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Diageo Captures Chalone with Higher Bid

British drinks giant will pay $14.25 per share for California wine group

Dana Nigro
Posted: December 20, 2004

California's Chalone Wine Group has terminated its sale to Domaines Barons de Rothschild (Lafite) and has instead agreed to be acquired by Diageo, a U.K-based alcoholic beverage giant, for roughly $260 million. The addition of Chalone's numerous labels should spruce up Diageo's wine portfolio, which includes Beaulieu Vineyard and Sterling Vineyards in Napa Valley.

Chalone signed a buyout deal on Oct. 30 with France-based Domaines Barons de Rothschild (DBR), which already owns 46 percent of Chalone's shares. But last week, a mystery bidder, which was only confirmed today to be U.K.-based Diageo, emerged, trumping DBR's $11.75-per-share offer by $2 per share in cash.

Under the terms of its agreement, DBR had the opportunity to match or exceed any offers from other bidders, and sources involved in the deal indicated that it might try to do so by a deadline of midnight Friday. While no one at any of the companies would comment on the matter, apparently some discussions took place over the weekend, as Diageo's final offer now amounts to $14.25 per share--50 cents more than last week's per-share bid.

Diageo must buy out DBR's stake in Chalone, and it is paying a termination fee of nearly $2.48 million to DBR on Chalone's behalf. The $260-million value also includes the assumption of Chalone debt. Like DBR, Diageo has agreed to give shareholders a one-time wine credit of $1 per share and to continue to provide wine club benefits.

DBR had been planning to use Chalone's brands to start a new high-end wine company in a three-way venture with U.S. wine giant Constellation Brands and Huneeus Vintners, owners of Quintessa winery in Napa Valley.

Fairport, N.Y.-based Constellation issued a statement today saying that it expects the partners will explore other opportunities together and it supports the decision not to match Diageo's competing offer. "We are disciplined buyers and see no reason to bid up the price of Chalone," chairman and CEO Richard Sands said.

That Chalone has managed to command such a price is something of a surprise, as its stock price had been stagnant, hovering in the $7 to $9 range for the past couple years, before DBR made its initial takeover offer at $9.25 per share in May. Its brands, while respected, do not have the name recognition of Robert Mondavi Corp., whose $1-billion purchase by Constellation this fall has publicly overshadowed Chalone's sale.

But it may have been Constellation's rapid growth that made Chalone such an appealing target. Already the world's largest wine company, Constellation has become even more of a threat to its competitors, such as Diageo, with its pending acquisition of Mondavi and the Chalone venture.

By taking over Chalone, Diageo snatches away a Constellation target and substantially boosts its portfolio of wine brands, improving its position in the market. In California, Chalone owns Acacia, Chalone, Dynamite, Echelon, Hewitt, Jade Mountain, Moon Mountain, Orogeny and Provenance wineries, as well as a 50-percent stake in Edna Valley Vineyard. It also owns Canoe Ridge and Sagelands in Washington and a 23.5 percent stake in Château Duhart-Milon in Bordeaux. And it owns nearly 1,500 acres of land in California, including vineyards in Napa, Sonoma and Monterey counties. In 2003, it sold more than 675,000 cases and reported net sales of $67.4 million.

Catherine James, head of Diageo's investor relations, said the company was not looking for acquisitions that would dramatically change its structure, as the purchase of much of Seagram's wine and spirits holdings did, but wanted premium wine brands that would complement its portfolio and that showed great potential. Calling Chalone a great asset, she said, "We hope to grow it like we have grown other [acquisitions]."

Diageo is well-known for its beer and liquor brands, such as Guinness, Johnnie Walker, Captain Morgan and Smirnoff. The prime holdings of the company's Chateau & Estate wine division in North America are BV and Sterling, but it also produces and/or markets Solaris, Century Cellars and Blossom Hill, as well as Barton & Guestier of France, and imports classified Bordeaux, estate-bottled Burgundy and other European brands. (It had also owned Mumm Cuvée Napa and Glen Ellen, but sold both those brands in separate deals in 2002.)

In a statement, Diageo indicated that it feels the financial performance of Chateau & Estates merits further investment in the American wine industry. "The U.S. wine market represents a growth opportunity for Diageo, with favorable demographic and consumption trends," said Ivan Menezes, president and CEO of Diageo North America.

Chalone president and CEO Tom Selfridge, who worked at BV from 1972 until 1989 (at which point it was owned by the company now known as Diageo), could not comment on how the structure or leadership of Chalone might change, but said, "I'm feeling good about this. I think it's a good deal for the shareholders."

He did not foresee any problems with integrating competing wines, such as multiple Napa Cabernet bottlings, in the two companies' portfolios. "There are ways you deal with it as far as marketing and price points," he said. "I think there's certainly room for a Beaulieu and a Provenance in the market place."

The deal is expected to close in the first quarter of 2005, pending a shareholders vote and regulatory approval. Diageo said in a statement that it expects the acquisition to become profitable during its third full year of ownership.

Additional reporting by Tim Fish and Jacob Gaffney

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