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Recently, the news media has focused on the troubles facing the wine industry as a result of the current economic recession. The outside world’s perception is that the wine industry is about to be inundated by a wave of despair in the form of bankruptcies, short sales and foreclosures. As we know, perception does not always match reality. As such, it is important to separate perception from reality in assessing the current market environment for winery transactions.
Market realities. The wine industry is navigating through incredibly challenging economic times. Gone are the days of wine club waiting lists and retailer allocations for $100 plus bottles of wine. Wineries that specialize in such luxury priced wines are being forced to incorporate creative marketing solutions in order to adjust to this new market reality. At the same time, wineries producing at retail price points in the range of $25 per bottle and below are thriving as a result of the consumer trading down to lower price points in search of value. While some bankruptcy reorganizations and foreclosures will occur, the magnitude of wineries succumbing to such dire consequences has been grossly overstated.
Current transactional environment. Although the number of recent winery transactions has been few and far between, beneath the surface there are signs of mounting activity. This buildup in activity is attributable to growing interest from buyers in three categories of winery assets: marquee wine brands, winery assets that have a significant cash flow component and winery assets that will ultimately trade at a discounted value because they lack meaningful cash flow.
Marquee wine brands. A marquee wine brand that is strongly identified with a particular varietal category (e.g., cabernet sauvignon or zinfandel), retail price point and quality – even if it is struggling with interim lapses in financial performance – continues to attract interest among strategic purchasers. In relation to other winery assets, the “brand equity” of marquee wine brands has a greater resiliency to economic down cycles. As a result, marquee wine brands are better able to preserve their value and marketability during market downturns.
Winery assets with positive cash flow. A winery investment that has a significant cash flow component will always have a buyer where the purchase price is based on a required return on investment.
The strength of a winery’s cash flow can be gauged by analyzing its earnings before interest, taxes, depreciation and amortization (EBITDA). Common ways to value the stream of cash flow include applying a multiple to EBITDA or performing a discounted cash flow analysis. In the current environment, negociant brands and custom winery service providers are examples of business models that typically fall within this category of winery assets.
Winery assets trading at a discount. The third area in which market activity is building up is where assets will be sold at a discount in order to compensate for their inability to cash flow or demonstrate strong brand equity. The one factor that is helping to mitigate this undercurrent is where the winery asset has a strong aesthetic appeal to lifestyle purchasers. However, assets that require more hands-on business responsibility are less appealing to a lifestyle purchaser.