Are MGP's Days Numbered As The Whiskey Market Matures? - The Whiskey Wash

Are MGP’s Days Numbered As The Whiskey Market Matures?

MGP is known to many as the base spirit supplier to a wide range of well-established brands and up-and-coming craft players alike. The reasons for buying spirit from MGP vary: some distilleries don’t want to make their own spirit, some are waiting for their distillery to be built, and some are waiting for their already in-house made white whiskey to age.

This has all been a nice cash cow for the Indiana-based industrial distillery, but as more and more of its clients come online with their own product and facilities, could its fortunes change? That’s one possibility from a new report just put out by Spruce Point Capital, a New York-based investment management firm.

MGP

This new report, which we’ve embedded at the end of this article for your consideration, takes a big swipe at the long-term viability of MGP’s fortunes in the whiskey industry. And, for that matter, it takes a swipe at the viability of the whiskey industry as a whole given the rapid entry of distilleries into the marketplace. This is a super thick report, so we’ve pulled from it the “quick highlights” as spelled out by Spruce Point:

  1. Rapid Whiskey / Bourbon Sales Growth, A Key Driver of MGPI’s Recent Earnings + Share Price Expansion Won’t Continue As A Result of Substantial New Capacity Growth
  2. Diageo Is A Material Whiskey Customer Accounting For At Least 8% of Revenues, Its New Distillery Comes On-Line In 2017; Best Case It Reduces / Eliminate Its Supply Contract With MGPI; Worst Case It Competes Directly Against It
  3. MGPI Also Appears To Be Quietly Covering Up A Large Market Share Loss In the Gin Category Associated With Seagram’s. Investors Should Study Both The Gin and Vodka Market As Case Studies For What Can Happen To Whiskey
  4. A Multitude of Other Contracts And A Key Ingredient Patent Expires in 2017 Which Significantly Increase MGPI’s Business Risk; Investors Are More Focused On The Alcohol Business, And Not Paying Close Attention
  5. MGPI Has A History of Operational Disasters (Fires and Chemical Explosions) Which Could Harm Earnings
  6. MGPI’s Foray Into Branded Liquor Sales Have Shown De Minimis Results, And Are Likely To Disappoint
  7. MGPI Is Out of Cash, And Borrowing Heavily On Its Credit Facility, Funding Long-Term Construction With Short-Term Debt. It Must Turnover Its Barreled Whiskey or Face Severe Financial Strain
  8. MGPI Quietly Restated 2015 Results of Related-Party Transactions Affecting Its ICP JV With Seacor (Another Public Company) Both Companies Financial Reporting Do Not Reconcile, Which Potentially Puts MGPI In Violation of Its Credit Agreement. MGPI Is Also Quietly Restating Sales Figures Tied To Customer Freight
  9. Regulators Are Expanding An Audit Investigation of MGPI, Which May Result In Increased Taxes and Penalty Costs
  10. Follow The Money Carefully: MGPI’s Largest Shareholder And Founding Family Entered A Stock Sale Program on Dec 21, 2016 – Around The Holiday Period When Things Were “Quiet”
  11. 11. Spruce Point Sees Approximately 60% – 70% Downside + Big Hangover Waiting For Investors Intoxicated By The False Hope of Future Gains. MGPI’s Valuation Will Revert To 8x-10x EBITDA From 14.5x Currently Once Reality Sets In

There’s a lot here to digest obviously, but one big takeaway from this, according to the New York Post, is that “Spruce Point Capital said whiskey’s long run as a popular drink, especially among younger drinkers and women, has attracted an over-saturation of distilleries.” And it is from this rush to market we could perhaps see a shakeout of weaker whiskey producers as well as a weakening of MGP as its bulk whiskey sees less demand.

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