| Qupé owner Vintage Wine Estates is looking to go public so it can continue to invest in new brands.
By Liza B. Zimmerman | Posted Tuesday, 09-Mar-2021
Few companies in the wine business have historically been publicly owned. Pegging the number precisely Rob McMillian, the executive vice president of the Silicon Valley Bank, says that the total would be fewer than 20 currently worldwide.
Generally, the wine industry has not been friendly to these types of business models. “It can be a bit tough for publicly traded companies. It really requires some long-term investments [which can] can tie up a lot of capital and the agricultural cycles can make it hard to generate predictable, consistent returns in the short term,” shares Stephen Rannekleiv, a global sector strategist for beverages, in Rabobank’s New York City office.
“Compared to wine, investments in other categories [such as beer or spirits] can look more attractive. Wine is also a highly fragmented market, where it has been traditionally harder to build very strong brands, as the market is extremely crowded.”
“The obvious negative aspects of becoming a publicly traded company are a loss of control over the organization and the threat of a sudden change in the business culture of a closer-knit, privately owned winery,” notes Mario Zepponi, a wine merger and acquisition advisor at the Santa Rosa-based Zepponi & Company.
This is why Vintage Wine Estates (VWE)’s recent IPO – scheduled to close in mid-May – has attracted so much attention as it is one of the few American wine conglomerates to have recently gone public. The company’s recent partnership with the Toronto-based Bespoke Capital Acquisition is slated to give VWE greater access to public markets and “additional capital to continue building on and accelerating our history of acquisitions [20-plus completed in the past 10 years] and enable us to continue to invest in our brands,” shared Terry Wheatley, the president of the California-based VWE, which owns brands such as Qupé and BR Cohn. “The proceeds from the transaction will provide a long runway of growth that will allow us to achieve the scale we need to be successful and profitable.”
Duckhorn Vineyards, which declined to comment for this story, is believed to be the next major wine company slated to go public. This move was confirmed by several major wine industry analysts.
Wine’s public reluctance
Aside from some major players – such as Constellation Brands, Pernod Ricard and LVMH as prime examples – most wineries tend to be privately owned, notes Rannekleiv. A public offering can also make a winery seem much less like an accessible family business, which is an important part of the mystique that is so essential for promoting wineries and attracting customers.
There will always be a stigma to going public that can compromise a winery’s investment in family values. “There will always be a tension between pursuing growth via access to public capital markets and preserving a private company’s image, authenticity and grassroots values. One should not assume that a publicly traded company lacks genuineness and authenticity [e.g. Apple, Southwest Airlines and Tesla]. However, it will be essential for the executive leadership of the publicly traded company to cultivate, promote and protect such core values,” shares Zepponi.
Another issue is that the wine industry doesn’t always generate steady revenue.
“Operating returns are quite low in the wine industry compared to many other industries. Really big returns are usually the result of selling the vineyards or brand later. There’s a substantial overhead burden in going and remaining public that only larger wine companies can really support. The business doesn’t really lend itself to the quarterly earnings and profit reporting that obsesses Wall Street,” says Christian Miller, the proprietor of Full Glass Consulting based in Berkeley, California.
However, concerns about losing family-owned, brand equity card can be mitigated if the company in question has solid brands and knows how to market them. “The consumer generally doesn’t look at the total portfolio of the company. They engage with individual brands. As long as Vintage [VWE] can effectively support and manage the brands, [going public] it isn’t an issue,” Rannekleiv adds.
© VWE/Dan Mills
| Terry Wheatley says that the pandemic has made wine acquisitions look worthwhile.
However, he notes, that “smart companies like VWE often keep the founders involved”. That was the case with the sale of Robert Mondavi to Constellation Brands in 2004, when founder and family patriarch Robert remained involved in running the winery. Few consumers even knew the company had been sold and no longer belonged to the Mondavi family.
