Honest Brew Limited EIS – for experienced investors only
This is an opportunity to invest in a proven, rapidly growing online provider of craft beer, Honest Brew Limited (“HBL”). The company is EIS-qualifying. Two institutional investors – a UK VCT and a U.S. early stage fund – are expected to invest £1.2 million. Wealth Club investors have the exclusive opportunity to invest alongside them on the same terms – only £200,000 remaining – with the additional benefit of EIS tax relief.
- Proven and established online business in growing craft beer market
- £1.5 million growth capital fundraise of which £1.2 million looks to be secured by two financial institutions – a UK VCT and U.S. early stage fund
- £200,000 remaining for EIS investors
- Advance assurance received
- Targeting 6x return on investment after tax relief (returns are not guaranteed)
- Exit expected in 3–5 years
- Minimum investment £25,000, for professional or very experienced investors only
- Closing 5 June 2017
Honest Brew launched its personalised craft beer subscription business in 2014 and now sells up to 1,000 different beers from 200 breweries. It has 2,147 active subscribers and turns over £1.4 million with a 21% gross profit margin. It provides consumers with much more choice than a supermarket and offers a good sales platform for smaller breweries who would otherwise have little distribution. Currently the average order value is £29 and the lifetime of a subscription customer is 20 months.
The UK craft beer market is estimated to be worth £665 million. It has grown significantly over the last ten years and now represents 5.5% of the brewing market. In the US the craft beer share of the market is 15% by volume, 20% by value and is worth circa $17 billion. If that’s anything to go by, the UK craft beer market could continue to grow. Interestingly, over 500 breweries opened in the UK in 2016 taking the total to 2,200, double what it was in 2011. As a comparison, in the US there are almost 5,000 breweries, compared to 1,500 a decade ago.
Supermarkets have detected the changes in the market and both Tesco and Waitrose have added to their beer range. Within the last few months Tesco increased its listings from 50 to 70, and Waitrose from 70 to 95, but that’s still only a fraction of the choice offered by HBL.
The business is looking to raise £1.5million of which approximately £1.2m is likely to be secured from a UK based Venture Capital Trust and a San Francisco-based early stage fund which previously backed Brewpublik (brewpublik.com), a US equivalent of HBL. Both institutions have carried out their own due diligence and are expecting to complete the deal by early June 2017, although there is no certainty until this is signed.
Approximately £200,000 EIS capital is remaining and is only available to Wealth Club and Chelverton investors (Chelverton is arranging the deal).
HBL is raising this latest round of capital to grow further and faster. The strategy is simple: to increase the number of subscribers through direct marketing, improve technology and systems to enhance user experience and repeat purchasing. As with any online business operation is driven by customer acquisition which requires investment. To date HBL has been able to demonstrate good results: for every £1 spent on direct marketing it gets a return of £2.62 taking into account the average order size and lifetime value of a customer.
Honest Brew believes its closest competitors are Beer Hawk and Beer 52. Both businesses claim to have annual sales of £2.5 million so are slightly ahead of HBL, although neither offers a personalised subscription service. Notable deals include the acquisition of Beer Hawk by AB InBev, a large brewer, in early 2016. Also in April of this year TSG Consumer Partners acquired a minority stake in Brewdog which valued the business at just under £1 billion. The deal time multiple hasn’t been disclosed but filed accounts for Brewdog in 2015/16 reported profits of just £7 million with a £71 million turnover.
Given the growth in the market and the relative fragmentation of the online providers, forecast sales growth to £30 million turnover by 2021 appears to be achievable. However, in our opinion, the main challenges, over and above market appetite and competition, will be maintaining conversion/activation rates, reorder rates and average order value at higher volumes.
HBL is managed by first-time entrepreneurs Andrew Reeve and Annabel Causer. They have the support of Keith Foreman as Chairman. Keith has a very strong track record in driving shareholder value in both public and private equity deals. He is currently backed by global PE firm Sun Capital as CEO of Freshpak Chilled Foods. Previously he was a senior executive at Bakkavor (Geest).
The institutional investors will also be able to add to the Board post completion. We consider increasing the depth and breadth of the management team will play an essential role in achieving the growth plan. We have seen due diligence findings and can confirm that management due diligence came out very positive, which is highly reassuring. We have also seen the monthly management information pack and KPIs produced every month. In our opinion they are extremely comprehensive and commercially strong for a company of this size. Becoming a private equity backed business for this management team will not be a difficult transition, in our view.
The capital gain could be substantial if the business plan is achieved. Adjusted EBITDA in 2021 is £4.4 million on £30 million turnover. This assumes approximately 40,000 subscribers. If the business sold for 6x multiple (which is very modest based on comparable deals) that would give the business an enterprise value of £26.4 million. This in turn would deliver 6.3x cash return to investors in year 4 after taking into account the EIS tax relief. That’s a 53.2% IRR.
Even if the business were to achieve just 50% of this plan, shareholder returns should still be at least double, including EIS relief. Returns are not guaranteed and you could get back less than you invest.
There is a 2% annual fee, which is rolled up and paid by investors on exit, providing they have received their capital back net of fees. There is a performance fee once compound annual returns exceed 8%: Chelverton receives` 20% of the excess. Other fees are paid by the investee company. The information memorandum has more details on the fees.
The usual risks with unquoted companies apply to this EIS offer. For instance, EIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief depends on circumstances and tax rules could change.
HBL has achieved a great deal to date on relatively small amount of capital. It is a small business but well established and managed. It operates in a growing and fragmented market, and has a good opportunity to establish itself as the prominent independent online retailer which could attract significant interest and attractive pricing on exit.
Due diligence has been positive. Funding from two institutions adds credibility and reinforces the quality of the opportunity. Whilst not without risk, the EIS relief helps to mitigate the risk and boost any returns. We consider 6x return to investors to be an ambitious, but not impossible, forecast. We know the institutional investors will be expecting these results. On a conservative basis we consider 2x return to investors to be reasonable (please note, none of the target returns are guaranteed).
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the providers documents carefully. 19 May 2017
- Min. Investment
- Amount Raising
- single company EIS
- 5 Jun 2017