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Wine business appetite for acquisition tops pre-pandemic pace

News of the acquisitions last week of Sebastopol’s Ace Cider and Napa Valley’s Frank Family Vineyards are part of a string of deals this year that industry experts say point to a reawakening of the North Coast wine business and even more such activity next year.

On Nov. 15, Vintage Wine Estates announced that it was buying California Cider Company, maker of the 1 million-case-a-year Ace brand, following several transactions since the Santa Rosa company became publicly traded earlier this year. Then on Nov. 17, Treasury Wine Estates said it inked a deal with Frank Family Vineyards to purchase the inventory for the 160,000-case-a-year brand, known for its luxury-tier chardonnay, and certain assets for $315 million.

While the stated reasons for those deals differed — diversification and market expansion for Vintage, movement into more premium chardonnay wines for Treasury — they share commonalities seen in other deal-making completed and pending, say seasoned brokers of such transactions.

For one, there is a lot of capital looking for investments with solid returns.

“The cash available is still extraordinary,” said Robert Nicholson, president of International Wine Associates, a mergers-and-acquisitions advisory for the wine and spirits industries.

Two big pools of such capital for M&A deals are billionaires and private-equity firms. Bloomberg estimated that over $5 trillion in portfolio wealth is held by U.S. billionaires. And private-equity firms had amassed $1.6 trillion in investment funds — commonly called “dry powder” — as of the end of last year, up 133% from $685 billion in 2014, according to alternative-asset management analytics firm Preqin.

“We’re seeing increased buyer interest, especially from strategics, especially foreign and (private equity) buyers,” said Ian Malone, a beverage industry specialist in Aspect Consumer Partners’s Napa Valley office. Strategic buyers are those that may be looking to pick up a brand or labels that fit marketing or growth gaps in their portfolios.

“There are far more PE firms active in food than the wine industry, but we have seen increased interest in the wine category,” Malone said, referring to private-equity investors.

That interest is credited partly to PE involvement in the rise of a 45-year-old Napa Valley-based collection of premium and luxury wines now known as The Duckhorn Portfolio. GI Partners acquired Duckhorn Wine Company from the family in 2007 and backed the founders’ investments in the brands, pouring in more than $60 million into hundreds of acres of vineyards and construction of wineries.

In 2016, GI sold Duckhorn to San Francisco-based TSG Consumer Partners, reportedly for about $600 million, and Duckhorn two years later acquired luxury Sonoma County pinot noir brand Kosta Browne. Duckhorn held an initial public offering of 20 million shares of stock in March, raising about $300 million. TSG owned about three-quarters of Duckhorn’s stock when it went public, but pared that back to less than two-thirds in October amid a follow-up offering of 13.8 million shares.

While reporting its fiscal fourth-quarter financial results, Duckhorn CEO Alex Ryan said that “creative M&A opportunities” is a path for “sustainable, profitable growth” in 2022 in beyond, he said during a conference call Oct. 4.

“We will be judicious with respect to our capital allocation,” Ryan said.

Another key PE move that touched the North Coast wine business this year Sycamore Partners Management’s purchase in October of Washington state-based Ste. Michelle Wine Estates, a $1.2 billion deal that included local brands such as Stag’s Leap Wine Cellars and Patz & Hall.

Banner year of deals

That deal was among a considerable string of transactions this year.

“I think that we're seeing more transactions in 2021 than in any year since 2017,” Nicholson said.

There have been a dozen sizable wine business M&A deals his Healdsburg-based firm has tracked so far this year, compared with eight last year, seven in 2019, 11 in 2018 and 14 in 2017. But the total deal value so far in 2021 has been “very high,” at $3 billion to $3.5 billion, Nicholson said.

But the 2021 deal value tally is skewed by three major transactions, including the one for Ste. Michelle, he said.

Constellation Brands sold 30-plus lower-priced brands to E. & J. Gallo Winery for $810 million. Napa-based Delicato Family Wines bought Sonoma County’s Francis Ford Coppola and Virginia Dare wineries in a deal estimated to be worth over a half-billion dollars.

The outlook for wine industry M&A in 2022 is robust, as deals that were in progress and set to close were shelved during the economic uncertainty and travel restrictions of the coronavirus pandemic, according to Mario Zepponi, a principal of Santa Rosa-based M&A consultancy Zepponi & Company.

