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What's Next for Ste. Michelle?

Photo by: David Yellen

Posted: Sep 19, 2008 10:26am ET

Industry analysts are having a field day guessing what's going to happen to Ste. Michelle Wine Estates, Washington's biggest wine company. Last week it was announced that Altria, which used to be Philip Morris, would be buying UST, which used to be U.S. Tobacco. Ste. Michelle is an independently run subsidiary of UST.

The analysts say that Altria, whose main business is cigarettes, acquired UST for its smokeless tobacco brands. They don't see how a wine company would fit, and they expect Altria to put it up for sale quickly. I am not so sure. For one thing, Altria already is in the adult beverage business, with a 29 percent stake in the brewer SABMiller. Why not add to the high life?

In Washington, Chateau Ste. Michelle, Columbia Crest, Snoqualmie, Northstar, Spring Valley, Eroica (a joint venture with Dr. Loosen of Germany) and Col Solare (a joint venture with Antinori of Italy) all fall under the Ste. Michelle umbrella. In California, it has owned Villa Mt. Eden and Conn Creek since 1986, and recently partnered with Antinori to acquire Stag's Leap Wine Cellars from Warren Winiarski.

Ste. Michelle makes a pretty good profit. It claims to be the fastest growing wine company among America's 10 biggest. UST has supported it with capital investments, buying vineyards, updating equipment and acquiring new wineries. Further investments would be pocket change for a big tobacco company.

Philip Morris was once in the wine business, too. For 17 years in the 1970s and '80s, it owned the Australian winery Lindemans. The brand is now in the hands of Foster's Wine Estates, but under Philip Morris it was among the first to make an impact in the U.S. market. I have no idea whether anyone from that era is still with Altria, so it may not matter that the company indeed has some history in wine. And this is a very different wine market than it was then—bigger, more robust, and yes, more competitive.

The analysts only see that wine is a very different business from tobacco, less profitable and much more competitive. UST was in it, according to people I've spoken with at Ste. Michelle, as much for the prestige of owning a classy winery as for any other reason. Who's to say Altria won't have the same impulse? A tobacco company can use a little prestige.

Should Altria decide to divest, however, most analysts peg Constellation Brands as the most likely buyer. But Constellation is currently in the midst of selling off some of its own wineries, dealing with a welter of duplication that came as a result of its own acquisitions. Other big drinks companies have been mentioned as suitors, including Diageo and Brown-Forman.

Both Ted Baseler, Ste. Michelle's current CEO, and Allen Shoup, his predecessor, say that UST has pretty much left Ste. Michelle to run its own business over the years. UST approved the CEO hirings and wrote checks for infrastructure and acquisitions that only made the asset more valuable. But it did not meddle in winemaking or marketing decisions.

It's not likely that a wine company or a drinks company would keep hands off in the same way if one were to acquire Ste. Michelle. So it would not surprise me if the current leadership at Ste. Michelle already is working behind the scenes to put together investors to buy the company should Altria decide to sell. It would be a big buy. Analysts put the asking price around $800 million.

"This is a pretty strong company on its own," said Keith Love, vice president of communications for Ste. Michelle, "thanks to UST, which gave us resources and a lot of freedom."

One interesting wrinkle might be Antinori, already partners with Ste. Michelle on several fronts. Ste. Michelle imports Antinori wines to the United States. Together they own Stag's Leap Wine Cellars in California and Col Solare in Washington, where they planted a big vineyard and built a lavish new winery on Red Mountain. Given the longstanding and fruitful relationship, I asked Albiera Antinori what interest the Italian company might have in buying the company.

"We are not in the position of buying Ste Michelle," she wrote in an email, but added, "Our links with Ste Michelle are very strong, since a long time. Therefore we will evaluate any opportunities to make these links even stronger."

John Jorgenson
Seattle, —  September 19, 2008 12:16pm ET
I wish I had 800 million!
Harvey Steiman
San Francisco, CA —  September 19, 2008 6:47pm ET
They might take a few bucks less, if it comes to that.
Tristen Larson
Seattle WA —  September 19, 2008 9:33pm ET
Regardless of the new owner, I hope they leave the company alone. Not all the offerings are great, but overall Ste. does a great job representing WA to a lot of wine drinkers that don't know any of the other wines from the state.
Allen C Shoup
September 24, 2008 11:47pm ET
This is not a small oncern for the Washington wine industry as this wine group controls close to 70% of the Columia Valley grape market (and the Columbia Valley represents about 98% of WA wine.) The Ste Michelle group currently injoys ideal ownersship and managment, and as the industry is on the cusp of another big jump in growth it would be a bad tme to disrupt the synergistic flow of support that has developed over the years.

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