Out of the ashes: Why pre-pack deals have left drinks suppliers raging

The collapse and subsequent sale of craft beer distributor Eebria to Beer52 has sparked a fresh debate over the ethics of pre-pack administrations.

This practice – known colloquially as ‘phoenix-ing’ – involves a business facing insolvency appointing administrators before all or part of its assets are immediately sold to a new ‘phoenix’ company.

This company could be – as in the case of Beer52 and Eebria – set up by an unconnected third party buyer, or – like with East London Liquor Co – created by the failing business’s existing directors.

Phoenix-ing has become the favoured vehicle for acquisitions in craft beer and spirits in recent times. In the past 12 months, Black Sheep Brewery, Brick Brewery, Purity Brewing, East London Liquor Co, North Brewing and now Eebria are among those to have been sold to new (or existing) owners in pre-pack deals. Brew By Numbers, meanwhile, briefly traded in administration before being sold to private investment group Breal.

How do pre-pack administrations work?

It’s fair to say the practice splits opinion. Proponents argue it allows an otherwise doomed business to continue with minimal disruption, and protects jobs that would otherwise be lost.

Julie Palmer, a partner at insolvency firm Begbies Traynor, says that while pre-packs are not a “silver bullet”, there is “overwhelming evidence they are a great vehicle for saving businesses and jobs”.

Critics, however, argue pre-packs let previous management off the hook for running a business into the ground, allowing them to stiff creditors and investors in turn. They claim the system also often fails to protect the very jobs new owners proclaim to have “saved”.

Palmer explains that because pre-pack administrations involve the purchase of a business’s assets and not the shares in the business itself, any debts from the old business are not transferred to the new ownership, while previous shareholders are also wiped out.

“By definition, it’s an insolvency process,” she says. “There isn’t enough money for all the creditors to be paid. Lenders will often have security over fixed charge assets, while employees and HMRC have preferential status, but it’s the unsecured creditors that effectively sit at the bottom of the pile, and will often get a small if any dividend at all.”

Why has Eebria’s pre-pack sale provoked such anger?

In a letter sent to Eebria customers, Beer52 CEO Fraser Doherty admitted – due to their status as unsecured creditors – it was unlikely brewers owed money by Eebria would see a return on outstanding invoices. That hasn’t gone down well with those affected.

Richard Archer, co-founder and managing director at Utopian Brewing, says his business has been hit “five or six times” by pre-pack sales, in one instance for more than £20,000.

He points out that because Eebria’s model is based on selling finished product from hundreds of breweries, its new owners face little incentive to square up the previous owner’s debts.

“People like us have no leverage and that’s why it’s raw,” he says. “There are so many small independent breweries and most are pretty interchangeable. If we turn around and say we don’t want to deal with them any more, there are other businesses that will.”

Palmer counters that, while some shortfall is inevitable, businesses can still opt to trade with the new company, which wouldn’t be possible if it was allowed to go under.

“They might have lost the value of the invoices, but they can still choose to have a relationship with that business,” she says.

Will Eebria continue after being sold to Beer52?

Beer52 is keen to stress that in the case of Eebria, its deal was the only one on the table that would have preserved the platform in its present form.

“We were the only bid that was looking to keep the platform running,” says Beer52 CFO David Gammie. “The rest – we’ve been told – were all only picking up bits and pieces of the customer database.”

He adds the directors of the old Eebria Limited, while still being employed by Beer52, hold no equity in the phoenix company.

Despite this, many brewers – including Utopian – have already taken their products off the platform, frustrated by Beer52’s claim the new business was “now well-capitalised with a strong balance sheet”.

Andy Parker, founder of Elusive Brewing, says he’ll need to see what communication is forthcoming from Beer52 before deciding to relist with the distributor.

“Eebria has been great to us. They’ve always been easy to work with and have generated us new business,” he says. “But we have no relationship with Beer52 and I don’t want to give a random entity credit.”

Gammie says Beer52 “completely understands that some suppliers are going to be unhappy”.

“We’re speaking to producers to explain who we are for our plans for the platform are. We want to keep it running because we believe it is an important route to market,” he adds.

Should businesses have to go trade in administration before being sold?

A further criticism levelled at pre-packs is that – because the deals are often thrashed out without the knowledge of creditors, and with the business continuing to trade – suppliers may find themselves unknowingly fulfilling orders for which they will never get paid.

Could and should failing businesses, therefore, have to appoint administrators before negotiations over a sale can begin?

Palmer says, however, that once it’s known a business is going into administration, the chances of there being a viable business to rescue diminish greatly.

“Once the outside world knows about the administration, the perceived value can crash very quickly,” she says. “And without a pre-pack, once an insolvency practitioner is appointed we don’t have a magical pot of cash to trade that business and meet ongoing liabilities.

“That makes it difficult to keep trading unless you’ve got somebody who’s willing to provide external funding to preserve value.”

In the case of Eebria, The Grocer understands third parties were first approached about buying all or parts of the business at the end of January. Parker explains that Eebria typically operates on a two-week basis with its suppliers, meaning most brewers will have been paid no longer than a fortnight before the business went into administration. 

Archer says, however, that if pre-pack is to be accepted as “an established feature” of the industry, then both creditors and shareholders “should be able to expect a full end to end process that is both fair and transparent”.

He adds: “Presently the administrator is required by law to treat all creditors the same according to their status, but there is no legal protection on the buying side. The new acquirer is completely free to do individual, selective deals with creditors of the old company.”

Beer52 is keen to stress it won’t be giving preferential treatment to any of its suppliers. “Everyone will receive the same treatment,” Gammie says. “We’re not picking and choosing in terms of how we are operating it.”

Will jobs be saved by Beer52’s purchase of Eebria?

Even a pre-pack, however, is no guarantee of salvaging a viable business and – by extension – saving jobs.

Under transfer of undertakings for the protection of employment (TUPE) regulations, a new owner must commit to taking on existing staff for the business being purchased. However, if new ownership subsequently decides to restructure and make redundancies, employees could still find themselves out of work.

Recent consolidation at Keystone Brewing – the new name given to Breal’s brewing operations – is an example of how pre-packs are “not always as clear cut as saving jobs”, Parker says.

Gammie, meanwhile, is unable to offer any long-term guarantees over the future of the 16 employees transferred to Beer52 under TUPE. “I’m not going to comment on employment side of things at the moment,” he says. “I’d rather not go into that.”

Palmer, however, is quick to stress TUPE means transferred employees have their rights protected and will at least receive full severance pay.

“You’ve probably got a better chance of your job surviving in the new company than the old one, but even if you are subsequently made redundant you still have your old employment rights,” she says.

Why are pre-pack administrations so popular?

The main argument given by advocates of pre-pack administrations is that they are the least-worst of all possible alternatives. Because of the significant costs associated with liquidation, Palmer explains, it’s unlikely to result in a better return for creditors.

She says other alternatives, such as a company voluntary arrangement (CVA), “often make it difficult to trade profitably” and still require that creditors accept “a reduced return on their liabilities”.

“Often administration can achieve the same thing, and it does it much more swiftly without that overhang over the old business that a CVA has,” she adds.

For small suppliers bearing the brunt of a succession of pre-pack deals while themselves peering into the abyss, that’s unlikely to offer much comfort, however.