Update: Truett-Hurst revised its stock value estimate, down to $8.50–$10.50 per share, on April 23.
A Sonoma County wine company is testing investor appetites for the wine business by going public. Truett-Hurst, which sells wines under several brands and private labels, announced plans April 3 to raise an estimated net proceed of $26.5 million through the sale of 2.9 million shares, 650,000 of which are already privately owned by stockholders. Public trading of the stock, estimated to be valued at $11–$15 a share, begins next week. It's a risky move, analysts said. Wall Street's demand for regular profits is but one hurdle public wine companies face.
Truett-Hurst's open auction of shares is the first California winery initial public offering (IPO) since another Sonoma winery, Ravenswood, went public in 1999. Partners Phil Hurst, Paul and Heath Dolan and Bill Hambrecht are behind the Truett-Hurst offering. Hurst and Dolan founded the company in 2007 and bought the Martin Family Winery in Dry Creek Valley for its winemaking operations, along with several small brands.
Truett-Hurst owns four Sonoma brands—Truett-Hurst, VML, Healdsburg Ranches and Bradford Mountain—and it bottles private labels for Trader Joe's, Safeway and Total Wine & More. After an $800,000 loss in 2011, the company recorded a profit of $26,000 in 2012, with sales more than doubling, from $5.4 million to $12.7 million.
Hambrecht is a well-known financier who’s been involved in numerous wine and vineyard ventures. He founded and headed Hambrecht & Quist and, through his subsequent investment firm, W.R. Hambrecht + Co., helped underwrite Ravenswood's IPO. According to the prospectus, once the sale is complete, investors will collectively own all of the economic interests in Truett-Hurst and hold approximately 44 percent of the voting power.
CEO and president Phil Hurst said the offering is a way for the company to raise money for continued growth. The company's stock sale would be used to pay down debt and invest in production equipment and increased staffing. The executives hope to compete with the leaders in the “super-premium” ($7–$14) category.
Truett-Hurst will join Robert Mondavi Winery, Beringer, Chalone and Ravenswood in going public. Even with Truett-Hurst's innovative spirit, wineries going public have had their share of challenges.
Robert Mondavi Winery, one of the most recognizable names in wine, went public in 1993 and demonstrated how transforming a family-run company into a publicly-traded corporation was a daunting task. Mondavi snatched up brands such as Byron and Arrowood and attempted to expand globally with wineries in Chile, Italy, Australia and France. Mondavi struggled to convince both the wine world and Wall Street of its value, and stocks plummeted amidst attempts to keep up with competition in both the higher and lower ends of the market. A major replanting of vineyards devastated by phylloxera cost the company millions, and the Mondavi family frequently disagreed and bickered with regard to the direction of the company. By June 2003, Mondavi's stock price had fallen by more than 30 percent. Shortly thereafter, Mondavi sold to Constellation for $1.3 billion.
Twice the size of Mondavi's offering, Beringer's 4.5 million shares became the largest public offering for a California winery in 1997. Beringer followed a similar strategy as Mondavi. At the time of its IPO, the company ranked as one of the top sellers of premium wines in the United States, having spent the past few years acquiring brands such as Chateau St. Jean and Stags' Leap Winery. Beringer sought to take advantage of its high profile as one of the leading producers of Napa wine, and grow to be a global wine brand. Consolidation forced Beringer to reconsider their strategies and they eventually agreed to sell the company to Foster's Brewing Group for $1.5 billion.
It could be argued that the sale of Mondavi and Beringer were victories for both owners and investors, “Takeovers don't happen without success,” said Tim Ramey, senior vice president and senior research analyst for D.A. Davidson & Co., in Oregon “They all got taken out at huge prices with happy endings.”
Truett-Hurst's biggest challenge may be that it doesn't have either the name recognition or volume of a Mondavi or Beringer; they, along with Ravenswood, were well-known, widely distributed and popular. Truett-Hurst is a relative newcomer without label recognition.
Rob McMillan, executive vice president of Silicon Valley Bank’s Wine Division in St. Helena, believes that IPOs are better-suited for larger-sized companies, and that the stock market is not well-suited for small wine companies. “The costs of being public are sizable; growth is great, but wineries experience a lot of pressure from quarter to quarter to grow, and positive returns are difficult to achieve,” he said.
Any winery going public is going to see decisions shift from the winery to the boardroom, where profits are the bottom line. Because wine is a small industry, many vintners will be curious about the success of the Truett-Hurst IPO, but for now most analysts, including McMillan, remain skeptical. “Historically, there are struggles [with wineries going public] that the market doesn’t grasp,” said McMillan, “Maybe they’re on to something and can be successful.”