EXCLUSIVE: Victory sells stake, joins Southern Tier in private equity deal

Victory Brewing, a stalwart of Pennsylvania’s independent craft beer industry, will join New York’s Southern Tier Brewing under a newly formed company managed by a Manhattan private equity firm.

Under a plan announced this morning to employees at the Downingtown-based brewery, Victory’s founders said the new ownership will allow it to grow into “a force in the Northeast.”

Combined, the breweries will produce more than 250,000 barrels (about 3.5 million cases) a year, moving the new company into the top 15 craft beer companies nationwide.

The deal is the latest in a series of big money transactions that have roiled the craft beer industry, as mid-size companies jockey for long-term financial security in an era of ballooning competition.

“For us to sit and see the competitive clouds forming on the horizon, and just fold our arms as if nothing was happening, that would be irresponsible,” said Victory brewmaster Bill Covaleski.

Founded in 1996 by Covaleski and his longtime friend Ron Barchet, Victory will now fall under the umbrella of a new out-of-state holding company called Artisanal Brewing Ventures.

ABV was formed last year by Southern Tier and Ulysses Management, a New York hedge fund manager and investment firm that owns a minority stake in Southern Tier.

The new company is led by a pair of former Big Beer execs who joined Southern Tier after the Ulysses Management purchase: CEO John Coleman, who served briefly as president of Pabst Brewing after a long career at Anheuser-Busch; and Bill Wild, another former Anheuser-Busch executive.

Covaleski and Barchet said they would become “significant” shareholders in ABV and join the company’s board of directors.

No financial details of the transaction were released.

The deal underscores the pressure on mid-sized regional brewers to continue growing as hundreds of new, small breweries compete for consumer attention. In particular, several western brewers – including Sierra Nevada and New Belgium – have opened new eastern facilities aimed at expanding sales in the region.

“They’ve obviously seen a vulnerability or at least an opportunity on the east coast,” Barchet said. “This will definitely put a mark in the sand that says that there already is a strong player in the northeast.”

For years, established brewers depended on bank loans underwritten by ever-increasing beer sales for the cash needed to buy equipment and add to the payroll. Indeed, Covaleski said Victory had borrowed $33 million to complete its new plant in Parkesburg, Chester County.

Increasingly, however, small breweries have sought new capital from outsiders.

Those investments have ranged from private equity deals, like the one last year that saw Delaware’s Dogfish Head sell a temporary 15 percent stake to a New York firm, to outright sales, including the spectacular $1 billion purchase in November of San Diego’s Ballast Point by international drinks conglomerate Constellation Brands.

With its partnership with Southern Tier, Victory is carving a middle road that it hopes preserves its reputation for independence while broadening its influence.

“It’s better to work with your peers than to beat each other up and let the big guys come in the back door and clean up,” Covaleski said.

The pair said they will continue running the company, and Victory’s job force will remain intact.

Said Barchet: “Of course ABV is buying enough that they’re going to have say in the way things go, but they obviously believe Bill and I have been doing a good job running this company.”

From a beer drinker’s point of view, the partnership makes sense: The two breweries are highly regarded in craft beer circles, with solid reputations for well-made styles that will likely complement rather than compete with each other.

Victory is the more traditional of the two, known for classical lagers and ales; Southern Tier, by contrast, often pushes its flavors to the extreme, with the likes of Pumking imperial pumpkin ale and Crème Brulee imperial milk stout.

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