Full Sail Sells to Private Equity Firm—What Does it Mean?

March 9, 2015 Jeff Alworth

This morning, Full Sail Brewing Co. disclosed that members of its Employee Stock Option Program (ESOP)—the collective group of employee-owners—voted to sell the brewery to Encore Consumer Capital, a private equity firm in San Francisco. The vote, which was confidential, was 98 percent in favor of the sale. Terms of the sale were not disclosed.

Full Sail was founded in 1987 in Hood River, OR, and grew rapidly throughout its first decade. Owners nearly sold the company to Vijay Mallya and his Indian-based UB Group in 1999, but instead shifted gears and established the ESOP. Full Sail is currently sold in 28 states and brewed 115,000 barrels in 2014.

What’s an ESOP?

Founder and executive brewmaster Jamie Emmerson gave the clearest, most succinct definition of an ESOP I’ve ever heard: “You look at ESOP like a retirement plan where the shares are the company you work at as opposed to investing in Wall Street.” Shares are held by employees in a retirement account. If they leave the company, they retain those shares for five years, during which time they can come back to the company. After five years, the company buys back the shares. “As those shares are bought back,” Emmerson explained, “those shares get recirculated to all the employees again”—as well as going to new employees, who enter the program after two years. Full Sail currently has 70-75 employees, and 60 were in the plan and voting members of the deal. (An additional 18 are former workers still in the program.) ESOP arrangements are overseen by the Department of Labor and the IRS, so this process had plenty of transparency among members.

What’s a Private Equity Firm?

If you remember back to the election of 2012, you may recall some discussion of private equity firms. They’re companies like Bain Capital, Mitt Romney’s old employer. A private equity firm, as The Economist explains, “buys mature companies, fixes them up and sells them on. … Buy-out firms usually set their sights on companies that they can improve, which means they may buy weaker or more bloated ones in the first place.” Encore Consumer Capital follows this practice, purchasing a range of companies, many of which it later sells. Encore’s focus is consumer products companies, including a number in the food and beverage realm—though Full Sail is the first brewery they’ve acquired. (Encore may not see Full Sail as weak or bloated—just an incredibly valuable asset in a field where much smaller companies sell for tens of millions.)

Why the Deal Happened

Full Sail was not looking to sell, and wasn’t soliciting offers. “We weren’t for sale, and we didn’t need the money—we could get cash if we ever needed it. That wasn’t the point,” says Emmerson. Founder and CEO Irene Firmat continued. “But as an ESOP, when people call, we have to talk to them.” After negotiations with Encore, all members of the ESOP were given 150 pages of documents to consider before voting. When I asked Firmat and Emmerson how they felt about the company going to an equity firm rather than another brewery like Anheuser-Busch, they were clearly in favor of the arrangement. “For us, the fact that there is no brewery means that they need all our employees,” Firmat said. Emmerson added, “They can’t move the capacity to another place [like another brewery could].”

One of the stipulations for an ESOP arrangement is an annual appraisal of the company. When the offer came along, management was able to assess the value of the company and come to an agreement on terms. From there, the vote happened quickly.

Implications

This demonstrates yet another wrinkle in the evolving industry. ESOPs have become a popular option for transition—Harpoon Brewery, New Belgium Brewing Co., Heartland Brewery and others have set up these programs as founding members left the company. Full Sail’s sale illustrates one hidden danger: once employees become owners, they have no great incentive to protect a brewery’s independence. It’s not surprising Full Sail’s employees chose a private equity firm—although they’ll become regular employees again (after a healthy bump to the 401k), they have good reason to think their jobs are secure in the short term.

But what about the middle term? The point of private equity is flipping companies. Once a brewery leaves the hands of the employees, they have no control over where it goes. Full Sail may well become a brand of Anheuser-Busch after all. Firmat and Emmerson are confident that the new owners plan to pump money into sales and put Full Sail in a stronger position, and that may be true. But private equity firms are thinking about short- or medium-term company value. It’s not at all clear they’ll make decisions thinking of the long term.

On the other hand, they might bring new thinking to a fairly hidebound industry. Each time Anheuser-Busch buys a smaller brewery, it’s counted as an asset that the big boys know the business. There’s no doubt some truth to that—with complex distribution and retail arrangements, the beer business is unlike many others. And yet, the whole reason Anheuser-Busch is now buying smaller companies is because they failed to anticipate the growth within the craft beer sector. Not being a brewery may be a strategic advantage in terms of strategic planning, positioning, branding, and selling.

For the moment, Full Sail remains independent. There are a lot more chapters to write in this book, though. As always, time will tell.

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Jeff Alworth is the author of the forthcoming book, The Beer Bible (Workman, 2015). Follow him on Twitter or find him at his blog, Beervana.