August 11, 2016 – Forbes, “Wave Of Mergers And Acquisitions Sweeps U.S. Wineries”

Wave Of Mergers And Acquisitions Sweeps U.S. Wineries

Brian Freedman , CONTRIBUTOR
I cover food, wine, drinks, travel; host dinners; and consult on wine. Opinions expressed by Forbes Contributors are their own.

Over the past several months, there’s been a drumbeat of big-name mergers and acquisitions in the U.S. wine industry. In April, Jackson Family Wines acquired Penner-Ash Wine Cellars for an undisclosed price and in May they bought Copain (price unknown). May also saw the purchase of a majority share of Far Niente Wine Estates (price unknown) by GI Partners, a private equity firm that also possesses a majority of Duckhorn. The deal also included Nickel & Nickel, Bella Union, EnRoute, and Dolce. Also recently, E. & J. Gallo bought Orin Swift Cellars (price unknown), Constellation Brands purchased The Prisoner Wine Co. for approximately $285 million, and Krause Holdings, Inc., helmed by Kyle Krause, whose business interests most famously include the Kum & Go convenience stores, bought Barolo’s Vietti Winery (price unknown). And that’s just a partial rundown since April.

These are unlikely to be the only major deals in the wine industry this year. Indeed, for all the debate over whether wine itself constitutes a solid investment, whether amassing a collection of prestigious bottles, storing them properly, and holding onto them until their value peaks and the time arrives to sell them at a profit, the purchasing of wineries themselves seems to be the big investment play of the moment.

Helping to drive the trend are low interest rates, consolidation among distributors that is driving wine companies to bulk up to gain market clout, and expanding consumption.

And consumption has been skyrocketing, with a 20-year increase that has topped 70% and projections that the market in the United States will clear 344 million cases within the next four years, explained Pat Roney, President of Vintage Wine Estates, in an email. “The U.S. is the top wine consuming nation in the world and there’s strong global demand for fine U.S. wine,” he noted, adding, “This makes wine an attractive investment category not only for those of us in the business, but for those outside looking for investment opportunities.”

The role of distribution cannot be underestimated, either. With consolidation in that area of the wine market as well–Southern Wine & Spirits and Glazer’s  merged into Southern Glazer’s , which is now the biggest in the country; others are in the works, too–the larger wine companies that result from smaller wine brands being acquired by corporate entities allows them to play a greater role in the market both domestically and internationally. Interest in American wine isn’t just a stateside phenomenon, and leveraging the potential growth outside our borders will become ever more important in the coming years. With better, more robust representation of specific appellations and regions under one ownership umbrella, larger groups of wine brands with the same ownership become more attractive to large distributors looking to expand their own portfolios.

Most of the time that stories of these acquisitions are reported, the focus is on the winery itself, as well as the team that initially built that brand and whether or not they will stay on board under the new ownership. Less obvious yet arguably just as important is the additional acquisition of whatever back-stock of wine is still aging in barrel or tank, which allows for a more seamless perception of the transition among consumers even if the new owners replace the existing winemaking team—which they generally try not to do.


Penner-Ash Winery, one of the gems of Oregon, was recently purchased by Jackson Family Wines (Credit: Andrea Johnson).

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For all of the hard numbers of production, acreage, back-stock and more, there are other less obvious considerations, too. “We look for quality, we look for stories, we look for brand differentiation, we look for culture, and we look for partners we’re comfortable with,” said  Peter Kaufman, a Managing Partner at the wine investment firm Bacchus Capital Management. “We view ourselves as partners with these wineries, as opposed to owners or acquirers. And it’s not just phraseology; we try and live it every day with them.”

Before partnering with the nine brands in their portfolio—including respected names like Madrigal Family Winery, DeLille Cellars, and Sbragia Family Vineyards, among others—Bacchus considered 200 before deciding. That sort of attention to the fine-grained details of each wine brand individually is as close as any investor can get to an assurance that the resulting partnership will be fruitful for both parties—not just from a bottom-line perspective, but also from a qualitative one. “We won’t go into a situation if all we’re contributing is money,” Kaufman added. “We strive—I’m not sure we always succeed but we strive—to free up the winemaker and the winemaker’s staff to do what they do best, which is make and sell great wine. And we do our best to take a lot of the other burdens of running a business off of their shoulders.”

Along those burdens is land development. Many top producers own more acreage than they actually have planted, so the new owners have the opportunity to develop vineyards in addition to what’s already on-line and producing high-quality grapes.

Of course, the purchase of land isn’t always part of the deal—that, Vintage Wine Estate’s Pat Rooney explained, “depends on the deal and the price point. We produce and market wines from $10 to $100+. The wines on the higher end are estate wine brands which generally include both winery and vineyards.” When Vintage purchased Clos Pegasse, for example, the deal included the winery itself as well as 450 estate-vineyard acres. For brands on the lower-priced end of the spectrum, however, he noted that they typically don’t include land: “In these cases,” he explained, “we are able to use our long term vineyard relationships to supply the fruit and wines.”

Perhaps one of the great advantages to having a larger corporate entity, with far deeper pockets to work with, is the wine brand’s newfound ability to invest in equipment, to take fuller advantage of the land, and to fund the necessary soil studies and exploration of which rootstocks, grape varieties, and clones are best suited to a particular site—all with them aim of leveraging existing land to maximize quality and profit. Establishing a new vineyard is an expensive project, and requires far more preliminary work and study than just digging holes in the ground and planting vines. Not only can the new, larger investors typically afford this with relatively greater ease, but they are also incentivized to do so in order to increase production or diversify the brand’s range within the existing portfolio of wines.

As summer turns to fall, I expect to see more wine industry mergers and acquisitions, partnerships, and investments. If the economy continues to do fairly well, consumers will keep on buying high-end wines crafted by producers that are increasingly attractive to investors. And if the economy slows down, and consumers start buying less wine, or less-expensive wine, then those wineries will still likely be appealing from an investment standpoint, just for different reasons—owners may be willing to sell for less money in order to gain a cash infusion. Combine that with a growing market, consolidations in distribution, and demand for high-quality American wine both here and abroad, and there is no reason to assume that this wine world trend of increasing mergers, acquisitions, investments, and partnerships will slow down anytime soon.

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