By Cody Jennings
There have been few years in recent memory as ripe for merger-and-acquisition activity as 2013 in the wine industry, particularly on the North Coast. A perceived shortfall in grape supply, easing credit terms and favorable wine consumption trends in the U.S. set the stage for a strong year. That momentum is likely to continue in 2014, including possible moves from international buyers.
Some motivating factors from 2012 carried over into 2013. Strategic wineries sought greater control over grapes via vineyard acquisitions and overseas buyers continued to capitalize on a relatively weak U.S. dollar. Within California, another large harvest stressed available tank space throughout the state, threatening to orphan some grapes on the vine and spurring interest in large-scale production facilities. Healthy demand for luxury winery and vineyard assets put Napa Valley once again at the forefront of deal activity in California.
Farther north, Oregon, which has long been eyed as a frontier area for high-end pinot noir, saw a flurry of investments from domestic and international buyers angling for a toehold in one of the fastest-growing wine regions in the U.S.
Back-to-back bumper California crops
Despite years of relatively modest plantings, California is expected to turn out over 4 million tons of grapes for the second consecutive year. The timing of 2012 and 2013′s “bumper crops” could not be more opportune, as the U.S. overtook France in 2011 to become the top wine-consuming country in the world.
Since mid-2012, when musings of a supply shortage began to surface, the pace of vineyard-acquisition activity has quickened, due in no small part to a corresponding uptick in grape and bulk-wine pricing, which reached dramatic levels in late-2012 and early-2013. Not surprisingly, as the apparent magnitude of the 2013 harvest came to light, bulk wine and grape markets softened, a trend which was compounded by the logical outcome of two back-to-back large harvests — strained crush and storage capacities.
Consolidation of wine-production capacity among larger strategic wineries is not a new theme, although this year saw a higher-than-normal proportion of stand-alone production facilities trade hands. In the North Coast alone, Entertainment Properties Trust sold four of its facilities in separate transactions to Jackson Family Wines, Duckhorn Wine Company, Francis Ford Coppola Presents and Lodi Vintners/Carneros Vintners.
In the case of EPR’s Hopland facility, Duckhorn’s acquisition may ultimately result in the displacement of significant production capacity that was previously operated as a custom-crush facility. A more abrupt event occurred last year when Gallo acquired the 60,000-ton Courtside Cellars facility in Paso Robles, leaving many Central Coast producers searching for tank space. Such acquisitions reduce available capacity for négociants and other wine producers that rely on custom-winemaking services, which in turn creates a greater demand for production capacity.
Napa in demand
With U.S. demand for wine outpacing production and the term “trading-down” comfortably out of earshot, confidence in premium U.S. wine assets is on the rise. Nowhere was this more evident than in Napa Valley, where an assortment of industry buyers and those from outside the business completed winery deals in 2013.
The headliner of the year was the Artemis Group’s acquisition of Napa’s heralded Araujo Estate Wines. The high-profile move by the French luxury goods conglomerate, which owns Chateau Latour winery in Bordeaux as well as other marquee nonwine luxury goods brands, may indicate a new round of attention from European companies that have been eclipsed in recent years by Chinese investment.
Earlier in the year, Yountville-based Goosecross Cellars was purchased by Golden Equity Investments, an affiliated investment arm of members of the Coors family. The acquisition was Golden Equity’s first investment in the wine space.
Two familiar faces to the industry also closed on Napa County wineries in 2013. Charles Banks, in partnership with the Schottenstein family, purchased the historic Mayacamas Vineyards. Vintage Wine Estates added Clos Pegase winery to its portfolio.
Napa has seen larger deal years. However, 2013 is noteworthy because of the diverse composition of buyers.
Oregon goes gangbusters
Another premium wine region found itself in the crosshairs in 2013. The Oregon wine industry’s tremendous growth over the past decade has come primarily from within, yet 2013 saw an explosion of investment from outside buyers, including major wineries in California, Washington state and France.
Beginning in the early spring, Jackson Family Wines, which is an umbrella company to a host of premium wine brands including Kendall-Jackson and La Crema, pulled off a string of land and vineyard acquisitions throughout the Willamette Valley, amassing over 1,400 gross acres of land with about 300 acres of high-end pinot noir and chardonnay vineyards.
The wine company subsequently added a production facility to its portfolio with the acquisition of the former Solena Winery facility in Yamhill, Ore.
In May, Washington-based Precept Wines strengthened its existing Oregon presence with the acquisition of the Yamhela Vineyard in Willamette Valley’s Yamhill-Carlton American Viticultural Area, bringing its total planted acreage in Oregon to 600 acres. A few miles away, Maison Louis Jadot made its first foray outside of Burgundy with the acquisition of Resonance Vineyard, a 20-acre property also located in the Yamhill-Carlton district.
New York-based private equity firm Bacchus Capital Management has also placed significant bets in Oregon. Beginning in 2011, it invested in Wines by Joe, one of the largest producers in the state. In May of this year, Bacchus acquired outright Panther Creek Cellars in McMinnville, Ore.
The entrance of major wine players into the state, coupled with Oregon’s rising prominence and attractive economics relative to other premium wine regions, will likely attract further investment in the coming years.
Implications for 2014
Many of the trends driving merger and acquisition activity in 2013 are likely to continue through the coming year. The pursuit of assets in new territories by large wine companies in 2013 will likely stimulate further moves in 2014, possibly among international companies seeking to take advantage of favorable exchange rates in the face of creeping interest rates.
While there is still a question as to the overall domestic grape supply equation, the dramatic rise in grape and bulk-wine prices witnessed earlier in the year seems to have been tempered by a second large harvest and has at least temporarily alleviated margin compression concerns by U.S. wine producers. With an estimated equivalent of over 500 million cases of wine harvested over the last two years in California alone, the U.S is well-positioned to meet surging domestic demand, which should bode well for investor confidence in coming years.
Cody Jennings is a vice president with Zepponi & Company (707-542-7500, zepponi.com), the largest mergers-and-acquisitions advisory firm dedicated exclusively to the global wine industry. Headquartered in Santa Rosa, Zepponi & Company has served as adviser on numerous transactions involving ultrapremium and luxury wine brands, estate wineries and vineyards, including Chalk Hill Estate, Diageo Chateau & Estate Wines, Jackson Wine Estates, Four Vines, Langtry Estate & Vineyards, Goosecross Cellars and F. Korbel & Bros.
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