Petaluma's Lagunitas Brewing to partner with Heineken in 50-50 deal

In the most significant deal yet in the American craft brewing industry, Lagunitas Brewing Co. and Heineken International announced a partnership Tuesday to take the fast-growing Petaluma company's hoppy craft beers and irreverent business ethos across the world.

Heineken will acquire a 50 percent stake in the nation's sixth-largest craft beer producer for an undisclosed amount of cash and a structure that allows Lagunitas to utilize the Amsterdam company's global production and distribution network, Lagunitas founder and owner Tony Magee said.

Watch an interview with Tony Magee here.

Financial terms were not disclosed, but Lagunitas was likely valued at about $1 billion in the deal, according to people familiar with recent acquisitions in the craft beer industry.

Magee described the agreement with Heineken as a 50-50 partnership. Heineken will have three seats on the Lagunitas board and the Petaluma brewery will retain three seats. Magee, who began the company on his kitchen stove in 1993, will remain chairman. The deal is expected to close in the fourth quarter.

Magee said the partnership would not change the soul of the 730-employee company or diminish the quality of its beers. Instead, the partnership represents 'a profound victory for American craft,' Magee said.

Though still just 11 percent of the U.S. beer market, sales of craft beer jumped 17.6 percent in 2014 while the overall beer market grew a meager 0.5 percent. Lagunitas and Heineken believe a similar explosion is imminent in global beer markets, he said.

'For us, we don't need assistance here in the United States. But there is the whole world to think about,' said the 55-year-old Magee in an interview. 'We can partner with one of the world's greatest family-owned, really beer-centric companies to find our way into all of these markets globally.'

Heineken CEO Jean-François van Boxmeer said his company was excited to partner with Lagunitas 'so it can reach parts that other craft beer brands have not.'

Though best known for its flagship IPA, short for India Pale Ale, Lagunitas sells two dozen different beers with such cheeky names as Sucks, Hop Stoopid and Undercover Investigation Shut-Down ale, which was named after a 2005 marijuana bust at the local plant. It is on track to produce 825,000 barrels this year from its production facilities in Petaluma and Chicago, and announced plans in June to open a third plant near Los Angeles in early 2017.

The size of Tuesday's deal, along with its global ambitions, the media coverage it received and the reaction it generated on social media, far surpasses any of the recent mergers and acquisitions transforming the U.S. craft beer industry.

The partnership with Heineken was the result of a fast-evolving courtship throughout the summer as Magee attempted to find out where his rapidly growing company would fit into a quickly changing $20 billion craft-beer marketplace.

Some U.S. craft beer companies have opted for the takeover route. For example, Belgium's Duvel Moortgat has acquired New York's Ommegang and Kansas City's Boulevard Brewing. It struck a deal this year to invest in Firestone Walker Brewing Co. in Paso Robles. Others have taken alternative approaches to being bought out by larger breweries. Private equity groups have taken stakes in Unita Brewing in Utah and SweetWater Brewing in Atlanta, while New Belgium Brewing Co. in Fort Collins, Colo., selected an employee-stock ownership plan so it could remain independent.

But many in the craft beer community detest the growing corporatization of the industry, which was created by home brewers in late 1970s in response to the mild lager beers that have mostly dominated the American market over the last 50 years. They are particularly wary of attempts by the two big domestic beer manufacturers, Anheuser-Busch InBev and SABMiller, to make inroads.

That made the choice of picking a joint venture partner more difficult for Magee, known for his hands-on approach to writing Lagunitas copy and designing labels. Magee did not want to give up ownership of the company and was cognizant of the incredibly demanding culture of craft-beer consumers — something he found out first-hand in January when he sued Sierra Nevada Brewing Co. in Chico, alleging trademark infringement on a label. He quickly dropped the suit after a massive social media backlash, admitting on Twitter that he was 'seriously schooled & I heard you well.'

