Vincraft investors seek other purchases among smaller-scale producers

[caption id="attachment_15090" align="alignright" width="252" caption="Kosta Browne Winery operators (from left) Dan Kosta, Michael Browne and Chris Costello at the Kosta Browne Winery in Sebastopol"][/caption]

SONOMA – The acquisition of Kosta Browne Winery is just the beginning of a wine portfolio for The Vincraft Group, a recently formed team of experienced industry executives and private-equity investors.

Sonoma-based Vincraft's Sept. 11 deal for a majority stake in the Sebastopol-based pinot noir producer is the first of what is expected to be five or six acquisitions of small-scale ultrapremium- or luxury-tier California wineries in the next few years, according to Pete Scott, Vincraft chief financial officer.

Neither he nor the continuing Kosta Browne operators – Dan Kosta in sales and marketing, Michael Browne as winemaker and Chris Costello as general manager – would disclose the transaction value. Estimates put the figure between $30 million and nearly $40 million.

"We have a reasonably steady flow of opportunities to look at," Mr. Scott said. "We hope to do one or two a year for the next two or three years."

Vincraft was started in fall 2008 by former Beringer executives Walt Klenz and Pete Scott, who runs the firm, as well as Bill Price, co-founder of the private-equity Texas Pacific Group, now TPG. Vincraft is a portfolio company in the TPG Growth Fund, so it may hold its investments longer than the five- to 10-year window for returns typical for private-equity funds before the current economic cycle challenged returns on investment, according to Mr. Scott.

Vincraft is looking to fill its portfolio with a number of business models.

“Our focus is cash generation and tangible-asset value,” Mr. Scott said.

Kosta Browne’s production of 10,500 cases this year from leased winery cluster space in Sebastopol and purchased grapes is one approach, but the preference is for fully integrated operations with a vineyard and winery in Napa and Sonoma counties or the Central Coast, according to Mr. Scott.

The brands would have to have a lot of market equity and consistent quality, and continued involvement of the founders and winemaker is key to that, Mr. Scott said.

The Kosta Browne deal, gelling for 12 months, was prompted mostly to refinance the operation and allow the exit of original investors, who were mostly friends and family, according to Mr. Kosta.

Because of desired rates of return and targeted higher price points, Vincraft is seeking operations likely producing 4,000 to 60,000 cases annually with a focus on higher-profit direct-to-consumer sales.

Viral marketing in the early days of Internet wine forums as well as involvement in charity auctions and private dinners has helped 8-year-old Kosta Browne sell 85 percent of its wine via its mailing list, according to Mr. Kosta. The winery isn’t open to the public.

“It’s more personal and allows us to control the channels we sell in,” he said.

Because the winery has little of its production in distribution, it hasn’t been hit by a dramatic slowdown in sales of high-end wines in restaurants and shops, Mr. Kosta noted.

Investment opportunities in California Wine Country are increasing because of a coming wave of generational transitions or an emerging “fatigue factor,” Mr. Scott told a group of industry professionals at the Wine Industry Financial Symposium last week.

“As we’ve talked to sellers in the past year we’ve noticed an emerging fatigue factor for owners who have been in the business for many years, so though there’s no need for generational change, they want to downscale their activity,” he said.

Recently, there’s been a narrowing of the “valuation gap” between the perceived value of a brand or operation based on sale prices in the past few years at high multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, according to Mr. Scott. Sellers are getting acclimated to lower multiples and buyers are less pessimistic than they were at the beginning of this year.

Another Sonoma-based emerging winery buyer who sees acquisition opportunities is Bill Foley, who also spoke on valuation at the symposium. In the past several years, Foley Family Wines acquired, invested in and launched 17 brands in California, Washington and New Zealand, including Sebastiani Vineyards, Merus and Kuleto.

Total case production totals a half-million a year, and he wants to expand that to at least 1 million.

In addition to generational and family-related transitions, Mr. Foley sees a number of wine businesses are overleveraged, particularly proprietors who borrowed money to build a winery in the past few years and now are coming to market with annual case production of less than 5,000.

“You have to be careful about what you buy and the value proposition, or you’ll be upside down again,” he said.

To avoid being overleveraged, he aims to keep the debt-to-capital proportion on deals below 30 percent.

He looks for strong brands but bases their value on hard assets. Casegoods and bulk-wine are appraised at no more than cost, overlooking goodwill.

Like Vincraft, Mr. Foley tries to keep a founder or primary operator on board as the “face” of the brand. Back-office functions as well as distributor relationships are consolidated.