Key trends in wine mergers and acquisitions last year likely will continue this year, according to some of the key brokers of North Coast deals.
Top drivers of this trend will continue to be increased premiumization, geographic expansion to keep up with pricing, and consolidation at the distributor and retail level leading to consolidation of wine producers, according to Kevin O’Brien, an adviser with Santa Rosa-based wine industry mergers-and-acquisitions firm Zepponi & Company.
“What we’ve seen in 2015–2016 is pretty much unprecedented — over $1 billion in transactions in the United States,” O’Brien said.
“Premiumization” is the shift of wine purchases toward higher-priced wines — mostly above $10 a bottle. As a result, makers of mass-market wines retailing for less than that have been busy acquiring higher-end brands, production capacity and vineyards.
E&J Gallo’s acquisition of the 600 acres of grapes in Stagecoach Vineyard property in Napa Valley’s Atlas Peak, completed last week, is a key example of premiumization of grape sourcing, according to O’Brien. Others recently along the West Coast, include WX’s purchase of Bread & Butter and Jamieson Ranch Vineyards, Trinchero’s of a Fetzer winery in Paso Robles, Gallo’s of Orin Swift, Ste. Michelle Wine Estates’ of Patz & Hall and Jackson Family Wines’ of Penner Ash.
“What we’ve been seeing happening in Napa — there’s not a whole lot of acreage left to be planted, but there still is a lot of demand, especially for premium-priced wine from that area,” O’Brien said.
Wine producers trying to support a $15–$25 cabernet sauvignon or red blend — hot-selling segments for the past few years — have been trying to move grape sourcing outside of Napa Valley, as grape and bulk-wine prices climb, O’Brien said. Some have been securing sources in Sonoma County, where wines in that price range have been more, but Sonoma grapes also are growing more expensive.
“Where else do you go?” O’Brien asked. “So the Central Coast might be an area of interest in 2017, as some of the larger suppliers look to support those $15–$25 price points.”
For example, Delicato Family Vineyards earlier this month said it was acquiring the 4 million-case-a-year Blossom Hill Winery near Salinas from Australia-based Treasury Wine Estates. The Napa-based company said it is part of an ongoing move toward higher-priced wines and strategy revealed in mid-2016 to grow to 15 million cases annually.
Another example of that was the announcement last month of a strategic investment in Sonoma’s V2 Wine Group, which has a portfolio of luxury-tier brands.
VINEYARD SELLER’S MARKET
As vintners buy vineyards to lock in consistent supply of quality grapes, other vintners that buy grapes from those vineyards are starting to look for new sources, concerned the new owners will not renew purchase contracts to outside producers, said O’Brien and Sean Maher, St. Helena-based managing partner of Aspect Consumer Partners’ wine M&A business. This has created a seller’s market for vineyards, particularly in Napa and Sonoma counties.
“The Stagecoach transaction has moved some folks into saying, ‘OK, where does that leave us? Where does that leave Napa Valley down the road?’” O’Brien said.
But acquisition of vineyards by wineries has been happening for quite a while, though it has picked up intensity in recent years, Maher said.
“Total tons of Napa grapes for a winery’s own use has trended upwards in the past 20 years,” he said.
This is also making it more difficult for buyers of Napa and other fast-appreciating grapes on the negociant or “virtual winery” model, because of resulting bottle price increases, he said.
“Talking price increases with distributors is a tough conversation,” Maher said.
In addition to locking up grape supply by buying vineyards, some wine companies also are locking in production facilities for higher-end brands. Facilities with existing permits to produce wine or to expand are valuable in this environment.
“Gallo has recognized the long-term value in grandfathered permits,” Maher said. He noted that reasoning was behind Gallo’s acquisitions of Courtside Cellars, Asti in Sonoma County’s Alexander Valley and The Ranch Winery in Napa Valley. Those facilities are gradually being repurposed from custom wineries for outside brands to production of Gallo brands.
BRAND BUYER’S MARKET
Conversely, a string of brand and winery transactions in the past few years has created somewhat of a buyer’s market, O’Brien said.
“There is still a lot of inventory out there, so a lot of these larger buyers that have filled in what we call ‘white space’ in their portfolio can be a bit more select in what they transact,” he said.
Brands that are doing well — selling at premium prices, growing quickly in sales, having a compelling brand story and reaching hot price points — are transacting at high multiples of earnings or another valuation metric, O’Brien said.
