Issue link: http://winesandvines.uberflip.com/i/562166
September 2015 WINES&VINES 43 FINANCE Have there been any trends in deal size? DAY: Deal size has been increasing both in lending and M&A transac- tions. Much of this is being driven by the change in deal focus from tuck- in type vineyard acquisitions to brands and production facilities. MCMILLAN: Deals continue to grow, fostered by land values and overall multiples in the market, which is frothy at this point by most standards. HINDE: On the debt side, I haven't seen any different trends in deal size. BEAK: Deals of all sizes appear to be continuing to transact. BRODY: I think banks are broadly more comfortable with higher levels of exposure to the wine industry, and as a result deal size has contin- ued to increase. OTHER TRENDS Have you seen any other changes in wine finance during the past 12 months or related trends that impact financing? BEAK: We're seeing more activity from private equity and financial buyers and the associated deal structures that are required for those types of transactions. The wine industry is in a good position, especially in the premium-plus price points, although growth has slowed in other areas. There con- tinue to be significant risks (i.e., en- vironmental, drought, huge growth in craft beer and craft distilled bev- erages). The growth rate in terms of consumption has slowed some- what but remains positive. The ef- fect of the euro devaluation will definitely bring some serious strength to imports; that will affect some of the U.S. producers, espe- cially their export businesses. BRODY: I don't see any noticeable differences other than more private equity-backed opportunities. Pretty much a continuation of the trend line. The key question is: What hap- pens when a market correction ex- ists, or when exogenous factors impact the industry in a given year? MCMILLAN: Some added empha- sis on Small Business Administration loans. (See "How Wineries Use SBA Loans" on page 46.) Some discus- sion of REPO (repurchase agree- ment) financing has surfaced in discussions, but that is going to prove difficult for the fine-wine busi- ness. Family offices (private compa- nies that manage investments and trusts for single families) and funds being formed to invest in vineyards continue to be mentioned, but today there is more smoke than fire there. Hedge funds have been more en- gaged in the business, and REITs (real estate investment trusts) have been considering the wine business. Perhaps the greatest threat to wine finance is the change in the local mood in Napa, Sonoma and Santa Barbara (Calif.) with respect to zoning, permitting and negative impacts from traffic, tours and events. Investment is best made in more predictable environments. Some of the existing discussion vis-à-vis regulation has moved to the point of considering claw-backs of prior permitting. While the effort to keep ag areas from wanton ex- pansion is important, how that in- evitably is done will have an impact in financing. DAY: One of the significant changes has been the abundant supply in the bulk wine market. De- spite successive larger harvests from 2012-14 and much higher vol- ume on the market, the healthy end demand is keeping prices stronger than expected. Normally, with the volume of available inventory we're seeing currently, we would have ex- pected prices to drop more than they have. Some prices, like Napa Cab, remain surprisingly high, as negociants and opportunistic brands are still seeing strong case- good demand and can make a healthy margin even at the prevail- ing price per gallon. The other odd- ity in a market with quite a bit of bulk is that grape contracting for the 2015 harvest is still very active at good pricing. This again is a tes- tament to wineries seeing strong growth trends in case good sales and anticipating that growth con- tinuing in the coming years. One of the related things that we're very focused on in looking at deals is water. It's been a bit of a paradox that during the persistent drought, we've had successively large harvests. However, that doesn't mean that we aren't very concerned with our clients' water sources and access going forward. That has to be a consideration in any long-term deal we're working on. BISHOP: Land values for quality vineyards have continued to grow at exponential rates. As with all real es- tate it is location, but also areas that have specific qualities for certain va- rietals such as Pinot Noir have in- creased at even a greater pace. HINDE: Wineries' demand for prime vineyard land has remained strong and has been a trend for several years. Vineyard prices have in- creased especially in the ultra- premium locations. I believe we have some good runway left in this up cycle—both macro economically and for the wine industry—but many of the key decisions wineries and vine- yard owners make have ramifica- tions many years ahead, such as when they plant a vineyard (three to five years until fruit production) or materially increasing production (two to four years from harvest until that bottle of wine is selling). Can any of us say at this point in the cycle that in 2017, 2018, 2019 things will be going great given what's going on in the U.S. and global economies? Those are the years that major ventures being made today such as the aforemen- tioned will be coming online and will need to perform. This may seem funny coming from a banker whose job it is to make loans, but as a community bank (Exchange Bank) and a community banker, I want the wineries, businesses and vineyard owners I call my neigh- bors to prosper in the good times and weather the bad times. Many times these key decisions are made when everything is going really well and banks are falling over themselves to provide more debt. Debt is a useful tool, but like anything (it) can be destructive if overused. One of my core beliefs is that I want my clients to have a good night's sleep, and I think the window for these kinds of ventures is narrowing. My comments are not meant to be negative, but rather they are made as a prudent advisor to point out risks to keep in mind for my clients and the in- dustry in general. Wineries with healthy financials going into the 2008-09 recession were far more ready to capitalize on opportuni- ties than others that were lever- aged up due to recent large capital investments. I don't have a crystal ball, but there are signs for con- cern on the far horizon with the greater economy, which always has an impact on consumers' wine buy- ing choices. Ben Narasin is a venture capitalist and freelance wine journalist. His work has appeared in the San Francisco Chronicle, W i n e E n t h u s i a s t a n d o t h e r m e d i a outlets. ticular. McMillan is also the author of the bank's an- nual "State of the Wine Industry Report" and speaks about the topic regularly. WILLIAM BISHOP is the managing director of the San Francisco, Calif., office of BMO Harris Bank's Food and Consumer Group. Bishop established the group's West Coast office in 1998 to specialize in serving companies that produce wine, fresh fruits and veg- etables, seafood and other foods and commodities. Prior to joining BMO Harris Bank, Bishop spent nearly 25 years in domestic and international banking, fo- cusing on the food and commodity sectors, and held senior positions at Credit Agricole (Calyon) and Rabo- bank International.