Bottom's Up
Family-owned wineries facing succession issues are ripe for picking and strategics are collecting their share
October 14, 2011
Buying into the wine business isn't for those who lack patience. Every year winegrowers along the West Coast have to worry about pests, extended winters, heat waves, lack of rain and anything else that may have a negative impact on growing an abundant crop. Thus, the unpredictable weather forecast over the last four to five years has prohibited a lot of vineyards from planting new crop. As a result, the price of grapes, primarily for red wine, has gone up within the range of 10 percent to 30 percent. Nevertheless, demand from strategics for the coveted assets continues to grow, while private equity firms lurk along the sidelines.
"It's a great time to be acquiring," says Stephen Kuhn, a senior advisor to buyers in the wine industry. There are quite a few strong brands that are ready to sell and the most prevalent ones are those with generational succession issues, says Kuhn. Industry observers estimate that there are currently more than 4,500 physical wineries of which 82% of are still owned by their founders. At least half of these family-owned establishments are ready to retire from their businesses. Unfortunately, owners are having difficulty figuring out who will be next in line and in some cases family members want no part in taking over the business. This leaves founders scouting the market to sell to a third party.
"The challenge is carrying out a sale," says Deborah Steinthal, managing director of Scion Advisors, a business and strategy consulting firm in Napa, Calif. She says difficulties usually arise when sellers are trying to please all parties, especially family members.
Take the Seghesio Family Vineyards for instance, a fourth generation winery located in Sonoma County. The family was having succession issues, among other problems, and realized that it would be financially pressing to run the business in years to come. In June, the Seghesio family came to an agreement to sell the business to Leucadia National's Crimson Wine Group. Although deal terms are unknown several published reports placed the price tag between $90 million and $120 million. For the Seghesio family the deal was effortless, given that the company had a previous relationship with Erle Marin, the CEO of Crimson Wine, for more than 10 years.
But this is not always the case for family-owned wineries. They can present a challenge to potential buyers. "It's hard to get in and it takes a long cycle to persuade these family owned businesses to sell," says Steinthal. That said, winery owner, Timothy Ramey, who bought the Oregon-based Zenith Vineyard in 2002, says he is aware of quite a few family-owned wineries in his area that are ready to strike a deal. "There is a generational shift going on with wineries." Most of the wineries founded in the 1970s and 1980s are readying to sell.
The price these assets are commanding varies. "They either go significantly overvalue, or they tend to go at a significantly discounted valuation metric," says Kuhn.
On a historical five year average Kuhn has seen public wine companies trading around 10.7x EBITDA and the 10 year average comes in closer to 12x EBITDA. However, there were transactions that were above that range. The Robert Mondovi deal, which sold to NYSE-listed Constellation Brands for $1 billion in 2004, had multiples that reached 17x to 18x EBITDA. After the financial market took a hit in 2008, valuations started to creep down to traditional norms of 8x to 12x EBITDA, says Perry Deluca, director and head of the wine and spirits practice at KeyBanc Capital Markets.
Not surprising, if it's a well run winery there tends to be more opportunities for M&A, says Steinthal. "Private equity firms usually ask for businesses to have at least $2 million EBITDA annually and you don't get there unless you are between $15 million to $20 million [in revenues] in the wine business," she says, noting that anything below that would be better suited for an independent buyer.
Most of these family-owned assets that have years of success and profitability, would be ideal for private equity buyers, but Kuhn says that there are very few private equity firms, despite a lot of talking in the wine industry, that have actually made investments in the space. "We've had a lot of private equity players show up regularly, but they aren't buying in," adds Steinthal. The wine industry has an allure that makes people want to get involved, but the long-term nature of the business makes private equity groups think twice before writing a check. "I think for most private equity funds the wine industry probably doesn't make sense," says Ramey.
