Bankable wine industry M&A deals: What buyers want
Over the past 18 months, the wine industry has seen a flurry of merger and acquisition (M&A) activity.
With changes brought on by the pandemic and shifts in consumer preferences, the appetite for deals has been high, with a number of large premium acquisitions being announced recently. This includes Treasury Wine Estates inking a $315 million deal to buy Frank Family Vineyards, and Joseph Phelps’ selling to global luxury goods group Moet Hennessy for an undisclosed amount.
While these high-profile deals tend to make headlines for their fairly dramatic valuations, it’s important for both buyers and sellers to understand that these multiples aren’t the new normal, but rather representative of particular deals for specific assets.
There is certainly still opportunity to make deals happen on the smaller to midsize end of the spectrum, as long as parties can manage the “valuation gap.”
As the first of a two-part article series on how to ensure a bankable wine industry M&A deal based on solid financial footing, the below highlights the buyer’s perspective. When preparing to make an acquisition in today’s market, the following considerations can help ensure a smooth and well-analyzed deal.
Clarity of intention
Before diving into the nitty gritty of a potential purchase, a buyer should have clarity as to what they are looking to accomplish.
From building distribution channels to increasing direct-to-consumer (DTC) sales to access to grapes and facilities, each specific buyer will have different needs for their portfolios. Clearly understanding these needs will help buyers save time and money by identifying viable targets for acquisition from an early stage.
Quality in brand and financials
Once a buyer has zeroed in on a winery or brand it is interested in purchasing, the financial due diligence process begins.
“There are two primary aspects of a sale process that are highly sensitive to a buyer financing an acquisition,” said Mario Zepponi of Zepponi & Company, a merger and acquisition advisory firm to the global alcohol beverage industry. “The first aspect is the quality of the winery owner’s financial information. In particular, it is best practice for a winery owner to, at a minimum, have reviewed financial statements and Generally Accepted Accounting Principles (GAAP)-compliant cost accounting information.”
Based on this information, buyers are faced with the task of analyzing projections and valuations to determine if an acquisition is realistic.
To this end, it is prudent to ensure projections are based on fact as opposed to growth predictions and future cash flow. It can be incredibly difficult to quantify exactly what a brand is worth, making the quality of information a seller provides all the more critical.
As so many wineries are family-owned, succession planning and the dependency on the family’s involvement in the brand is another aspect buyers should look to evaluate. Buyers often need to consider how a wine brand would operate as part of a portfolio after acquisition and not as a family business.
Real estate and property assets
The second critical aspect of a sale process to the buyer, according to Zepponi, is the physical condition of any related real property assets.
“A lender will require an appraisal as a condition precedent to providing acquisition financing,” Zepponi said. “Therefore, the winery owner should repair or report any deferred maintenance items and address any use permit, water rights, and wastewater discharge issues in advance of a sale process. Any known or observed deficiencies in the real property assets will be noted in the appraisal report and incorporated in the appraised value.”
As we are seeing the industry currently contend with the effects of drought and low crop yields, buyers should have a plan in place for managing water rights and tight inventory situations.
Moreover, as investment at all levels continues, the wine industry is poised to continue its strong momentum over the next several years. Stay tuned for our next installment in this two-part series where we will explore considerations for sellers in creating bankable deals.