BrewDog – shareholder letters and class C shares

BrewDog are not a company to do things in an easy or conventional way. Want investors? Sell thousands of shares, one at a time, to your fans. Want to get more of your beer to the USA? Crowdfund a huge distillery there. Find there aren’t enough hotels near your HQ? Try to build your own. Want to get new investment that is currently against the company’s articles of association? Send out an email to all of your relevant shareholders at 11pm on the latest day you can notify them.

The last is a new one, but the notification letter had a few things in it, wrapped up in glorious financial legalese. Here’s my attempt at unravelling it…

You can read the full notification of meeting here. Also, and this is quite important: I am not a lawyer. I am not a finance expert. I do not even play one on TV. I used to be a computer programmer working on financial data, but I now write about drinks for a living. Last time I wrote about finance stuff, I said that whisky from Glenfarclas was a bad investment, which is demonstrably wrong. But with those caveats, here’s what I’ve got from the letter.

BrewDog want to grow, both in terms of the money they have to do stuff and in staffing. To do the former they want to:

1. do a new Equity for Punks and/or bond issue
2. allow a large investor (or investors) to buy in to the company.

To do the latter, they want to have a pool of shares to use as an incentive for staff. The suggestion is that they want to tempt in an experienced management team – not a bad plan for a company that is getting as large as it is and is currently helmed by a brewer and an entrepreneur – and that having the ability to award shares would help. Which I reckon it would. This definitely counts as a good thing in my book.

So, back to the investment. The new EFP/bond isn’t a shocker – it’ll be their fifth crowdfunding round and a second bond. However, the second part, the new investor, is the bit that needs some examining.

There are several parts to it. Firstly, they are creating a new type of share: Class C. These shares will only be available to the new investor(s) and have some extra things regular A and B shares don’t:

• if the company goes under, the cash is returned for some other reason, or the company is floated on the stock exchange, C-class share holders are entitled to interest on their investment at a rate of 18% compounded annually, or what A and B shareholders are entitled to, if higher.
• C shares can be transferred to funds and other investment vehicles
• they can be converted to A shares if the investor wants.

So, these are institutional investor shares – BrewDog is going in for the long term. With the 18% interest bit, they’re going to need to float sooner rather than later, or very quickly have to pay a very large amount of money to the investor. From a bit of reading around, this is a fairly usual thing, although 18% is very high – things are usually about half that and often go much lower in areas where there is contention for funds. This strikes me as BrewDog looking for an investor who either won’t interfere where they’re not wanted (if it’s a corporate investment) or will bring in significant expertise (if it’s an individual who can provide them with contacts and help push growth in areas that the current management team don’t have expertise).
(Edited: I’d missed the ‘or flotation’ bit in the letter, so hadn’t realised that this is getting paid if everything goes to plan and BrewDog go public. The above paragraph is new speculation by me).

Secondly, the new investors will be able to buy some existing shares. ‘Significant Shareholders’ – which isn’t clearly defined but seems to be early shareholders and those who have helped raise funding – will be able to sell up to 20% of their holdings to the new investor(s). Before this happens, their shares will be converted to type C shares so the new investor(s) will have just this class.

Thirdly, the new C-class investment will total no more than 30% of the company’s shares by the end of the process. The new investor(s) will also be paying at least £75 a share. Which is a nice number, if you’re a Significant Investor looking to get some capital out of BrewDog.

As part of selling to the new investors, they want to change the rights of shareholders. Currently, pre-emption rights allow existing shareholders to top-up their holding in the company from any newly issued shares, allowing them to keep the same percentage holding in the company, if they want to invest more money. However, as the C shares are aimed at these new investors, BrewDog want to change that rule and remove the right for these C shares – the language suggests that it’s just for these shares.

On top of all of that, they want to do 10-1 stock split, making all the current 1p shares 0.1p shares. Your investment value won’t change, you’ll just have lots more shares. I assume this is to make things nicer for when they float the company on a stock exchange, which they also mention as being something that might happen sooner rather than later.

So, in order to do all that, they need to get shareholders to vote. The meeting is on 29 March 2017 up at BrewDog HQ, but if you can’t make it they are allowing proxy voting – details are in your email.

Anyways, this is what I think is going on (IANAL and IANAFA – I am not a financial advisor) and to me it looks good. BrewDog are being a grown up company, looking for a major investor as well as rewarding staff and allowing fans to invest again. The new investor(s) are lined up in the wings somewhere and the C-class shares look to have been specified by them – the ability to transfer the shares to funds makes them look very corporate to me – and we’ll find out about who they are in June, if the vote goes through.

Update: the investment partner was revealed at the AGM on 8 April – TSG Consumer Partners.

Update II: Martyn Cornell’s analysis is spot on.