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The Consolidation Factor

Posted: February 3, 2000

The Consolidation Factor

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The recent series of high-profile winery acquisitions totaling more than $950 million may signal a new wave of consolidation in the wine industry. Big public companies have been gobbling up well-known wineries, often for very high prices, as a way to build their brand portfolio while interest in wine is high. Meanwhile, wineries are turning to these large corporations to help them compete in the marketplace.

This year alone, Canandaigua has snapped up Simi Winery in Sonoma County for $55 million and Napa Valley-based Franciscan Estates for $240 million, while Brown-Forman Corp. bought Sonoma-Cutrer for about $125 million. Last year, Fortune Brands paid $100 million for Geyser Peak Winery, also in Sonoma.

And although LVMH Moet-Hennessey sold Simi, the French luxury group is still in growth mode. Its head, Bernard Arnault, has taken over three high-profile names in France in under a year. The company acquired Champagne Krug for $175 million and finally sealed its long-disputed deal for Chateau d'Yquem in Sauternes for more than $101 million, while Arnault himself and a partner forked over about $156 million for Chateau Cheval-Blanc in Bordeaux.

But why?

Why all the activity? "You're seeing the convergence of a number of positive factors that contribute to a higher perception of [wineries'] value than in the past," says George Coope, principal at Hambrecht & Quist, a San Francisco investment firm that has handled public offerings for several major wineries. "Not only that, [these factors] sort of compel consolidation types of acquisitions."

To start, wine is enjoying a boom among American consumers. But while overall sales are rising, the cheap jug wines are dropping in popularity. In their place, Americans are buying more premium wines. Among California table wines, for example, those priced $7 and up at retail are considered to be the fastest-growing segment at this time.

Companies like Canandaigua, which primarily sells inexpensive blends, such as Almaden and Paul Masson, are looking at this trend and deciding it makes sense to diversify into higher-end brands. Such companies have two options, according to Evan Goldstein, spokesperson for Seagram Chateau & Estate Wines Company (which is trying to sell its two Champagne brands, Mumm and Perrier-Jouet). They can start from scratch to develop a new wine -- or they can buy an established company. "Presuming one has the resources, that's probably the easier way to go," he comments.

But the number of wineries worth acquiring is limited. "The brands that are big enough to matter -- those with $20 million in sales and over -- are few and far between and there are a lot of acquirers," says Coope. "That drives the prices up." Canandaigua, Brown Forman and Fortune aren't the only big players out there. Other companies considered to be looking at strategic acqusitions include Beringer; Mondavi, under certain circumstances; Stimson Lane, which owns Chateau Ste. Michelle and Columbia Crest in Washington; and Australia's Southcorp, which has expressed interest in U.S. purchases.


LVMH -- which is trying to become the world's dominant luxury consumer products company -- is a story in itself. While the company divested itself of the still table wine business with the sale of Simi, it's still a contender for Champagne and sparkling wine brands that fit its high-end portfolio. (It already owns prestigee cuvees like Moet & Chandon and Veuve Clicquot.) Meanwhile, it continues to expand other consumer product lines, with deals such as its attempted takeover of Gucci.

In addition, a new set of investors is interested in wineries now that there are a number of public companies in the industry, according to Coope. "There is greater interest among financial investors than I've ever seen before. It used to be that you couldn't get any of these equity funds to invest in the wine industry; now they're all looking to. They can't pay same prices that the strategic acquirers can, but there's a lot of money looking for a way in."

Also, a good economy brings a seller's market. Many wineries have been on the market for a long time -- including Franciscan. "It's the proverbial 'House for Sale,' but it's been on the market for so long that no one noticed the 'for sale' sign was still up," says a source close to the wine industry. Other wineries aren't listed for sale, but are willing to consider it if a buyer comes along offering the right price.

"A natural response"

Finally, it makes sense right now for wineries to become part of a larger organization. "Consolidation is a natural response to the future," says Allan Shoup, CEO and president of Stimson Lane, who expects the trend to wind down soon in the United States, but continue in Australia and start in Chile and South Africa. Consolidation has been occurring in the distribution channels, leaving the remaining wholesalers and retailers with more buying power. Wine brands are almost forced to consolidate under one umbrella to better compete for space on shelves and restaurant lists.

"It's increasingly difficult for the middle-size company to have the influence, sales force and promotion and marketing capability to be the equal of the larger companies," says Coope. Meanwhile, giants like Mondavi and Beringer have raised the ante by using more radio and TV ads to market their wines to consumers. "That's a big company thing, not a little company thing."

What does this consolidation mean for the average wine lover? Probably not much, other than more advertising. "The brands will get more visible and the big premium brands will get bigger," said Coope. "All the players know the industry very well, and they know how to make good wine at whatever price point they are aiming at. I don't think consumers will see changes in wine quality, and the pricing will be whatever the market will bear -- which is the situation now."

-- Dana Nigro, with Jane Shufer

So what do you think about all this? Send us your comments and we'll put the best ones on this page.

Recent sales in California:

  • April 22, 1999
    Canandaigua Buys Franciscan Estates in Blockbuster Deal

  • April 2, 1999
    LVMH Sells Simi to Canandaigua for $55 Million

  • February 11, 1999
    California's Sonoma-Cutrer Sells Majority Stake To Brown-Forman

  • July 23, 1998
    Sonoma's Geyser Peak Winery Sold for $100 Million

    Recent sales in France:

  • April 21, 1999
    Battle Over Chateau d'Yquem Ends With LVMH as New Owner

  • January 21, 1999
    Krug Champagne Bought by LVMH

  • October 23, 1998
    Chateau Cheval-Blanc Sold to LVMH Chairman and Belgian Businessman

    For more on Arnault:

  • December 31, 1998
    The Two Tycoons Behind The Cheval-Blanc Deal

  • November 30, 1995
    The Billionaires: Bernard Arnault

    Possible future sales:

  • January 22, 1999
    Seagram Looking for New Buyer for Champagne Brands
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