Bloomberg News

America Drinking Top-End Wine Fuels Napa Deals

September 04, 2012

America Back Drinking High-End Wine Fuels Napa Deals

Workers walk among hundred's of oak wine barrel's filled with aging wine inside the barrel cellar at Valley of the Moon winery in Glen Ellen, California, on Aug. 31, 2012. Valley of the Moon is a 60-acre property with 41 acres of vineyards and annual production of 35,000 cases. Photographer: Tony Avelar/Bloomberg

A new era for California’s priciest wine regions began Feb. 1, when PlumpJack Winery partners bought 50 acres in Napa Valley’s Stags Leap district, home to heralded vintners Shafer Vineyards, Clos du Val and Cliff Lede Vineyards.

The purchase kicked off a sales spree for premium properties across the state that’s poised to climb to $800 million by year end, the most since the 2007 market peak, according to Demeter Group, a San Francisco-based consumer investment bank and advisory firm.

“It’s been a complete turnaround,” Stephen Rannekleiv, lead U.S. wine analyst in New York for Rabobank Nederland NV, the Utrecht, Netherlands-based bank that finances agriculture businesses, said in a telephone interview. “There’s lots of interest in good California properties right now. If you’ve got vineyard acreage, it’s a hot commodity.”

Renewed dealmaking follows three years of plunging demand for high-end California wine, which accounts for more than two- thirds of U.S. bottle sales above $20, according to data compiled by Nielsen Holdings NV. The recession that started in December 2007 turned luxury consumers into bargain hunters “dancing on the graves of bloated wine inventories,” Rob McMillan, wine division founder at SVB Financial Group Inc.’s Silicon Valley Bank, wrote in an April 17 industry report.

Sales Gains

Purchases of California premium wine totaled $410 million in the 12 months through July 21, up 14 percent year-over-year and better than the 11 percent gain for all U.S. luxury producers in the period, store-scan data from New York-based Nielsen show. High-end wine sales are advancing at more than double the rate of overall wine sales, with north coast warehouse shipments up 12 percent in the first half of 2012 from a year earlier, said Woodbridge, California-based industry consultant John Gomberg.

“Everything that was restricted is more fluid compared with two and three years ago,” Sam Bronfman II, former president of Seagram Chateau & Estate Wines Co. and now managing partner of San Francisco-based winery financier Bacchus Capital Management LLC, said in a telephone interview. “From expense accounts to travel to entertainment, things are moving.”

Credit availability is unlocking sales, as mortgage distress abates and wineries streamline operations, said Jeff Menashe, Demeter Group’s chief executive officer. Vineyard defaults plunged last year by 61 percent in Napa and 44 percent in Sonoma from the 2009 peak, when 18 properties in each county entered the first stage of foreclosure, according to DataQuick. For the first seven months of 2012, only four vineyards in Napa and eight in Sonoma were in default, the San Diego-based research firm said.

‘Meaningful Tailwinds’

“Luxury wine has gone from having significant headwinds to meaningful tailwinds,” Menashe said in a telephone interview. “The industry is growing at the ultra-premium end. Everyone is trying to push up.”

Distressed sales in 2011 were limited to “fringe” properties outside prime growing districts, according to a year- end summary by the California chapter of the American Society of Farm Managers and Rural Appraisers. Five bank-owned vineyard sales occurred in Lake County north of Napa, where premium vintners buy cheaper grapes for blending, said appraiser Michael Pipkin of Santa Rosa, California-based lender American AgCredit.

Credit Access

“It’s a fairly healthy situation, with access to credit again and strategic buyers looking for really good property,” said Bill Stevens, Silicon Valley Bank’s wine division manager in St. Helena, California. “Wine producers got right-sized.”

The lender’s wine unit had $374 million in mortgages secured by real estate as of June 30, an 8.1 percent increase from the end of 2011, according to an Aug. 8 regulatory filing from the Santa Clara, California-based company.

About $500 million in vineyard and winery deals in the premium north coast and central coast regions of California were completed this year through Aug. 13, Demeter Group data show. Another $300 million in transactions are pending, the company estimates. Property is changing hands after sales “fell off a cliff” in late 2008 as the financial crisis took hold, said Sonoma-based land appraiser and real estate consultant Tony Correia.

