory restrictions but from an existing business culture. The alcohol industry is varied in its culture which oftentimes fuels the development of unique product and industry innovation. However, the combination of diverse business cultures can also stifle productivity and integration. Initial due diligence in this area can help with overall assessment and development of an integration plan that supports both intended immediate and future operations.

Mergers and acquisitions in the alcohol industry can be motivated by a variety of factors ranging from a true desire for collaboration and partnership to the stifling of competition. Whatever the reason, consideration of potential regulatory and integration obstacles could influence such motivation and even ultimately the success of any consummated transaction.

Robert F. Lewis is a managing shareholder and Marbet Lewis is a shareholder at Greenspoon Marder. Mr Lewis can be contacted on +1 (888) 491 1120 or by email: robert.lewis@gmlaw.com. Ms Lewis can be contacted on +1 (888) 491 1120 or by email: marbet.lewis@gmlaw.com.

Robert F. Lewis and Marbet Lewis

Greenspoon Marder