Brewdog appoints AlixPartners to consider strategic options

Sadly, BrewDog is a cautionary tale. Early-stage investors take huge amounts of risk. If things go well, they often get diluted or subordinated by large funding rounds; if things go badly, they get wiped out.
 

In this case, it appears management was not sufficiently focused on the plight of the company’s early-stage investors and fell prey to the siren call of private equity.

In 2017 the company was expanding rapidly and needed significant new funding – far more than could be raised from existing individual shareholders or via the crowdfunding route.

Enter private equity in the form of TSG, in a manner which structurally subordinated and potentially diluted existing shareholders. The deal contained strong downside protection and priority rights for TSG.

For the founders, the TSG involvement crystallised a huge paper valuation, preserved their voting control, allowed them to sell some shares and brought credibility for a future IPO. For the equity punk shareholders, the deal brought a (temporary) theoretical increase in implied share value but made them fully dependent on stellar performance. Limited upside and all the downsides.

A combination of poor trading conditions, Covid, business rates, increased NI and minimum wage have conspired against stellar performance. The company has taken on very costly debt from a combination of TSG and Oaknorth and is now effectively in a death spiral driven by the cost of its debt – a shame because there is the spark of increasing EBITDA underlying the numbers.

A sale, or a debt restructuring, is inevitable. Either is likely to wipe out shareholders, given their structural subordination. The fate of BrewDog’s equity punk investors was sealed by the founders 9 years ago.

ShareSoc hates to see this happen and emphasises the need for early-stage investors to focus on the risk warnings in the subscription documents.

If any members are Brewdog holders who are happy to speak with the press we would be keen to hear from them at info@sharesoc.org.  

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