Issue link: http://winesandvines.uberflip.com/i/742839
November 2016 WINES&VINES 15 WINE INDUSTRY NEWS N apa, Calif.—The big- gest 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 acquisi- tions of wineries, brands and vine- yards in the past few years. The two panels about mergers and acquisitions offered different perspectives. The first was moder- ated by George Coope, senior di- rector of strategy and analysis at M&A advisor Zepponi & Co., and included executives from two ac- quired companies plus one firm that had sold a winery. What's driving current trends? Coope introduced the subject by l i s t i n g t h e f a c t o r s d r i v i n g 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 ac- quired 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 consoli- dation: As distributors and chains consolidate, wineries need larger portfolios to keep larger distribu- tors invested. In 1995, there were 1,800 wineries and 3,000 distribu- tors. 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: Cali- fornia wineries are acquiring properties and wineries in the Pacific Northwest, and Washing- ton's Ste. Michelle Wine Estates bought a winery in Sonoma. Win- eries also are buying property in the Central Coast of California. Jackson Family has been espe- cially aggressive in acquiring Pinot Noir vineyards, buying 2,000 acres of vines and two win- eries in Oregon. Meanwhile public wine com- panies such as Constellation Brands (The Prisoner and Meiomi) and Treasury Wine Estates prefer to buy brands only and remain asset light to improve their finan- cial 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 spar- kling 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. Kor- bel & 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 Vine- yards to Pernod Ricard and Valley of the Moon to the Stewart family of British Columbia. Banfi wanted Kenwood's win- ery and adjoining vineyards (about 30 acres), but didn't con- sider the winery's 170 acres of other vineyards important. Per- nod 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 tem- porarily. The winery has now ex- panded its capacity, and Faris admits that he's not sure where Kenwood will find grapes to ex- pand in the tight market. A word from the acquirers On Sept. 27, Robert Nicholson, principal of M&A advisor Interna- tional 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, how- ever, 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, in- cluding Gallo buying Talbott, Asti and The Ranch; Jackson buying Field Stone, Penner-Ash and Co- pain; Huneeus buying VML Win- ery 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 win- ery 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 Jack- son 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 Jack- son 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, includ- ing pending generational changes. Reimers said Jackson acquired North Coast properties at a dis- count as a result of the recession in 2011 and 2012. —Paul Franson A SHIFT IN M&A TRENDS SINCE 2005 2012-2016 2005-2011 E. & J. GALLO WINERY Orin Swift Cellars (2016) Edna Valley Vineyard (2011) Talbott Vineyards (2015) William Hill Estate (2007) Asti Winery (2015) Barefoot Cellars (2005) Souverain (2015) The Ranch Winery (2016) J Vineyards & Winery (2015) Cypress Ranch & Palisades Ranch (2015) Columbia Winery (2012) JACKSON FAMILY WINES Field Stone Winery & Vineyard (2016) Chateau Potelle Winery (2007) Copain Wines (2016) Arrowood Vineyards & Winery (2006) Penner-Ash Wine Cellars (2016) Byron Vineyard & Winery (2006) Siduri Wines (2015) Freemark Abbey Winery (2006) Carneros Hills, formerly Buena Vista (2012) Murphy-Goode (2006) Recent Gallo acquisitions targeted winery assets at Talbott, Asti, The Ranch and Columbia, while Jackson acquisitions focused on Pinot Noir vineyards and brands. TOP STORY Mergers and Acquisitions from Both Sides