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Monday, April 8, 2013, 6:30 am

Top wine M&A players see opportunities

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    The year 2012 was a big one for wine-related property and brand transactions, and industry expectations are that 2013 deal-making also will be busy.

    2013 Wine Industry ConferenceAt the Business Journal‘s Wine Industry Conference on April 18, five of the most active players are set to be part of a panel discussion on what’s happening and the potential for more.

    Peter Byck

    Peter Byck

    Part of a family that owns and operates Paradise Ridge Winery in Santa Rosa, Peter Byck co-founded Winery Exchange of Novato more than a decade ago and transformed it into a company that makes wine, spirits and beer for a number of retailers and companies worldwide. In recent years, the company has started acquiring and creating its own brands, including Echelon, Our Daily Red, Orleans Hill and Ogio.

    Dennis Carroll

    Dennis Carroll

    Dennis Carroll 13 years ago joined Derek Benham in what became the Purple Wine Co. brand maker and Sonoma Wine Co. large-scale custom vintner. Purple Wine has built several brands, including the large Mark West pinot noir brand sold to Constellation Brands last year for $160 million, recent launch of the Cryptic brand and purchase of the Four Vines brand.

    Bill Foley

    Bill Foley

    Bill Foley II, executive chairman of Fidelity National Information Services, got into the wine business with Central Coast acquisitions in 1996 and has since expanded industry holdings to include more than 1 million cases of production in California, Washington and New Zealand. Last year, he acquired several North Coast wineries, brands and vineyards such as Langtry Estate and Lancaster Estate.

    Pat Roney

    Pat Roney

    Through Vintage Wine Estates, Pat Roney, veteran of top-executive wine and retail positions, and Leslie Rudd have acquired or taken a stake in several North Coast wine production facilities, brands and related companies in the past few years. Last year, the company acquired the large former McConnell custom winery in Mendocino County as a future base of production.

    Jeff Wesselkamper is chief legal officer and executive vice president of 5 million-case-a-year Jackson Family Wines. The company is said to have completed more than a dozen vineyard transactions last year, including several hundred acres in the North Coast. The company has been vying for large vineyards in Oregon as well.

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    They talked to the Journal about some major factors influencing wine mergers and acquisitions.

    How active has your organization been in mergers and acquisitions?

    Peter Byck: We have done two deals in the last few years. We bought the Echelon brand from Diageo two years ago and closed a deal to buy the market leading USDA-certified organic wine brands Our Daily Red and Orleans Hill at the end of 2012.

    Dennis Carroll: [Editor's note: Mr. Carroll is answering as someone who has consulted on wine-related transactions for 13 years, including for Purple Wine, and not for the company itself.] I have continually looked at deals over the past 13 years. It has been an ongoing conversation and analysis during that time. Several deals were completed during that time period, however many, many deals have continually been reviewed, discussed and analyzed.

    Bill Foley: Active. We have acquired four wineries, including vineyards and facilities, during 2012, one of which was in New Zealand. Also acquired four vineyards in the U.S. in 2012.

    Pat Roney: We have been somewhat active and intend to continue to acquire brands and wineries as the opportunity arises. We also intend to continue to focus on organic growth as well as new brand development internally.

    Jeff Wesselkamper: The acquisition of existing wine businesses — brands, wineries and vineyards — has been an important part of Jackson Family Wine’s growth story. Over the years, we have been lucky to be in the right place and financial position to acquire a number of well-respected brands, including Matanzas Creek, Murphy Goode, La Jota, Freemark Abbey, Arrowood and Byron. I don’t want to down play the importance of those acquisitions.

    Our success, however, has been built on the quality of our coastal vineyards. Over the past 12 to 18 months, our main focus has been on acquiring high-quality vineyard land.

    How does M&A fit into your growth strategy? How have wine sales and supply of inputs changed those plans?

    Mr. Byck: We believe M&A is a nice way to augment the strong organic growth of the company. Even though we’re mainly focused on wine M&A, we’ve also considered transactions in other categories such as beer and spirits. Since we’re mainly a non-asset based company we have flexibility regarding supply and demand variations. We carefully consider the supply and demand ramifications when analyzing a possible transaction.

    Another key area where we are considering M&A is in the cloud-based information system segment of the industry. Our TradePulse business unit is the leading provider in this segment and has many of the top players in the industry using its data collection and depletion reporting product and services.

    Recently we’ve developed a number of additional cloud-based applications such as pricing, trade management, retail execution and customer resource management based on the TradePulse system. We’ve experienced a very strong demand for these best-of-class cloud-based solutions and are searching for complementary acquisitions for the TradePulse business.

    Mr. Carroll: M&A has been and will continue to be an attractive component of growth for many wine companies. Supply fluctuates year to year given the agricultural aspect of our business. That is simply a fact you have to deal with as you grow individual brands and the total company. The most important variable for an acquisition is the purchase price relative to the growth potential of the acquisition brand.

    Mr. Foley: M&A was the basis of obtaining cost saves to spread general and administrative expenses over a larger base enabling the achievement of significant synergies. The market has been improving of late so value opportunities are not as prevalent as over the past several years. At the present time we are concentrating on exploring additional vineyard acquisitions. With supply constraints and increasing pricing from growers we are focused on improving vertical integration hence the desire for additional vineyards.

    Mr. Roney: Acquisitions continue to fit into our growth strategy and we are currently evaluating a few opportunities. Certainly understanding long term grape supply and wine supply availability factors into all of our considerations.

