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Spirits and beer company Mighty Craft (ASX: MCL) is taking a cold hard look in the mirror after last year's thoughts of ditching its stake in Better Beer to pay off debt, making a 180-degree turn since then and resolving to make the relationship much more serious with plans for a full buyout.
The beer brand co-founded by publican Nick Cogger with Inspired Unemployed comedians Matt Ford and Jack Steele accounted for 90 per cent of Mighty Craft's consolidated revenue of $28.8 million from continuing operations in the December half.
This high concentration is partly due to Mighty Craft's aggressive divestment activity. In 2024 thus far it has also sold the Mismatch beer and 78 Degrees gin brands for $7.2m, and handed back Slipstream Brewing to its founders for $850,000.
But the high proportion of sales coming from Better Beer also stems from the success of the brand itself as it gains market share and recorded scan growth of 18.2 per cent in the recent March quarter.
This compares to an 11 per cent like-for-like drop in unaudited group revenue for Mighty Craft in the quarter to $19.8 million, and net operating cash outflows of $2.4 million for a group that by the end of 2023 had accumulated losses to its name of $95 million.
Mighty Craft has made strides in its attempts to pay down debt this year with $2.3 million of senior debt paid by the end of March, while around half the proceeds from the Mismatch and 78 Degrees sale will also be used to reduce its borrowings.
Nonetheless, the company admits it is in breach of various loan covenants and is in "ongoing constructive dialogue" with senior lender Pure Asset Management to "pursue a path to material debt reduction" in the short to medium term.
The company is now taking the tack that Better Beer - in which it holds a 33 per cent share - is its best bet for survival, and is holding preliminary talks with Better Beer and its lender Pure to "explore the possibility of a transaction" whereby it would acquire all shares not already owned by Mighty Craft in exchange for MCL shares, followed by a subsequent capital raise.
Mighty Craft has signed a non-binding letter of intent to explore the feasibility of this option, and has noted that if it can't strike a deal within the coming months the board believes it would "likely be difficult to secure the additional debt or equity funding that would be required to allow the company to continue its operations".
Mighty Craft chair Grant Peck says the focus and priority of the board remains very clear – deleverage the company and continue to reduce operational costs.
"The company’s debt levels, however, will remain unsustainable and divestments of the non-Better Beer assets alone will not be sufficient to restructure the balance sheet to the extent required," Peck explains.
"While the board continues to assess all available options, the company’s strategic focus has shifted towards seeking a potential merger with Better Beer.
"Discussions with the relevant stakeholders are at a very early stage, and there is no certainty of any transaction eventuating. The board is committed to finding a path that balances the interests of all stakeholders, and we will update the market as required by the listing rules."
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