Investment Dealers’ Digest – March 13, 2009
Vino Draws PE Play
Investment Dealers’ Digest – Kelly Holman, 2009-03-13
A glass of vin de pays might suffice for a steak frites dinner, but it’s the wineries snaking across the rolling hills of Sonoma County that have private equity financiers salivating. Whether the gamble on West Coast vintners will ultimately pay off remains to be seen, but the wine business is proving to be one area in mergers and acquisitions where deals are getting done.
Falling purchase valuations and a dearth of financing options have created attractive acquisition opportunities for private equity investors.
“There are a number of properties moving very expeditiously towards an exit, and that’s being driven by succession but also by financial issues,” says Stephen Kuhn, a managing partner at the San Francisco private equity wine investment firm Vinum Capital Management. “The economy has only accelerated deal flow, and valuations are decreasing.”
Kuhn says wineries that once commanded purchase multiples of 12 times cash flow during the M&A boom now draw six times Ebitda or less.
Vinum, a San Francisco firm, launched fundraising for its $250 million wine-focused fund last year, targeting midsize premium and superpremium winemakers producing anywhere from 20,000 to 150,000 cases of wine annually. Although it hasn’t closed the investment vehicle, the firm has secured investor commitments, Kuhn says.
On Tuesday, Sapphire Wines of Franklin, Tenn., bought Carneros Creek and Wildhurst wines from Briarcliff Wine Group of Danville, Calif., for an undisclosed sum. Earlier this month Fidelity National Financial chairman Bill Foley bought Kuleto Estate Family Vineyards of St. Helena, Calif., which produces less than 8,000 cases annually, from the California restaurateur Pat Kuleto through Foley Family Wines of Lompoc, Calif. Foley purchased the ultraluxury cabernet maker Merus, as well as Sebastiani, last year.
Of course, it would be wrong to suggest that the traditionally recession-resistant wine industry isn’t feeling any effects of the economic downturn. Consumers have cut spending on costlier wines, and restaurants have reduced their inventories of high-end brands to meet customer demand for less expensive wine. It’s not quite a favorable development for the financiers that have plowed money into superpremium wines with a cult following, such as Screaming Eagle. Former CSI Capital Management president Charles Banks and Stanley Kroenke, the owner of basketball’s Denver Nuggets, purchased the popular brand in 2006.
“Private equity firms that bought into ultrapremium or superpremium wines face the drop-off in high-end onpremise [restaurant] volumes,” says John Fisher, head of Fisher & Co., a wine and spirits investment banking firm in Menlo Park, Calif. “Private equity firms that bought positions in premium winemakers face more modest declines in off-premise retail, but declines nevertheless,” he adds.
Sales of wines priced at more than $20 a bottle fell 8% through mid-December, according to Nielsen Co. Just how much the downturn in consumer spending will affect higher-end brands is unclear. Before the price decline, however, the superpremium category was attractive enough that the veteran buyout financier William Price, a cofounder of TPG, acquired a minority stake in Kistler Vineyards in January 2008.
Fisher & Co. brokered the sale of Kistler to Price, who established the Three Sticks Winery in 2002 and is seeking to make white-knight minority-stake investments or acquire majority stakes in ultrapremium vineyards, according to Fisher.
“He was a vineyard owner and grower years before he started doing these deals. That’s instrumental in his ability to find little gems and run businesses,” says Fisher. The Kistler sale came less than a year after GI Partners, a private equity firm in Menlo Park, bought a controlling stake in Duckhorn Wine Co., a premium vintner based in St. Helena.
The chance to tap into the sheer number of privately held wineries facing generational ownership changes and growth financing needs is what appeals to some private equity investors, particularly those that invest in familyheld businesses.
A survey last year by Silicon Valley Bank and Scion Advisors, a wine business advisory group in Napa, Calif.,found that 51% of wineries in the West, primarily in California, Oregon and Washington, will change ownership within the next decade. It also found that 75% of California wineries were controlled by their original founders, 88% of which were launched after 1975.
“There’s a wave of owners thinking about exits, and private equity would be one mechanism for an exit to occur,” says Deborah Steinthal, a founding partner of Scion, a firm that helps wine owners prepare their businesses for sale.
In other cases, executives of companies like Oriel Wines are simply assessing their strategic options (Hickory Group is advising Oriel) in light of financing opportunities.
Oriel is a bit different from the traditional wine producers some buyout financiers are chasing. The company is smaller on the volume side only selling about 20,000 cases of wine a year, but its wines are produced from 24 regions in 10 countries and sold under the label Oriel.
“We have a very simple and clear opportunity to be the world’s leading fine-wine producer,” says John Hunt, founder of Oriel. “We are kind of a network of talented winemakers”, and “our model is not subject to the vagaries of the weather system.”
A serial entrepreneur, Hunt founded the Gran Clos winery in Spain’s Priorat region — which produces a uniquely flavored wine because of its slate-rich soil — and he is the chief executive of the $150 million special-purpose buyout company Overture Acquisition Corp. He is optimistic about the wine business.
“Wine has been growing faster than beer and liquor, and you’re starting to see interest from the beer companies in wine,” he says.