Lenders watching inventories in ‘opportunistic’ market

Monday, November 16, 2009, 3:45 am

By Jenna V. Loceff, Business Journal Staff Reporter

Holiday sales key; growers urged to prepare for upswing

NORTH BAY – Wineries have to take a closer look at their inventories as the credit crunch is impacting lending, while industry observers say holiday sales will be a critical indicator of what’s in store for the industry.

A typical company outside of the industry might have 30 to 60 days of inventory. But wineries generally have two to three years and consequently rely on lines of credit.

“That is their financial flexibility,” said Michael Sullivan, senior vice president and regional manager for Wells Fargo.

In addition to the general tightening of credit, when a winery has to lower the price point to encourage sales, the total value of inventory is lowered. Banks lend on an inventory-based formula, maybe 50 percent of the value of cased goods.

“I think lenders are following those trends carefully,” said Bill Stevens, wine division manager of SVB Silicon Valley Bank.

Nonetheless, deals are still occurring and financing is available.

Vincraft, a recently formed group of industry executives and private-equity investors, began its acquisition of small high-end wineries with Kosta Browne, the Sebastopol-based pinot noir producer.

“There are successful wine companies out there that are buying up assets, additional fruit. There are some folks out there that are being opportunistic,” Mr. Sullivan said.

Mr. Stevens added that “wineries that can articulate, can talk to their lender about their plans, will get loans. The others will not.”

People who have not tweaked their normal business model for the times will fare worse than those who have changed things to consider what is going on now, Mr. Stevens said.

“There are still good ideas out there. If you start a winery today, it is still a good investment. It is just hard to get in,” he said.

He said valuations have come down. The multiples were at 14 to 18 times cashflow and now they are more like 10 times, he said.

Bill Rodda, vice president of American AgCredit in the capital markets group, said there may be more of that in 2010 if things continue to be challenging.

For growers, Mr. Rodda, encouraged them to weigh the risks of not being aggressive enough.

Although the amount of nonbearing acreage statewide is at a high, “This will change,” he said. “There is the potential of a shortage of fruit.”

“If you don’t plant vineyards today,” said Mr. Stevens, “you won’t have grapes five years from now.”

He said growers need to put their fear of the down market in check. “The short run may be bad, but they need to be prepared for the upswing.”

Typically the holiday season is a strong sales time for wineries.

Looking forward, Mr. Rodda said how well consumers respond to wine sales this holiday period “will give us a clue as to how the coming year will look.”