The biggest deal so far in 2012 is Constellation (STZ:US) Brands Inc.’s $160 million acquisition in June of Mark West brand, produced from fruit around California and bottled in Sonoma and Napa, according to Demeter Group. Mark West is the best-selling U.S. pinot noir, with 600,000 annual cases, said Victor, New York-based Constellation, the world’s second-biggest wine company.

Foley Family

In Napa, deals include Fidelity National Financial Inc. Chairman William P. Foley’s Foley Family Wines purchase in May of the Sawyer Cellars winery and 49 acres (19.8 hectares) in the Rutherford district, and PlumpJack’s acquisition of the Stags Leap property, first planted with wine grapes in 1963 and dubbed Odette Estate by the new owners, according to statements from the vintners that didn’t disclose price.

“The last couple years, some vineyards were laying fallow until the economy turned around and people felt there was demand for the wines,” John Conover, partner and general manager of Oakville-based PlumpJack, said in an Aug. 11 interview at the property, which includes a 25,000-case winery. “Grapes were available right through the harvest last year.”

In Sonoma, Wilson Family Wine Estates in March purchased 137 acres in Dry Creek Valley; GI Partners LLC’s Duckhorn Wine Co. in June bought more than 400 acres in Sonoma’s Alexander Valley; and West Coast Wine Partners LLC in August bought Valley of the Moon winery and 60 acres in Sonoma Valley, the companies said without giving prices.

Gallo Winery

E&J Gallo Winery Inc., the world’s biggest wine company, in August acquired Monterey County’s Courtside Cellars with a 60,000-ton capacity winery, as well as more than 300 acres, also in Monterey, in a separate central coast deal. Modesto, California-based Gallo didn’t disclose prices for either transaction.

Premium deals so far have hewed to valuations that haven’t changed much since the 2007 boom year, according to Correia. The best California vineyards are priced at $175,000 to $300,000 an acre on average in Napa; $75,000 to $125,000 in Sonoma; and $35,000 to $50,000 in Monterey. Very rarely, a small “A+ super- primo” Napa property changes hands for as much as $450,000 an acre, he said.

“We’re seeing some major players make some major moves,” Correia said in an interview at Valley of the Moon, where the new owners had begun pruning fruit in early August to increase the quality of grapes on the vine before harvest begins next month. “The wineries are the buyers today, versus hobbyists, the rich-and-famous, venture capital and vulture funds.”

Deal Multiples

The dollar value of California wine deals this year has already equaled last year’s tally and will be the highest since $1.4 billion in 2007, according to Demeter Group. Sales were $600 million in 2008 and less than $150 million in both 2009 and 2010.

Last year, almost half of the total was from one deal, Santiago-based Vina Concha & Toro S.A.’s $238 million acquisition of Fetzer Vineyards, which included 1,060 acres of owned and leased vineyards in Mendocino County, brands including Fetzer and Bonterra, and production capacity for 11 million gallons. In 2007, the total was composed primarily of three deals, led by Constellation’s $877 million purchase of Beam Wine Estates assets.

“Today, financing has become more available, and banks are looking at a stabilizing market,” Dan Zepponi, co-owner of Glen Ellen, California-based West Coast Partners, said in a telephone interview. Valley of the Moon will concentrate its 45,000-case annual production on cabernet sauvignon, zinfandel and chardonnay from prime Sonoma growing districts, he said.

Gavin Newsom

At Odette, whose other partners include billionaire oil heir Gordon Getty and California Lieutenant Governor Gavin Newsom, a new 20,000-square-foot wine cave with dining and tasting rooms is under construction in Napa’s Stags Leap.

The existing winery will be replaced by a new structure composed of recycled shipping containers and a “green living roof” that are intended to reduce energy consumption, according to Conover. A cabernet sauvignon from Stags Leap, made by pioneering vintner Warren Winiarski, triumphed in the 1976 “Judgment of Paris” blind tasting against French wines from Bordeaux, earning Napa its global reputation, he said.

“Spending the money makes sense for us, because we’re in it for the long haul,” Conover said. “We see the consumer coming back. Everybody is optimistic.”

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net


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