FA Alpha Daily

Creating a spirits powerhouse

MGP Ingredients (MGPI), known for alcohol and specialty products, is undergoing a strategic transformation. MGPI’s acquisition of Luxco in April 2021 enabled vertical integration into branded spirits, resulting in synergies by combining its production capabilities with Luxco’s brand portfolio. In today’s FA Alpha Daily, we explore how this transaction has boosted profitability and positioned MGPI for growth.

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Everyone appreciates transformational acquisitions, particularly when the underlying business offers numerous potential synergies. This is precisely the case with MGP Ingredients (MGPI), which has historically provided alcohol, specialty wheat proteins, and starches. In April 2021, MGP completed a significant $475 million acquisition of Luxco, a beverage alcohol products producer with a diverse portfolio of brands.

This transformative deal expanded MGP’s product portfolio into branded spirits and significantly changed the combined company’s trajectory. As a producer for over a decade, MGP had established production facilities and supply chain infrastructure but primarily generated revenue from bulk sales, supplying alcohol to other companies for use in beverages and industrial applications.

MGP sought to vertically integrate and enter the higher-margin branded spirits segment for its next phase of growth. The Luxco acquisition presented an opportunity to realize this strategic goal at scale.

Luxco owned a diverse portfolio of brands such as Ezra Brooks, Rebel, and Yellowstone. It had strong distribution networks and sales teams promoting its brands.

However, Luxco faced challenges in guaranteeing supply to meet the increasing demand for its products. It relied on third-party producers for its alcohol needs. This dynamic introduced inefficiencies and supply risks.

The acquisition created a fully integrated spirits company with production and brand ownership capabilities. MGP gained a sizable portfolio of established brands while Luxco secured access to MGP’s large distillation facilities.

Management expected significant synergies from leveraging these combined strengths. MGP could use its alcohol for Luxco brands at lower costs than third-party suppliers. Luxco benefited from MGP’s production expertise and supply reliability.

Following the acquisition, MGP also expanded its customer base to include retailers and distributors. It could now sell its alcohol not just as bulk ingredients but also as branded super-premium spirits.

Years after the acquisition, MGP has realized substantial synergies. It has invested over $16 million to expand distillation capacity dedicated to Luxco brands.

Production efficiencies allowed MGP to grow Luxco brand volumes profitably while maintaining margins. SG&A expenses per unit also declined as the companies integrated sales teams and consolidated resources.

MGP’s operating income increased by 80% and the stock price has appreciated over 40% since the acquisition on the back of its success in integrating Luxco.

Furthermore, our EEA shows that analysts expect this company to achieve higher Uniform return on assets (‘‘ROA’’) going forward.

The market is just beginning to recognize the transformed company’s significant earnings power and long-term potential.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.

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