Mergers and Acquisitions from Both Viewpoints

Leaders of large wine companies detail reasoning behind current flurry of deals

by Paul Franson
wine winery vineyard sales mergers acquisitions WIFS
The targets of winery acquisitions has changed dramatically during the past 10 years, according to Zepponi & Co. and other presenters at the Wine Industry Financial Symposium.
Napa, Calif.—Though you might expect the biggest concerns at the 25th Wine Industry Financial Symposium held Sept. 26 and 27 in Napa to be the economy, the election, water or the grape crop this year, no topic got more attention than mergers and acquisitions (M&A).

From symposium founder David Freed’s keynote—and possible finale—to two separate panels of experts and inclusion in most other talks, the meeting was abuzz about the unprecedented stream of acquisitions of wineries, brands and vineyards in the past few years—not to mention mergers, but those were primarily in distribution and retailing, and are equally impacting the industry.

The two panels about mergers and acquisitions offered different perspectives. The first on Sept. 26 was moderated by George Coope, senior director of strategy and analysis at M&A advisor Zepponi & Co. It included executives from two acquired companies plus one firm that had sold a winery.


    Gallo: Recent purchases
    Orin Swift Cellars (2016)
    Talbott Vineyards (2015)
    Souverain (2015)
    J Vineyards & Winery (2015)
    Columbia Winery (2012)
    Cypress Ranch & Palisades Ranch in Napa County (2015)
    Ranch Winery (2016)
    Asti Winery (2015)

    Gallo: 2000-2012 purchases
    Edna Valley Vineyard (2011)
    William Hill Estate (2007)
    Barefoot Cellars (2005)
    Bridlewood Estate Winery (2004)
    Louis M. Martini Winery (2002)
    Mirassou (2002)

    Jackson Family Wines: Recent purchases
    Field Stone Winery & Vineyard (2016)
    Copain Wines (2016)
    Penner-Ash Wine Cellars (2016)
    Siduri Wines (2015)
    Carneros Hills, formerly Buena Vista (2012)

    Jackson Family Wines: 2000-2012 purchases
    Chateau Potelle Winery (2007)
    Arrowood Vineyards & Winery (2006)
    Byron Vineyard & Winery (2006)
    Freemark Abbey Winery (2006)
    Murphy-Goode (2006)
    Robert Pecota (2006)
    Matanzas Creek Winery (2000)

The second panel, held Sept. 27, was moderated by Robert Nicholson, principal of M&A advisor International Wine Associates, and included executives from two major acquirers.

Both moderators offered almost-exhaustive lists of acquisitions.

What’s driving acquisition?

Coope introduced the subject by listing the factors driving consolidation:

Premiumization: Wineries are looking to expand their portfolios with wines selling for more than $20 per bottle at retail. Whereas in 2005 Constellation Wines bought the Rex Goliath brand selling for $7 to $9, it recently acquired The Prisoner and Meiomi, which sell for more than $20, for example. Likewise, Gallo bought Barefoot ($5-$7) in 2005 and Orin Swift Cellars ($30-$100) this summer. Even The Wine Group upgraded from $10 Big House and Cardinal Zin to Benziger Family Winery in recent years.

Distributor and retailer consolidation: As distributors and chains consolidate, wineries need larger portfolios to keep larger distributors invested. In 1995, there were 1,800 wineries and 3,000 distributors. Now there are more than 8,800 wineries in the United States and 675 distributors. A number of large distributors recently merged, and the top 10 account for more than two-thirds of the industry’s sales, the top four more than 60%.

Geographic expansion: California wineries are acquiring properties and wineries in the Pacific Northwest, and Washington’s Ste. Michelle Wine Estates bought a winery in Sonoma (Patz & Hall Wine Co.). It already acquired Stag’s Leap Wine Cellars in Napa Valley and also owned Conn Creek Winery there. Wineries are also buying property in the Central Coast.

Coope predicted robust M&A activity is likely to continue at least through 2016 due to the above trends plus aggressive acquisition by Gallo, Jackson Family Wines and Constellation Brands that will likely pressure competitors to follow.

In addition, low interest rates and availability of capital encourage strong market activity, and foreign investors are attracted by the U.S. market and its growth (as well as wealthy Chinese investors seeking investments outside China). Private equity has excess capital to invest and continues to be selectively interested.

Coope did raise a warning: An annual study by Pepperdine University’s Graziadio School of Business Management of private capital sources including commercial banks, asset-based lenders, mezzanine providers, private equity and venture capital notes that it takes an average of seven to 10 months to close most deals, but some stretch to years.

More surprisingly, more than a third of deals are not completed due to inaccuracies and inconsistencies in financial statements; undocumented or poorly written agreements; undisclosed liabilities; missing permits, licenses and registrations; non-compliance with permits; real property title or environmental problems and vineyards and/or facilities requiring significant near-term investment.

Following Coope's introduction, the three panelists discussed their experiences. Russ Joy is vice president of Patz & Hall of Sonoma, which recently was acquired by Ste. Michelle. Matt Dusi is general manager of Robert Hall Winery in Paso Robles, which recently was acquired by O’Neill & Co. David Faris is vice president of corporate development at F. Korbel & Bros., which sold two wineries in Sonoma Valley—Kenwood Vineyards to Pernod Ricard and Valley of the Moon to the Stewart family of British Columbia, who earlier acquired Lake Sonoma Winery from Korbel and own Envolve Winery in Sonoma Valley. They also own Quail’s Gate Winery in the Okanagan Valley.

