In April 2003, TSG Consumer Partners (which, at the time, was known as The Shansby Group) invested $40 million for a 30% stake in a company named Energy Brands, Inc. Energy Brands was the parent company of Glaceau, the maker and marketer of vitamin and herb infused waters.  At the time of the investment, flavored water, as a drink category was in its infancy, but TSG was on to something.   On August 23, 2006 TSG sold its stake in Energy Brands to Tata Group for a reported $677 million, or ~ 6.4x Trailing Twelve Months (TTM) Revenue.   TSG’s return amounted to over 17x after dividends.  Not bad for a lifetimes work, let alone three years.

The chapter has a second verse,  between August 2006 and May 2007, the value of Tata Group’s stake nearly doubled from $677 million to $1.2 billion, when Coca-Cola purchased the company for $4.1 billion.  The deal valued Glaceau at 11.9x TTM Revenue, an unprecedented multiple for a beverage company.  Despite the astronomical price Coca-Cola paid, it was hailed by industry analysts as a paradigm shifting move in the battle with Pepsico.

It turns out the Pepsico was not the only one listening to Coca-Cola.  Since that fateful date there have been hundreds of alternative beverage companies launched.  Most were thrust into the market in hopes of being bought by one of the big beverage conglomerates, who had been prolific acquirers over the past three years. Strategies have ranged from ready-to-drink beverages with super fruits, to tea based beverages, to energy drinks to affinity concepts.   At a 2007 beverage trade show I attended, there were literally hundreds of energy drinks being launched in hopes of being the next Red Bull, the homegrown parallel to Energy Brands.

Fast forward to today, I’m sitting in an office with an “A-list” consumer investor and a strong private beverage company.   Beverage company is interested in taking growth equity to launch a handful of new products and a moderate amount of recapitalization.  Very solid operating company meets very solid investor.  As I am watching the back and forth, it dawns upon me, beverage investing is dead, at least as we know it.

I came to this conclusion, not necessarily from the above meeting, but rather over the last 60 days as I have met with a number of beverage companies seeking capital.  What I have seen during my meetings can be summarized as follows — revenue ramps are not being met, marketing spend to realize those ramps has been 2x – 3x budget amounts, expensive packaging is a serious drag on profitability and value relative to invested capital is under water.  Long short, the beverage case at Whole Foods and other natural markets has become increasingly crowded.  Marketing spend to rise above the chafe has been much more costly than originally anticipated.  Grocery store cut-ins have exacerbating the problem, and will continue to do so.

The unstated reality, is also that Coca-Cola and Pepsico have slowed their pace of acquisition (see chart below).  The reality is a number of the bets these companies have made over the past 24-months are just not panning out at the expected rate.  As an example, Coca-Cola’s investment in Bassa Nova is often referred to as a “dog”.  As a corollary, deals that should have gotten done in relatively short order remain in the balance.  Sambazon, a leader in the acai based beverage category, has been actively raising money for more than six months, despite a threshold level of financial traction ($20+ million in revenue), a solid position in the marketplace, an asset goldmine locked up (they control much of the acai that flows from the Amazon rain forest) and what appeared to be well thought out valuation expectations.  The last major equity private placement into a beverage company was Oak Investment Partners minority investment in FRS on June 2007 (see chart below).

I’m not worried about financial investors, they are smart people they are paid to put money to work and benefit from the upside.  I fear for the angel investor who does not see the down stream reality, funding money into a company that faces increasingly dim near term prospects for capturing a threshold institutional equity investment.   As an example, the recent winner of an angel event I attended was a better-for-you beverage company.

Have a drink, but put it on ice, beverage investing is going into a period of deep freeze.  Smart investors will wait out the inevitable market rationalization.