Other factors that go into higher valuations are whether there are land or a winery connected to the brand, are direct-to-consumer programs such as tasting venues or clubs supporting cash flow, have sizable existing case production and a significant synergies with a buyer’s current distribution network.
Assets that don’t fit those criteria may not be as attractive or bring deal prices at high multiples, as the active buyers are assimilating into their portfolios a number of transactions in the past few years, O’Brien said.
“That doesn’t mean they’re not out looking, but they are going to be more selective from a brand or winery perspective,” O’Brien said.
Wine has been benefiting from premiumization across a number of luxury goods, and that’s being reflected in higher deal multiples, compared with mainstream consumer packaged goods of the same type, he said.
DISTRIBUTION FUNNEL GETS NARROWER
Consolidation of distribution is driving a lot of these decisions. After a number of mergers in recent years, there are now three large distributors controlling roughly half of wine’s path to market in the U.S.: Southern Glazier’s Wine & Spirits, Breakthrough Beverage Group and Republic National Distribution Company.
“And retailers continue to consolidate as well, so for suppliers to keep top of mind — to keep the attention of these distributors — they need to have brands at the price points that are moving off the shelves,” O’Brien said.
Buying such a brand can be a more certain way to get that attention than trying to build an in-demand brand, he said.
“There is more certainty if they can lock in what they think is a good price to acquire a brand and plug that into a distribution channel and have one more reason to contact their partners in the wholesale network,” O’Brien said.
WHAT ABOUT SMALL BRANDS?
With so much of the interest from large producers in premium brands focusing on brands that already are large, it’s getting more difficult to get distributors’ attention for vintners in the mid-tier-producing tens of thousands to a couple hundred thousand cases annually, O’Brien said.
“There are some folks that are interested in selling their brand that may not find a buyer,” he said. “This is an industry that, although it’s wine, is not that liquid of a market. There are only so many buyers that are out there, and it has to be a good fit for them.”
IMPACT OF TIGHTENING LOCAL RULES ON WINERIES
Currently, there’s a value premium in deals involving winery and vineyard properties with grandfathered development or expansion permits, O’Brien said. But as land-use policy discussions in Napa, Sonoma and other California coastal counties continue to question allowances for events, visitors, production increases or winery and vineyard development, that valuation premium calculation, and even the saleability of such properties, may be affected.
“That is driving interest in other markets, whether it’s the Central Coast, Oregon, Washington or [Mendocino County’s] Anderson Valley,” O’Brien said. “There is a little less regulation, less restriction. If you theorize that direct-to-consumer is the path to profitability, those are going to look more attractive. That being said, there is more foot traffic [in those higher-regulated areas].”
The calculus includes not just land costs but also costs to build and improve the production facility or tasting room.
APPETITE FOR SONOMA PINOT CONTINUING?
There remains interest in high-end North Coast pinot noir but also from elsewhere in the Pacific Northwest, O’Brien said. A year ago, Washington-based Ste. Michelle Wine Estates, one of the nation’s largest vintners, purchased Patz & Hall, a Sonoma-based noted maker of single-vineyard chardonnay and pinot noir wines.
Last year, Santa Rosa-based Jackson Family Wines purchased two higher-end vintners in Oregon’s emerging Willamette Valley premium pinot region. In April, it acquired pinot noir specialist Penner-Ash Wine Cellars, and in October, WillaKenzie Estate, a producer of single-vineyard pinot noir and pinot gris.
“That’s a market that has a percentage — it’s not very large — but you’re able to get a consistent luxury price point, and it’s a lot cheaper than Sonoma Coast is for land,” O’Brien said. “Oregon and Washington will continue to be a player in 2017 as folks are looking outside of the North Coast, which some have been priced out of, quite frankly. In trying to build a brand of national significance, it’s become difficult if you don’t already have the land to support that.”
Significant deals for Washington luxury-tier producers last year were New York-based Constellation Brands purchased the Charles Smith brand, and Napa-based Crimson Wine Group picked up Seven Hills Winery, which focuses on cabernet sauvignon and red blends.
“Pinot noir as a category continues to grow at those price points, and we expect pinot noir to continue to be hot into 2017 and beyond,” O’Brien said. But producers will continue to secure sourcing options not tied to one or two specific regions, he said.
O’Brien is scheduled to discuss the wine mergers-and-acquisitions market at the Business Journal’s Wine Industry Conference in Santa Rosa on April 28.
Jeff Quackenbush (email@example.com, 707-521-4256) covers construction, commercial real estate and wine.