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Future Uncertain for Ste. Michelle Wine Estates

The recent buyout of its parent company may lead to the future sale of Washington state's biggest wine producer

Harris Meyer
Posted: September 16, 2008

A big merger in the tobacco industry may have important repercussions for Washington state's wine business. Cigarette giant Altria Group, which owns Marlboro, announced an agreement on Sept. 8 to buy smokeless tobacco firm UST for $10.4 billion. As part of the deal, Altria will acquire UST's Chateau Ste. Michelle Wine Estates. That's left many in the industry wondering if Altria will soon sell off Washington's biggest wine company to a firm that's more focused on wine.

Neither Altria nor Ste. Michelle, an independent subsidiary of UST, are talking about future plans. But industry analysts and some Washington winemakers predict that Altria will quickly sell the growing and profitable Ste. Michelle to a wine company such as Constellation, a big spirits company such as Brown-Forman, or even a private equity firm. Altria currently has no wine holdings, though it does own 29 percent of brewer SABMiller.

Connecticut-based UST, best known for smokeless tobacco, has owned Ste. Michelle since 1974. The wine company, which produces both supermarket and premium wines through wineries including Chateau Ste. Michelle, Columbia Crest, Northstar, Erath, Col Solare and Stag's Leap (the latter two through a partnership with Antinori) reported 2007 sales of $354 million. Analysts say it could fetch as much as $800 million in a sale.

Once regulators and UST shareholders approve the purchase, Altria plans to "take a look at the wine business and make a determination as to what's the best way to create value for shareholders," Altria CEO Michael Szymanczyk told analysts the day the deal was announced. "It's a great business. We'd like to understand it a bit better."

"We expect to remain a standalone subsidiary going into the future," said Keith Love, Ste. Michelle's vice president for communications in Woodinville. "We don't know that there is a possibility of the unit being sold. We have a great team in place, we're making great wine, and we're starting to pick grapes now. It's business as usual."

Ted Baseler, Ste. Michelle's president and CEO, said he's not concerned about the possibility of another sale. "We're eager to continue to build our company as the fastest-growing top 10 wine company in the country. Our job is to keep everyone focused on that." Ste. Michelle's sales grew more than 25 percent last year.

Altria commands half the U.S. cigarette market and reported $9.5 billion in revenue for the first half of 2008. UST owns the two leading smokeless tobacco brands, Skoal and Copenhagen, and reported $1.95 billion in revenue last year. Esther Kwon, alcohol and tobacco analyst for Standard & Poor's, said UST has done a good job in growing Ste. Michelle but that many had questioned why it was in the wine business, which is less profitable than tobacco and didn't produce any synergies.

She guessed that New York-based Constellation Brands would be interested in buying Ste. Michelle because that company is seeking to move into more up-market, prestige brands. "That division isn't going to remain [in Altria] very long," she said.

Ann Gilpin, a Morningstar analyst who covers the alcohol industry, agreed. She played down the idea that spirits companies like Brown-Forman, Fortune Brands, or Pernod Ricard would be interested in Ste. Michelle. "Spirits is a wonderful business to be in, with very high brand loyalty," she said. "Wine has no brand loyalty, consumers like trying new things. You have to reinvent yourself all the time."

A Constellation spokesman said it was too soon to discuss Ste. Michelle since Altria has not said it plans to sell.

Allen Shoup, who was CEO of Ste. Michelle (then known as Stimson Lane) for 18 years until 2000 and now heads Seattle-based Long Shadows Vintners, said it was an anomaly for a public company like UST to be in the wine business for so long and that it's hard to explain. Partly, he said, it was that UST was able to get into the business at a low cost, build its own industry in Washington, and not have to compete in California.

"UST had a very enlightened attitude," Shoup said. "No one tried to tell us how to run the company. The reason is they were such a wealthy company. As long as the company was going in the right direction, they were happy. Eventually, they took a lot of pride in it."

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