California North Coast wine M&A slows in 2017 amid smaller crop

Vineyard worker Jesus Lopez and his coworkers trim vines at Stagecoach Vineyards near Napa, California, on Thursday, April 6, 2017. (Alvin Jornada / The Press Democrat)

JEFF QUACKENBUSH,

NORTH BAY BUSINESS JOURNAL

The brisk pace for sales of North Coast vineyards, wine brands and wineries in recent years slowed in 2017. It was a “roller-coaster ride” of a growing year that ended with a long, likely below-average-sized harvest punctuated by record September temperatures and October wildfires.

Mergers-and-acquisitions activity in the U.S. wine business in 2016 reached its highest level in the past 10 years, according to Matt Franklin of Zepponi & Company, a Santa Rosa-based firm that has advised on a number of high-profile deals in the industry. For the 23 transactions with a business value over $10 million, the transaction volume reached $2.4 billion. Deal volume involving brands is on track to stay below $500 million this year, and the size of transactions didn’t reach the big price tags of 2016, Franklin said.

“Perhaps, what happened this year was there were so many big transactions in 2016 that the big strategics are taking a breather,” he said.

“Strategic” is a category of wine M&A player that looks for brands or physical assets that will advance business goals such as expanding into a geographic area, varietal or style of wine or retail price point, or securing grape supply or production capacity.

In 2016, there were a few big deals in the hundreds of millions of dollars, Franklin said. GI Partners sold St. Helena’s Duckhorn Wine Co. to TSG Consumer Partners. GI acquired a majority of Oakville-based Far Niente Wine Estates. Constellation Brands bought The Prisoner portfolio from Napa’s Huneuus Vintners.

This year, the largest deal was Gallo’s purchase of 600-acre Stagecoach Vineyard in Napa Valley, reportedly for $180 million. But most transactions were for less than $100 million, Franklin said.

The Stagecoach deal is part of the continuing trend in recent years of large wine companies’ buying real assets to support growth. Gallo also had done that in 2015 with the purchase of The Ranch custom winery in Napa Valley.

This year, Napa’s Delicato Vineyards acquired Blossom Hill Winery on California’s Central Coast, picking up growth capacity of 4 million more cases annually. Lodi’s Michael David Winery bought Silver Oak Cellars’ Alexander Valley winery to produce North Coast wines. Vineyards in Napa Valley have long been in hot demand, but the Stagecoach deal sent deal-making into high gear, Franklin said. Boisset Collection’s Raymond Vineyards acquired the 55-acre Bartolucci Vineyard near St. Helena.

Grape supply could be crimped from the 2017 North Coast winegrape harvest. Before harvest this year began in early August with early picking of Napa Valley and Sonoma County chardonnay and pinot noir grapes for sparkling wines, expectations in the local wine business were for a crop of average tonnage or above, according to Brian Clements, partner with Novato-based grape and bulk-wine deal-maker Turrentine Brokerage.

Then came a blast of several back-to-back days of triple-digit temperatures and thunderstorms.

“Then we go into harvest, and it started looking like it was average or below,” Clements said. “It’s depressing, because wineries need their fruit.”

The scale of the cab crop will tell the rest of the tale of the 2017 North Coast crop, he said. But when the cab crop was in the home stretch in Napa and Sonoma counties, and about three-quarters done in Mendocino and Lake counties, massive wildfires started burning uncontrolled through those counties from Oct. 8 through the end of the month. Testing companies say “smoke taint” won’t be much of an issue for the 2017 vintage, and a small fraction of the vineyard acres in the North Coast are thought to be irrecoverably damaged.

However, experts in the wine and tourism industries are looking to the full scale of the fires’ impact coming in spring, when vines bud and tourists arrive.

“Premiumization” remains the driver for North Coast and premium-area acquisitions, as producers shift toward the faster-selling category of wines on the shelf, meaning those that retail for more than $20 a bottle, Franklin said. This year had three notable Napa Valley higher-end brand deals: Silver Oak’s purchase of Ovid Napa Valley, Constellation’s acquisition of Schrader Cellars and LVMH’s deal for Colgin Cellars.

Colgin and Schrader also were examples of the continued role of business succession in decisions to sell, Franklin said. A wave of ownership changes related to succession is something industry watchers have noted from surveys for about a decade.

“Succession, if the market holds up, will continue to be one of the themes at least for the next couple of years,” Franklin said.

North Coast vintners continued to expand their geographical reach in 2017, Franklin said. A Central Coast player from its early days, Santa Rosa’s Jackson Wine Estates in 2017 bought Brewer-Clifton Winery, with 60 acres of grapes and a tasting room in the region. Duckhorn expanded to the Central Coast with the acquisition of “pinot pioneer” Calera’s winery, brand, tasting room, 85 acres of estate vineyards. Santa Rosa’s Vintage Wine Estates bought its first Oregon brand, pinot noir and pinot gris specialist Firesteed Cellars.

Mid-sized wine companies kept expanding their portfolios this year, and this helps them compete in a market with fewer distributors to carry brands, Franklin said. Vintage acquired Cameron Hughes Wine and bought three Napa Valley wine labels: Layer Cake, Cherry Pie and If You See Kay. Vintage’s production now tops 2 million cases a year.

Novato-based WX, formerly Winery Exchange, continued its diversification into national brands from major wine, beer and spirits private label brand-builder. This year, WX bought the Jamieson Ranch portfolio, Bread and Butter brand, and Jelly Jar Wines, all from Napa Valley.

Deal-making for fine-wine brands and assets looks like it will continue for the first-half of 2018, and deal volume next year may reach this year’s level, Franklin said.

“Folks we’re in touch with aren’t shutting the door on more opportunities to see,” he said. “That’s a good sign. If anything, there may be more opportunities available than in the past, because people may recognize that if they are considering a sale, that it is a good time.”

Also supporting optimism for next year are continued low interest rates for financing, low unemployment rate, and favorable corporate tax rates in the most recent Congressional legislation, Franklin said.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers the wine business and commercial construction and real estate.