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Mergers and Acquisitions from Both Sides

November 2016
 
by Paul Franson
 
 

 
Napa, Calif.—The biggest concerns at the 25th Wine Industry Financial Symposium held Sept. 26 and 27 in Napa weren’t the economy, the election, water or the grape crop. Instead, the meeting was abuzz about the unprecedented stream of acquisitions of wineries, brands and vineyards in the past few years.

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

What’s driving
current trends?

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 per bottle, it recently acquired The Prisoner and Meiomi, which sell for more than $20, for example. Likewise, 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. Wineries also are buying property in the Central Coast of California.


Jackson Family has been especially aggressive in acquiring Pinot Noir vineyards, buying 2,000 acres of vines and two wineries in Oregon.


Meanwhile 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.)


Coope did raise a warning: A study by Pepperdine University 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 at all.


Korbel is 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.


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. David Faris, vice president of corporate development at F. Korbel & Bros., said that caused huge problems. “Distributors lost interest, and it took two years to recover.”


As a result, Korbel executives were exceptionally secretive when they sold two wineries in Sonoma Valley—Kenwood Vineyards to Pernod Ricard and Valley of the Moon to the Stewart family of British Columbia.


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
On Sept. 27, Robert Nicholson, principal of M&A advisor International Wine Associates, moderated a panel featuring two big acquirers, Gallo and Jackson Family Wines.


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 noted that different buyers have different ways of valuing wineries or brands. 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.


Roger Nabedian, senior vice president and general manager of E. & J. Gallo Winery, 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.


Hugh M. Reimers, president of Jackson Family Wines, 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.”


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.

 
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