“We think it’s going to be a very good year in 2022,” Zepponi said. “What 2021 didn’t have is the return of international travel. And for the North Coast that’s important for French and other buyers in taking look at North Coast opportunities, but they were not able to travel here until November.”

Taste for luxury chardonnay

The Treasury Wine Estates deal for Frank Family Vineyards, set to close next month, comes as the publicly traded Australia-based company said it has completed a selloff of lower-priced U.S. brands as part of a focus on higher-priced brands, a trend commonly called premiumization. Those divestments netted Treasury AU$300 million ($218 million), the company said.

The Frank Family Vineyards transaction would include the Calistoga winery and tasting room at 1091 Larkmead Lane, some of the vineyards (others would be leased) and the inventory. Annual production is about 160,000 cases, according to Treasury. Winemaker and General Manager Todd Graff would continue to oversee operations.

Proprietors Rich and Leslie Frank would remain involved with the brand and would retain ownership of Winston Hill Vineyard in Rutherford and Lewis Vineyard on the Napa County side of the Carneros winegrowing region. Treasury would get the Benjamin Vineyard and Rutherford and the S&J Vineyard in eastern Napa County.

Ben Dollard, president of Treasury’s Napa-based Americas business, called the deal “another important step towards our ambition of becoming the premium wine market leader in the Americas.”

Frank Family Vineyards fills a “key portfolio gap for luxury chardonnay,” the company noted. Treasury said it will use its national distribution network and California assets, including grape sourcing, to help grow the brand.

The acquisition would place Treasury as a No. 3 player in U.S. premium chardonnay and No. 2 for such wine retailing for over $25, the company said.

The deal price is figured to equate to 13.2 times earnings before interest, tax, depreciation, amortization and stock compensation, Treasury said. The company said it plans to pay for it with $240 million in debt plus cash, including proceeds from recent divestments.

Frank Family Vineyards last fiscal year had net sales revenue of $54 million and pro forma earnings of $21 million. Rich Frank started the wine company in 1992.

Treasury Wine Estates brands include Penfolds, Beaulieu Vineyard (BV), Beringer, Stags’ Leap, 19 Crimes and Sterling Vineyards.

Excited by cider

Vintage Wine Estates’s deal for The California Cider Company, the Sebastopol-based maker of the Ace brand, closed Tuesday. It added about 1 million 9-liter cases (90,000 barrels) to annual production for the Santa Rosa-based wine company. Vintage already was the 15th largest U.S. wine producer, at over 2 million cases a year previously.

The deal, set to close Tuesday Nov. 16, would add about 1 million 9-liter cases (90,000 barrels) to annual production for the Santa Rosa-based wine company. Vintage already was the 15th largest U.S. wine producer, at over 2 million cases a year previously.

California Cider, founded in 1993, has been a pioneer among family-owned hard cider producers in the U.S. Annual sales are about $20 million, and compound annual growth rate has been in the mid-teens for the past five years, according to Vintage.

Cidery founder and President Jeffrey House and sons Jason House, vice president of production and operations, and Simon House, vice president of sales and marketing, are said to be remaining involved with the company. Other terms of the deal weren’t disclosed.

“This strategic acquisition adds an innovative product line to our RTD (ready-to-drink) category and brings us access to a significant new sales channel for distribution, through which we expect we can push many of our brands,” Vintage Wine CEO Pat Roney said in the announcement. “ACE is an excellent complement to our wine portfolio and its products are distributed through the beer channel which provides a new growth opportunity for all of our RTD products. Importantly, this provides another platform from which we can expand by executing our strategy of consolidating highly fragmented offerings where we can leverage our production and marketing expertise to gain market share, capture more customers and increase volume.”

This acquisition follows several Vintage Wine has made in recent months following its becoming a public company early this year. Before California Cider, the company made a larger move into the membership club market with the acquisition of Vinesse in October, The Sommelier Company in June and Kunde Family Winery in April.

Vintage Wine reported fiscal first-quarter earnings were $2.8 million on $55.7 million in net revenue, down from $3.2 million in net income a year before and $53.8 million in quarterly revenue.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.

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