As he explored options with Wells Fargo Securities, Magee said he had 'multiple offers on the table.' Heineken had not been interested in participating in the U.S. craft beer market, but the Dutch company quickly became the front-runner after Magee hit it off with van Boxmeer during a visit to Lagunitas' Chicago plant.

'We changed their mind. Their original view going forward is that they wouldn't make any sort of partnerships with any sort of craft breweries,' Magee said.

But as talks progressed in places such as New York and London, the two found more commonality. Founded in 1864, Heineken is still family-owned — controlled by Charlene de Carvalho-Heineken, who is one of the world's richest women with an estimated worth of $11 billion — and puts a premium on quality. Magee noted the Dutch company brews its beers with 100 percent malt and has a 'very best in class' distribution system in more than 70 countries and more than 165 breweries around the world, from Vietnam to Nigeria.

'It would give them a platform for them to tap into some of that excitement around (craft beer). For a long time, they have been one of the world's great specialty brewers,' said Magee. 'As I learned about their culture, (we) saw ourselves in it. We weren't very different people at all.'

Under the deal, Lagunitas will retain autonomy over its business operations, Magee said, keeping its same marketing, sales and production teams as well as its suppliers and distributors. He even got to put an expletive in the Lagunitas press release announcing the deal, which wasn't included in Heineken's more formal one.

'We're not working for Heineken, we are working with,' he said, noting that each side will have a 50 percent stake in the venture. Magee doesn't believe there will be disagreements, but if they do occur, the two sides will work through them.

'The Dutch are very consensus-building. They are also some of the most intelligent and kindest people I have ever encountered. In their own words, we will be partners and partners talk to each other. I'm confident we aren't going to find ourselves at loggerheads in this,' Magee said.

Started out with borrowed money, the Lagunitas brand was primarily built on Magee's passion for beer as well as his iconoclastic nature; he counts Frank Zappa as a hero and went on tour with a rock band this summer as the deal with Heineken was being finalized. In an industry that is known for its collaborative nature — such as breweries getting together to brew a combination beer — Magee prefers to go his own way and talks about how beer serves as one of the 'fundamental human needs,' unlike many other consumer products.

But as the craft beer industry evolved, Magee said he also realized he needed to delegate more to be able to think about the future. The company formed an advisory board, which now includes executives from Facebook, The Gap, and Morgan Stanley.

For example, he doesn't write the beer recipes anymore, but says that he 'art directs' them. His most significant move was bringing in Maria Stipp as CEO in June. Stipp had served as president of ecoATM, an automated kiosk business, and served as an executive at Activison, which produced the 'Call of Duty' video game, and earlier in her career was on the sales team at Miller Brewing Co.

'I'm not a micromanager, I'm probably the ultimate delegator,' he said. 'What I want to do is paving the road forward. But it takes an awful lot of people to get asphalt down.'

Lagunitas' first international target will be Mexico, Magee said. It will take a well-thought out approach attuned to Mexico's beer culture, he said, using Lagunitas employees working in the pipeline that Heineken has made available for them.

'When I hear a native Spanish speaker say the word 'Lagunitas,' it's 10 times prettier than when I say it. It becomes song,' Magee said.

The company also intends to build at least one more plant in the United States, one that would likely be near a port given its expanded focus on exporting beer. Lagunitas is available in the United Kingdom, Sweden and Japan.

The deal's success will be dependent on targeting international markets with affordable prices and where the taste profile of its IPA will be acceptable, said Jon Moramarco, a beverage industry consultant.

'My view of the joint venture is that it's the start of very long-term adventure,' Moramarco said. He noted that Mexico could be an attractive market given the large amount of American tourists in areas such as Cancún.

Heineken's purchase will allow some of Lagunitas' early investors to recoup some cash, Magee said. They are ones who invested from 1999 to 2001 and he emphasized were not 'big money guys' but rather those from varied backgrounds that he knew: a veterinarian, a dentist, a retired U.S. Navy chaplain, a police officer and retired school teacher among others.

'(It) allows me return some money to my shareholders who have displayed the patience of Job while letting me run the company in the way and the directions that we felt were most important,' Magee said.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.