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42 WINES&VINES February 2016 VIEWPOINT Napa Fermentation Supplies is proud to be a West Coast Kärcher distributor since 1989. Our prices are the lowest and we have the complete product line available. We are also a Kärcher repair facility. Kärcher state-of-the-art high-pressure washers are distinguished by infi nitely variable operating pressure, water volume and temperature control, as well as precise chemical metering. Heated models incorporate a 90%+ fuel effi cient burner system, low fuel shut-off and complete machine shut-off at the trigger gun for maximum safety and performance. Contact us today! 575 ird St. Bldg. A Napa CA 94559 707-255-6372 | napafermentation@aol.com www.napafermentation.com attractive growth market for in- ternational wine producers, and owning a U.S. brand can provide significant credibility within the sales channels. Potential acquirers going forward will include com- panies such as Pernod Ricard and Concha Y Toro, which already own U.S. brands and may wish to increase their market presence, as well as other Western European, South American or Chinese com- panies seeking to strengthen their foothold in the U.S. market by acquiring a domestic brand and sales team. Although somewhat unpredictable, Chinese buyers continue to express interest in U.S. wine investments involving vineyards and real estate to diver- sify their holdings outside China. Private equity: It is no secret that the wine industry, with its long investment horizons, high working capital requirements and complex distribution structure, has not been a good fit for tradi- tional private equity funds. Purely financial investors are ill equipped to compete for acquisitions with strategic acquirers, who can typi- cally pay higher valuations based on synergies they bring to the transaction. Yet there is growing evidence that certain individual investors, funds and family offices may have found an appropriate niche in acquiring smaller, luxury- priced boutique brands. These brands can be efficiently managed to maximize margins and profit- ability, often predominately through the direct-to-consumer channel. Recent examples include the acquisition of Kosta Browne by J.W. Childs and the purchase of Brewer-Clifton by a private in- vestor group. We expect to see more of these acquisitions as in- sightful investors explore whether it makes sense to own several of these brands with the potential to share back-office functions and direct-marketing expertise. Factors potentially inhibiting acquisitions Impact of craft spirits and beer: Craft spirits and craft beer are growing rapidly and receiving sig- nificant attention, particularly from younger consumers. Craft is synonymous with experimenta- tion, and there has been notice- able erosion of wine's share in the on-premise markets as consumers choose to sample new cocktails and craft beers. Particularly in the case of larger, diversified beverage suppliers such as Constellation Brands, the craft sector threatens to divert acquisition dollars and attention away from the wine industry. Valuation as a balancing act: M&A activity historically is the strongest when buyers expect sales and profits to continue and sellers still have reasonable price expectations. The wine industry has experienced a period of growth since 2012, with many industry insiders of the mindset that sales will continue to be strong into the foreseeable future. This tends to increase valuations as both buyers and sellers believe significant growth can be achieved at relatively low risk levels. Based on past experience, buyers may begin to associate more risk with that growth the further into an expansion cycle we move, which can create a widening gap be- tween buyers' valuations and sell- ers' expectations. Difficult to rival 2015 transac- tion value: With Constellation Brands and Treasury Wine Estates spending close to $1 billion on two transactions in 2015 (Diageo and Meiomi), it is likely that 2016, even with significant continued acquisi- tion activity, will not match 2015 in total dollars transacted. Mario Zepponi, principal at Zepponi & Co., has extensive experience as a trans- action advisor with beverage alcohol brands, winery estates and parties seek- ing to create strategic alliances. George Coope, senior director at Zepponi & Co., has more than 25 years of investment and advisory experience in the wine, beer and distilled spirits. David Von Stroh, senior vice president at Zepponi & Co. has more than 15 years of investment and corporate advisory experience that includes mergers, acquisitions, joint ven- tures, and equity and debt financings.