Public wine companies: withering on the vine?

Back in the 1980s and '90s, it looked like the wine industry had finally found the key to open the vaults of the capital markets. No more dependency on local bank debt; no more worries about estate issues; no more begging from friends, relatives and business associates. By golly, the wine industry was mature, and real investment bankers wanted to speak to participants.

Although the Tiburon Vintners experience in the 1970s cast some doubts on the efficacy of wineries as public companies, the success of Canandaigua and Chalone, a Bull market and short memories conspired to bring investor attention to the industry. Also, large publicly traded companies (U.S. Tobacco, Fortune Brands, etc.) had acquired, or were in the process of acquiring viticultural assets. Add to that a dash of wine health benefits, compliments of CBS's "60 Minutes," and the wine business appeared all the more appealing.

When Robert Mondavi became a public entity, a template was created from which investment bankers could judge the industry. One of the benefits of public ownership is the removal of financial opacity and illiquidity which often cloud true valuation. If you could compare well to Mondavi's financial ratios, maybe you had the right stuff for going public.

And so it began. Fully integrated wineries such as Beringer, Ravenswood, and R. H. Phillips joined the public ranks. Less integrated organizations, such as Scheid Vineyards and Golden State Vintners, also found a public home. Even a wine retailer, Geerlings and Wade, made the cut.

Boy, what a difference a few years, a Bear market and new regulations make. First to go were Beringer, Ravens-wood, and R.H. Phillips, all acquired by larger organizations. It is assumed that the marketplace fairly values public companies. Sometimes, as in the above three situations, individuals or organizations think they know more than the hordes of emotional, ignorant investors. That is one reason acquisitions occur.

More recently, Geerlings and Wade basically left the public arena by deregistering its stock with the SEC, and now trades only in the Pink Sheets. Golden State Vintners, privatized in 2004, was the subject of a heated and ongoing battle between management and an outside private investment group, which the latter won.

Now, two of the paragons of public wine companies are leaving the market-place. Chalone Wine Group is in the process of being taken private by its major shareholder, Domaines Barons Rothschild, along with the Huneeus family and Constellation Brands. The other stalwart, and probably the leading light of the public's perception of a public wine company, Robert Mondavi, will be folded into the world's largest wine organization, Constellation Brands.

Over the past few years, Constellation Brands has thrived as a public company, while a good half dozen have left the arena. Why such a ratio? Are the public markets an inappropriate venue for the wine industry? Each exit from the marketplace probably has a unique set of circumstances, but most share some commonalities.

Increasingly, senior managers question the value of being public. One former wine company CEO stated that more than 20% of his time was spent on public company affairs, to the detriment of the winery. Other executives complain of the rocketing costs of complying with the new regulatory environment in the wake of corporate scandals.

As with most government regulation, smaller companies have a tougher time of bearing the regulatory burden. Many public companies have seen their legal and accounting bills jump by 100% over the past five years. For companies that are unable or uninterested in using the capital acquisition benefits of being public, the headaches may not be worth it.

This disenchantment may be reflected by the absence of wineries going public. During the period wineries were leaving the public arena, there were only two new entrants: Asconi Corp (ACD) and Knightsbridge Fine Wines (KFWI). However, both of these organizations chose reverse mergers rather than public offerings to achieve their public company status.

The absence of public offerings may also reflect disillusionment with the wine industry on the part of the investment banking community. Lack of investor and brokerage interest recently has caused the cancellation of an Oregon winery's initial public offering.

But whether or not a winery really can succeed as a public company may lie with a single intangible. That intangible is a fuzzy concept called the "right stuff." The right stuff encompasses issues such as discipline--both in terms of management and financial controls; vision--of not only where you are, but where you are going and a sustainable, expandable business plan that can remain viable in the face of the fiercest competition.

In an industry noted for family managements and laid back lifestyles, it may be a challenge to meet the above standards. Yet, Constellation Brands rose from humble (family-owned) beginnings by recognizing that the prestige and panache of being in the wine business will never outweigh an investor's need for earnings growth. Public wineries that don't recognize this fact will be condemned to use public status to attract the consumer/investor, as opposed to the serious investing public.

The privatization of Chalone and Mondavi represents a mixed blessing for the portfolio we've followed in Wines & Vines the past several years. On the one hand, their higher acquisition prices have helped propel our wine portfolio to a year-to-date return of 33.6% (77% since inception). On the other hand, 29% of our portfolio positions will disappear on their departure from the public arena. Their departure may force us to redefine our universe of publicly traded wine companies and challenge our portfolio optimizer to re-allocate positions across a broader wine industry portfolio.

(Bill Wallace has been an observer of, and a participant in the wine industry for more than 35 years. He is presently affiliated with a San Francisco money management firm. Marshall Berol also is involved in money management and is an investor in several wine ventures. Contact them through bill@globax.com.)

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