    Mr. Wesselkamper: You can’t make great wine without great grapes. The Jackson family has always fundamentally believed that owning premium vineyard land and controlling our grape supply has been, and will continue to be, critical to our success. So we are always looking at potential land acquisitions.

    As a private company with a deep brand portfolio and significant control over our grape supply, we have a lot of levers at our disposal to manage supply-and-demand fluctuations. Short-term dislocations in supply and demand may make us more inclined to “sit out” or “get in” at any given point in the acquisition cycle but do not change the overall long-term strategy.

    What geographic areas and types of opportunities are the most attractive for your business?

    Mr. Byck: Since Winery Exchange has global sourcing, winemaking and sales capabilities we are open to many types of opportunities and global geographies. We are however looking for deals that complement our business and do not add too much complexity which results in a preference for California produced beverage alcohol products and U.S.-based information products.

    Mr. Carroll: Anywhere domestically. It is trickier outside of the country for a smaller company to execute. 

    Mr. Foley: California, primarily Napa and Sonoma and New Zealand.

    Mr. Roney: We focus more on brand strength, cash flow, direct to consumer positioning, three tier strength and upside opportunity than we do on geographic fits. Certainly we would like to acquire a Central Coast winery and we do consider acquisition of an import portfolio to be potentially of interest. In all cases, AVA (i.e., winegrowing region) considerations are after our primary hurdles are met.

    Mr. Wesselkamper: Anywhere you can grow exceptional fruit to make world-class wines. Elevation and cool, coastal mountains, ridges and benches are our primary focus.

    How many of the opportunities you come across these days are viable?

    Mr. Byck: Probably about 10 percent are viable. We try to quickly determine whether a deal is viable or not so as to not waste too much of the organizations’ time on something that’s ultimately not a fit.

    Mr. Carroll: This depends on what your acquisition strategy revolves around. Are you trying to acquire brands from a strategic portfolio perspective or from a purely financial perspective? If it is from a strategic perspective, there are very few deals that make it through a company’s filter. If it is simply financial, this broadens the potential candidates.

    Mr. Foley: Very few.

    Mr. Roney: Of all opportunities we see, less than 5 percent get to the consideration level. There are a lot of opportunities to acquire push brands, small-margin opportunities, workout situations and over-priced deals. We have little interest in any of these.

    Mr. Wesselkamper: Given the number of vineyard acquisitions we have closed in the last 12 to 18 months — and those in the pipeline — I guess I would have to say a lot of them have been viable.

    What are the top make-or-break indicators you look for in a deal?

    Mr. Byck: The transaction needs to be (earnings before interest, taxes, depreciation and amortization) EBITDA-accretive, complement our portfolio and be synergistic with our nonasset-based model and capabilities.

    Mr. Carroll: Purchase price relative to growth opportunities, quality of accounts, on-premise and off-premise account mix, account concentrations, cost of goods profile and distributor network.

    Mr. Foley: We are most interested in asset-heavy businesses, including winery facilities and vineyards. Not virtual brands.

    Mr. Roney: Internal rate of return on invested capital is important to us as well as immediate positive cash flow. We don’t have the patience or desire to invest in opportunities that will take five to 10 years to provide a return. The quality of the distribution is important as well as the direct-to-consumer business currently and the opportunities to enhance that segment. It is also important to us early on to have confidence that a deal can get done.

    Mr. Wesselkamper: Can the property grow great grapes? Does the seller understand his or her assets and the market well enough to be realistic about price so that it is worth investing our — increasingly limited — time and resources on discussions? How does it fit with our current brand portfolio and needs?

    How have prices for wine-related real estate been changing? How is that affecting the economics of a deal?

    Mr. Byck: Since we’re mostly interested in nonasset-based entities we generally do not consider purchasing real estate and do not assign resources to that area of research.

    Mr. Carroll: I try to stay away from acquisitions with winery assets attached to the transaction. Physical assets usually are not necessary for acquisitions that I have had interest in. Typically, the types of brands that I am interested in acquiring don’t need a sense of place to be successful or are they too big that I can’t service the production with existing or contracted facilities.

    Mr. Foley: Prices have been firming and even increasing which makes M&A difficult.

    How has the landscape for wine M&A changed recently?

    Mr. Byck: As the economy continues to improve and the wine industry continues to grow there seems to be more and more buyers on the market making it more competitive for good deals.

    Mr. Carroll: Deal activity seems to be as robust as it has ever been. Although anecdotal, it seems there are fewer buyers than sellers. Consolidation has taken place over the last decade, and I am not sure there are as many strategic buyers that there once was. Financial buyers continue to be interested in the wine space, although they require higher transaction amounts to satisfy their capital-deployment levels than many transactions can generate.

    Mr. Foley: Very active involvement by large private companies. Public companies seem content to hold onto existing assets.

    Mr. Roney: The landscape for M&A deals is always in a state of flux. Whether its higher or lower land prices, changes in the ultra premium pricing demand at retail, market trends, lack of credit or excess supply of cheap funds, entrance or exit of lifestyle buyers, large spirit companies love affairs or disdain for wineries, etc. things are always changing. The key for us and I assume for most buyers is to focus on what makes sense for you regardless of what is happening now or two years ago or what may change again in another few years.


    Update, April 12, 2013: Jackson Family Wines President Rick Tigner originally was set to be on the conference panel. In his place is set to be Jeff Wesselkamper, chief legal officer and executive vice president. Mr. Wesselkamper’s comments were added April 12.

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