As Distressed Breweries Close, More Used Equipment Heads to Auction
https://www.brewbound.com/news/distressed-breweries-close-used-equipment-heads-auction
In his report As Distressed Breweries Close, More User Equipment Heads to Auction, Jason Kendall analyzes the macro and micro economic reasons why breweries are closing, the implications of these closings, and how this ostensibly negative indicator of economic health in the market is providing opportunity for others.
Firstly, Kendall discusses how hundreds of breweries are expected to close in 2019, partially due to the fact that breweries founded during the boom in 2012 are reaching a stage in their business where they re-evaluate their progress versus their original anticipated growth. As many breweries are not performing as well as expected with cash flow issues, debt payments, and a more competitive market, many of these failed businesses are turning towards asset auctions as a way to pay off their debt. However, business analysts still believe the industry to be quite profitable and take the increased brewing equipment auctions as a sign of a maturing market. Thus, while there is a greater amount of distressed property for sale, there is a robust pool of eager buyers to match—the property is quickly being auctioned off to new business owners.
After this initial analysis of the market, Kendall delves deeper into the activities of auction houses, such as Heritage Global Partners. Buyers are either looking to get into the business or upgrade their equipment, sellers are trying to pay off their debt to banks. Generally, the buyers seem to think they are acquiring these breweries for a price far lower than their perceived value as they are greatly satisfied with their purchases for the price.
In context of concepts in INFO2040, the findings in the article imply that the value V of these breweries to buyers is far greater than the bid price they are paying at the end. One CEO describes buying from an auction as getting a brewery for “pennies on the dollar”. Since these auctions are predominantly ascending bid auctions, and we learned that one should always bid their value in this auction, this implies that the second highest bidder must have a much lower value than the winning bidder in order for the winning payer to have such a large payoff (difference between value and paid price). In context, this makes sense as some of the bidders are larger companies looking to expand with more capital and therefore placing more value than an entrepreneur looking to start a small business. In addition, in the descending bid auctions, the bank’s (auctioneers) expectations are often exceeded implicating that the high price the auctioneer starts at is generally close to the value many bidders are valuing the equipment at.