Issue link: http://winesandvines.uberflip.com/i/718029
36 WINES&VINES September 2016 FINANCE panded interest by non-strategic buyers (i.e. private equity firms). Acquisition multiples remain quite high, so for a private equity firm to invest, they must accept a potential lower near-term return with capital appreci- ation over time. The likes of Gallo, Kendall-Jackson, Cha- teau Ste. Michelle and others have been ac- tive in securing supply through vineyard acquisitions as Cabernet Sauvignon—and supply of certain other varietals—are becom- ing very tight. JH: Anyone who has picked up a newspaper knows that the M&A guys are having a great year. What hasn't been discussed in more de- tail—and from what was shared at the North Bay Business Journal's Wine Industry Con- ference in March—is the amount of wineries wanting to sell, but so far have not been able to sell. One panelist mentioned that he has anywhere from 10-15 deals a month come across his desk; he may look closely at one or two of them, at most. I believe there are a lot of winery owners in the baby boomer de- mographic looking to sell their wineries, and there are very few buyers for smaller winer- ies. Most of the headline-grabbing M&A deals has been for larger wineries being bought up by even larger ones. AB: The equity/investment/buyout market remains extremely strong. There's a lot of capital out there and a lot of interest in the U.S. wine business—from both U.S.-based and international strategics. I just returned from meeting with my colleagues in France and Italy, as well as a number of large Euro- pean wine and beverage players. They're all looking to increase their exposure to the U.S. market, and several things are driving that interest. For one, the U.S. is the largest wine-consuming nation on earth, with low per-capita consumption rates and room to grow. What's more, by global measures, the U.S. economy is doing quite well. The pre- miumization trend in the U.S. wine market also makes it very attractive for both inter- national and U.S.-based companies. Between the market dynamics and the debt dynamics, this is as good a time as we've ever seen. Have any players changed (banks, financiers, private equity, etc.)? JH: I don't think there have been as many new lenders to the wine industry as we've seen in previous "up" cycles, only a couple come to mind. We have many regular lend- ers that are active all the time as well as the fair-weather lenders that typically lend in the up cycles. AB: The existing players are as engaged as ever, and more are coming in. We're definitely seeing more banks in the arena, and private equity continues to be extremely interested. It's a highly attractive market for capital. MB: We have seen some very aggressive moves by newer banks to the wine space of- fering aggressive structure and pricing. WB: There have basically been no banks ex- iting the sector in 2015-16, and in fact some new entrants along with a couple of banks that previously were perimeter players and have now expanded their staff and wine portfolios. As mentioned elsewhere, private equity firms continue to show desire to par- ticipate in the roll up of the industry but dis- cover returns are of a long-term nature and potentially beyond their three- to five-year flip scenario mindset. Have there been any trends in deal size? WB: Deal size is dependent on size of winer- ies for sale. That said, by far the largest transaction that will occur in 2016 is the dis- tributor merger of Southern Wine & Spirits and Glazer's. This combination of the top two wine and spirits distributors will have significant impact on the industry. In general it should create greater efficiencies for all distribution and enhance wineries' capabili- ties on a go-to-market basis. Some smaller wineries and/or wineries without distinctive brands may be more challenged for support from the consolidated distribution system but also may need to look to direct sales op- tions and expanded wine clubs. AB: There's been a lot of activity and inter- est across the board, but not every deal is getting done. A deal has to make sense for the buyer, so we've seen a number of big deals over the past year. Bigger buyers have a lot of capital and a need to grow, so they're pursuing acquisitions that make sense in terms of their ability to take an asset and make it worth more under their tutelage. JH: We have not seen any trends in deal sizes, we see very small to quite large win- eries and vineyard owners needing capital or refinancing. We've also seen several smaller deals that may not make as much sense. The math for big players doing big deals is rela- tively straightforward, but for small players, the math gets harder. Smaller deals often face an uphill battle, and they have to re- ally work within whatever structure the buyer is able to bring. MB: I have not noted any particular trends. How might the Brexit impact U.S. wine industry finance? JH: Brexit is no doubt a significant event, but I think what most people don't know is that it will take years for Great Britain to decouple itself from the EU. I don't think we'll see any effects for our local wine industry nor wine industry lenders anytime soon. MB: Short-term consequences are not mate- rial as exports in general, and exports to Britain specifically are not a big factor in the premium end of the business today. To the extent that Brexit causes uncertainty and volatility in global markets, this could have a dampening impact on California producers trying to establish new export markets. Obviously, to the extent that the global economic confidence that is eroded as a re- sult of Brexit winds up triggering, hastening and/or exacerbating a global recession, that "GALLO AND THE WINE GROUP ARE UP-TIERING THEIR PORTFOLIO WITH SIGNIFI- CANTLY HIGHER PRICED BRANDS." William Bishop, BMO Harris Bank