The wineries were in very different positions. It was well known that Robert Hall was for sale; the founder had died after he resolved to sell and had brought in Dusi as a manger. Hall’s widow continued the process when he died.

The four partners who owned Patz & Hall weren’t intending to sell the winery, though they were taking steps to transition from family to professional management. “I expected a sale in maybe 10 years,” Joy said. However, Ste. Michelle was looking for a strong Pinot Noir company such as Patz & Hall.

Korbel is, of course, a powerhouse in sparkling wines, but it expanded into still wines in 1995. Eventually the owners decided to return to their strong niche of sparkling wines. Brown Forman acts as Korbel’s marketing and sales arm—a fourth tier in the channel, Faris calls it—but Korbel had to develop and manage its own efforts for table wines. “Still wines were too hard. They wanted to simplify things.”

They sold two of the wineries to a Canadian wine family, and in a very public process, the owners of Italian winery Banfi negotiated for Kenwood, then backed out at the last minute.  Faris said that caused huge problems. “Distributors lost interest, and it took two years to recover.”

As a result, they were exceptionally secretive in dealing with Pernod. Only three people, including Faris and owner Gary Heck, were initially involved. “It could not fail,” Faris said.

In Robert Hall, O’Neill secured both a winery facility and significant vineyard holdings, but Patz & Hall’s reputation was based on long-term relationships with well-known independent growers. “Ste. Michelle determined that grape supply was assured,” said Joy, noting that the winery only makes 30,000-40,000 cases and expects to grow modestly to 60,000. “They assured us that they didn’t want to mess things up.”

Banfi wanted Kenwood’s winery and adjoining vineyards, about 30 acres, but didn’t consider the winery’s 170 acres of other vineyards important. Pernod did. Quail’s Gate wanted the Valley of the Moon winery, plus 65 acres of vines.

One issue for Pernod was that Korbel and Valley of the Moon were providing some production capacity for Kenwood, and they agreed to continue to do so temporarily. The winery has now expanded its capacity, and Faris admits that he’s not sure where Kenwood will find grapes to expand in the tight market.

A word from the acquirers
The next day, Robert Nicholson moderated a panel featuring two big acquirers, Gallo and Jackson Family Wines. Roger Nabedian is senior vice president and general manager of E. & J. Gallo Winery and rarely speaks publicly. Hugh M. Reimers is president of Jackson Family Wines.

Nicholson introduced the subject, noting that current U.S. wine market growth is fueling winery, brand and vineyard acquisitions, generally at increased valuations.

He said, “There are few distressed sales now, since following the great recession the ‘real market’ has returned. Values are firm for most assets.

American winery buyers seek to improve their market leverage and expansion into new categories, according to Nicholson. International buyers want to improve their access to U.S. distribution and diversify assets (particularly Chinese buyers for the latter).

Nicholson noted that all buyer groups are active now—wealthy families, international, public and financial buyers including some overseas. Lifestyle buyers, however, have mostly disappeared.

He also said that winery valuation multiples have risen a bit, from 6 to 10 times EBITDA and two to three times revenues before 2000, to 6.5 to 14 times EBITDA and 1.5 to four times revenues since 2012 (Figures may or may not include vineyard value). He also noted that different buyers have different ways of valuing wineries or brands.

Public wine companies such as Constellation Brands (The Prisoner and Meiomi) and Treasury Wine Estates prefer to buy brands only and remain asset light to improve their financial ratios. (Treasury inherited leases on vineyards owned by a REIT when it bought Diageo.) 

Family and private wine companies seek real estate appreciation in owning winery and vineyard assets, including Gallo buying Talbott, Asti and The Ranch; Jackson buying Field Stone, Penner-Ash and Copain; Huneeus buying VML Winery and the owners of Fiji Water buying Hop Kiln.

Gallo’s Nabedian noted that Gallo looks to long-term growth and buys properties to secure winery facilities or vineyards, buy brands that have a unique position in the market, or because it’s less costly to buy rather than build—either a brand or hard assets.

Reimers said Jackson bought the Carneros Hills winery, formerly Buena Vista’s production winery, because “It’s incredibly expensive to permit and build a winery. It can cost $100 million. Carneros Hills needed a lot of love, but it let us continue to grow LaCrema.”

Reimers explained that Jackson now buys relatively small ($5 million
to $30 million) brands that complement and expand their portfolio upward. “They need to be well above Kendall-Jackson and LaCrema.”

He admitted that some acquisitions have not worked as well as others. “Legacy (Arrowood, Byron and Freemark Abbey) took years to start growing,” but Murphy-Goode came at a good time to help the company get through the recession without compromising brands.

Nabedian believes that a lot of the current acquisition activity is a backlog from the recession, including pending generational changes.

Reimers said Jackson acquired North Coast properties at a discount as a result of the recession in 2011 and 2012. “LaCrema is a $20 wine, and it didn’t work with the inflated Pinot prices in Sonoma. So we acquired 3,000 acres of vineyards at $10,000 to $13,000 per acre. We also moved into Oregon. Jackson is a real-estate company disguised as a wine company,” he added.

Nicholson concluded by forecasting the future M&A environment:

• Wine industry consolidation of wholesalers, retailers and wineries will increase leading to a decrease in viable winery targets.

• Viable profitable targets will continue to command strong multiples, but others may have difficulty selling, and vineyard values will continue to increase, applying pressures on supply.

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