Melbourne-headquartered alcoholic beverage company Mighty Craft (ASX: MCL) is contemplating selling off its star performer Better Beer as part of a divestment program to reduce debt, after the brand delivered a 135 per cent increase in revenue to $45 million.
This represents more than half the group's revenue from continuing operations of $82.5 million, but a shift in the proportion of beer sales versus spirits has contributed to a five percentage point cut in gross margins, in addition to the impacts of cost inflation for the beer and cider category.
"The team has delivered strong growth in FY23 in a significant year of change for the business - $82.5 million in sales at plus-48 per cent organic growth is a significant achievement," says Mighty Craft interim CEO Jess Lyons.
"Notwithstanding this, earnings performance has not met expectations of the management team and board."
Lyons stepped into the leadership role after former CEO and managing director Mark Haysman resigned in June - one of six director exits from the board since November 2022 as the group grapples to pay back borrowings that have risen by almost 45 per cent over a year to reach more than $20 million.
Since November Mighty Craft's share price has fallen almost 88 per cent from 24 cents per share (cps) to cps. In January 2020 shares were trading at 46cps.
Lyons assumed the leadership just weeks before Mighty Craft revealed the outcome of a strategic review that called for a restructuring of head office costs, an immediate reduction of debt, and an optimisation of company structure.
She explains that the group removed nearly $5 million in costs in the June quarter and expects further reductions in the current half-year. On 31 July, Mighty Craft struck a binding agreement to sell Jetty Road Brewery on the Mornington Peninsula, and the company is currently in the process of identifying potential buyers for Foghorn Brewery in Newcastle - one of the first brands to become part of the group's portfolio.
Mighty Craft's debt-reduction program involves a target to divest $25-45 million worth of assets in order to reduce its senior debt facility, repay a bridging loan and improve its trade payables position.
The sale of Better Beer alone would sit within that range if its estimated valuation translates to a deal. Mighty Craft used to have a 58 per cent stake in the brand that was co-founded by internet comedians Matt Ford and Jack Steele, but in March the brewer announced a capital raise which diluted the ASX corporate's stake.
In its latest result, Mighty Craft reported that a restructure of shareholdings in Better Beer reduced its holdings to 33 per cent - an investment worth approximately $32 million.
Better Beer generated total comprehensive income of $498,000 for Mighty Craft in FY23, compared to $146,000 for its share in Brisbane-based Slipstream Brewery, and $358,000 for Seven Seasons in Melbourne, which was founded by former AFL star Daniel Motlop.
Meanwhile, Brogan’s Way in Melbourne and SauceCo in Cairns clocked up comprehensive losses of $250,000 and $1.425 million respectively for the group. The SauceCo venue closed in July, and the Mighty Craft directors believe a $200,000 loan receivable from an associate is unrecoverable.
In its financial statements released to the market yesterday, Mighty Craft notes it has received inbound interest on a number of its beer, cider and spirits assets, including the equity stake in Better Beer, and it is 'currently considering whether a full or partial sale of its equity stake in Better Beer is in the best interests of Mighty Craft shareholders'.
Mighty Craft chairman Chris Malcolm, a former chair of Lark Whisky who joined the company in May, says the group is going through a significant period of restructuring.
"As part of the strategic review, the board has listened to many key stakeholders and it is clear the business model needs to change," he says.
"We need to reduce debt and we need to reduce the cost base. In order to do this, we need to divest some larger assets.
"Once we are through this interim period and divestments are clearer, we will outline a path forward for the business. Rest assured the management team and new board are working incredibly hard to stabilise the business and implement the outcomes of the strategic review."
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