Think 2023 was chock full of winery mergers and acquisitions in the US? Then get ready for 2024, which may be even busier.
There probably won’t be as many blockbuster deals as in 2023, say those the who work in winery mergers and acquisitions (M&A). After all, how does anything top E&J Gallo buying Napa’s Rombauer Vineyards or Treasury Wine Estates spending upwards of $1 billion for Paso Robles’ Daou Vineyards?
But expect to see a variety of deals, and maybe even another blockbuster or two.
Is a shakeout coming?
Primarily, the focus will be on small- and medium-sized producers and vineyards, and even some facilities. Buyers will be looking for what Pat deLong, founder and principal at Azur Associates in Napa, calls “real brands,” like those involved in many of the biggest deals over the past several years. And, he says, there aren’t a lot of real brands — of any size.
The experts say there will likely be more properties for sale than there will be buyers. And those that aren’t sold? The industry could finally see a long-feared shakeout, as higher cost structures, including land, labour and insurance, may finally force some smaller producers out.
There will likely be more properties for sale than there will be buyers.
“For buyers, it will be similar to prospecting for grapes,” says attorney Todd Friedman, a Stoel Rives partner and co-leader of the Portland firm’s agribusiness industry group. “The deals that get done will meet specific needs, whether it’s to add capacity or to fill a specific niche for the acquiring company.”
The current wine industry climate — flat sales, decreased margins, and higher costs— probably won’t slow the activity. Neither will decades-high interest rates. In some respects, those will give some companies more opportunities to make deals.
“The companies that get bought will have respectable valuations, but just won’t be as prominent, says Robert Nicholson, the founder and a principal at International Wine Associates in Healdsburg. He identifies middle-tier companies, those who rank among the middle 50 of the 100 biggest US producers, as those that will be the most active.
“No one will want to buy companies that they have to repair,” he says, “because it’s very difficult to turn around a wine brand. And there will be lots of those for sale.”
More and more deals
Talk to the experts, and to a person, they see the next five to eight years as boom times for winery mergers and acquisitions. Case in point: Duckhorn Portfolio paying $400 million in stock and cash for upscale Chardonnay house Sonoma-Cutrer Vineyards on Nov. 16, both of whom fit the mid-size profile the analysts discussed.
The reasons are varied. ”Honestly, you can find about 15 reasons to explain why people want to do deals,” says Erik McLaughlin, the CEO of METIS in Walla Walla, Washington, and which focuses on the Pacific Northwest. “Companies are looking to solve specific problems with acquisitions.”
They highlight six reasons as among the most important.
Six reasons for an acquisition
Wholesaler consolidation
As the second tier continues to consolidate, even larger producers are looking to add brands to maintain their influence with their distributors, says Friedman. Bigger wholesalers prefer bigger brands, and they typically spend less effort — or even drop — smaller brands. “What is it? The number of wholesalers is down by 20 or 25% from 25 years ago,” Friedman explains. “So the middle-sized companies are getting squeezed unless they add brands.”
Filling niches in the portfolio
This also means “access to supply,” says DeLong. “As they grow and expand their number of SKUs, they’re going to need more grapes.” DeLong’s point here, which was shared by several others, is that despite the overall flat-to-lower US wine market, there are areas showing growth, even if some is only in the low single digits. So if a producer buys a brand to bolster a specific price point, it’s going to need more grapes as the brand expands.
This is especially true for a variety of higher-end producers in Oregon, says McLaughlin, who notes that these wineries have higher margins and are seeing higher sales growth. If any of them are acquired, the new owner will need to source more grapes to expand production to take advantage of those higher numbers.
Making the financing numbers work
“I think, when we saw interest rates double to 6.5% or more, a lot of buyers reconsidered about how they would make the deals work, and that they didn’t make sense at that level,” says Friedman.
Given the higher rates, banks are being choosier about lending, even though they are still looking to finance acquisitions. Now, he says, prospective buyers are looking harder at the financials of the properties they’re considering. How reliable are those sales figures? Are those cost projections in line with earlier estimates? If not, a deal that might have passed muster 18 months ago probably won’t today. Hence, the seller may have to give more to close the deal, whether on the purchase price, assets to be included, and so forth.
It’s also worth nothing, say several experts, that there seems to be more private money, and especially from Europe, checking in on US acquisitions. Some of it is private equity, though those buyers don’t seem as eager as they were 18 months ago. Rather, it’s family or corporate money, which won’t need bank financing.
Gaining more clout on the on-premise
The Gallo-Rombauer deal, say the experts, is a perfect example of this. Gallo, now that it owns one of the most prominent on-premise brands in the country, can gain leverage for its other brands. Obviously, it’s not a quid pro quo, which is illegal in many states, but a more subtle, nuanced approach — often working in conjunction with the wholesaler.
Focusing on the US direct-to-consumer market
The DtC market, though having slowed from its rapid growth during the Pandemic, is still seen by many as a key to small- and medium-sized winery growth. This is especially true for producers in higher-end appellations or who make pricier wines, including Cabernet Sauvignon and Pinot Noir.
“I think you’ll be seeing wineries filling in their DtC niche,” says McLaughlin, “as they try to improve their channel mix. They’ll be looking at the long term, and seeing what brands will benefit them the most in that area.”
Eying non-US markets, and especially China
US producers are notorious for exporting very little. Just slightly more than one in eight bottles went to another country in 2022, of which Canada took half, according to the Wine Institute trade group, so this might seem like a stretch. But DeLong says he’s convinced that the Treasury-Daou deal has major export implications, since it looks like the Chinese may loosen their wine import restrictions. And Treasury, an Australian company, has a long history of lucrative export deals to China. Could this, then, pave the way for another purchase or two of a Daou-style producer — with a solid critical and consumer reputation and even better sales figures -— with the Chinese market in mind?
In the end, says, Nicholson, “there will be a lot of great brands for sale. And the buyers will want to buy the greatest ones.”
