Do the numbers add up for merry BrewDog?

AS A REGULAR INVESTOR in early-stage companies, and a beer drinker, you might think that I would have been tempted to invest in BrewDog – a high profile brewery which launched its first ‘Equity for Punks’ crowdfunding campaign in 2011. Their shares, then priced at £3.75, carried the right to discounts at their bars and an invitation to their annual general meeting, reputed to be the best corporate piss-up around.

The reason I wasn’t interested is that I normally expect some basic rights and protections with my shareholdings, and it seemed that BrewDog wasn’t offering much of either of those.

BrewDog eschewed ‘normal’ crowdfunding methods and reached out directly to the beer drinking public. And they were wildly successful – since their first £2m fundraise in 2011 they have raised three further crowdfunds and, as a result, they now have 55,000 shareholders, raising over £50m.

I currently chair a public company listed on the London Stock Exchange where we are subjected to lots of regulatory restrictions and disclosure rules, but although BrewDog has many more individual shareholders than we do, it doesn’t have to worry about such irritations. Now they have announced that they have added one very big new punk to their investors – a San Francisco private equity company called TSG Consumer Partners. TSG has invested in other food and drinks companies including Vitamin Water and Popchips.

TSG will invest £213m to obtain a 22% stake in Brewdog, at a valuation which makes the whole company ‘worth’ over £1bn. The two founders of BrewDog, James Watt and Martin Dickie, will sell 40% of their stakes to TSG for £100m.

However, don’t imagine that this sweet deal is open to the rest of the 55,000 small investors, who have been restricted to selling 15% of their stake to TSG, up to a limit of 40 shares. If you don’t want to do that, they’ll send you a six-pack of beer. What a deal!

BrewDog are claiming that this investment represents a whopping 2,765% rise in value of shares bought at their first crowdfunding round. Even last year’s investors have seen the 'value'of their shares rise by 177%.

But of course, the shares are only worth that if somebody is willing to pay it in exchange for your shares and, as we know, right now you’re not going to get much more than £40k out of TSG – somewhat short of the tens of millions enjoyed by Watt and Dickie.

And then there are the ‘preference’ rights awarded to TSG which means they are guaranteed an 18% return each year on their investment – money which will be paid in advance of anybody else.

You might wonder if the 95% of shareholders who voted in March to suspend ‘pre-emption’ rights and enable this deal quite understood the implications of this. It’s worth an explanation.

The current valuation is reported to be £1bn. If BrewDog was to float or be sold – as anticipated – in 5 years time, its then value would have to be £2.25bn for TSG to get its 22% ‘fair’ share back. If the value were to fall short of that, TSG is guaranteed the first £487m of any proceeds before anybody else gets anything.

BrewDog made £7m profit last year which makes the current £1bn valuation quite extraordinary. It will have to perform miraculously in the next few years, otherwise 55,000 punks may find they have lost out badly.

So now we maybe know why they called their shareholders ‘punks’ – defined in many dictionaries as ‘a worthless person’.