One of the keys to a smooth transition during an IPO is keeping family members as “the face of the business and having them invested in assuring its ongoing success. For a winery owner looking to take a step back from day-to-day operations, selling to someone like VWE can be a nice pathway to put some money in their pockets,” Rannekleiv says.
However, given the bigger picture, there are a number of clear hurdles for wine companies to effectively go public. “While Wall Street operates on a quarter-to-quarter cycle, the wine industry operates on an annual growing cycle, with 40 percent of sales backloaded to the holidays, while Wall Street is more interested in quarter-to-quarter change. The investment in vineyards can be extensive, yet the appreciation in vineyard assets never goes into accrual earnings but is recognized when the vineyard is sold. Individuals who own a vineyard asset can be patient and take the capital gains at the time they are ready to turn over the vineyard. Public companies are on the other hand are pressed by investors and analysts to show accrual earnings,” says McMillan.
Because of this, there has not been much of a history of pubic wine companies. “Wineries have to a large extent been started by individuals and non-institutional investors,” confirms McMillan. “Vineyards have had more institutional ownership within public and non-public funds, often as alternative assets in a portfolio. Winery acquisitions are more often pulled off with bank debt supported by institutional or private money.”
The advantages of a SPAC
These types of acquisitions – SPACs, an acronym for a special purpose acquisition company that is publicly traded and has no operations, no assets other than cash and a plan to eventually buy another company – are fairly new to the market and the wine industry. Previously, most wine entities with corporate ambitions, merged with other entities or went public on their own. Using a blank slate as an investment shell allows the company guiding the collaboration to have a solid cash influx – allowing it to buy new brands – without a cultural imposition or threat of a clash from the company with which is it partnering.
McMillan adds that a SPAC can be “be a simplified way to take a company public. With the shell already public and funded, months can be shaved off the timing of an acquisition.” He goes not to note: “For the investors, the benefits are more about the speed of offering and the terms of the target acquisition … For the winery, a single purpose SPAC – as in the case of VWE – allows the existing management team to continue on with added acquisitions. Being the target of an acquisition by a larger company with multiple brands means the target has to adapt to the acquirer and most often loses control.”
This type of acquisition is also cost effective. “For a company the size of VWE, there would be very short list of potential buyers that could afford it and then effectively integrate it. I think they had been thinking an IPO was likely their best exit plan for some time,” says Rannekleiv. He adds that the deal with Bespoke was done at a price known in advance and came with additional capital for future acquisitions.
Zepponi thinks IPOs can be positive for some wine conglomerates. If the “company is well capitalized, professionally managed and operates within a corporate structure …[then an IPO] should not create a departure from its standard operating practice once it becomes publicly traded”.
A company, such as Bespoke, was also perfect partner for VWE because Paul Walsh, Bespoke’s chairman, was CEO of Diageo for more than a decade. According to Wheatley, going forward he will be the non-executive chairman of VWE.
Wheatly also notes that because of the pandemic the acquisition market in the wine industry is looking particularly favorable. “We didn’t necessarily have to go public but the unusual market circumstances presented us with great opportunities for consolidation and synergies of this $45-plus billion and growing industry.” An additional benefit of the deal is also “greater access to capital, enhanced visibility and for the company and a currency for acquisitions”.
She adds that while VWE previously focused on the $10-20 sweet-spot sector, it will now expand to the $10-30 range as pricing channels continue to grow.
What the future holds
A handful of other major wine industry players are likely to soon go public: including Duckhorn in the United States and Virgin Wines in the United Kingdom, according to Rannekleiv.
Many analysts think going public is the right move for some companies. “The SPAC phenomenon should not carry a negative connotation as it relates to the wine industry. So far, there have not been any recent examples of companies abusing their attempts to access public capital markets,” Zepponi says.
Rannekleiv adds: “The amount of liquidity that is being pumped into the market – to help stimulate the economy in the wake of the pandemic – is playing an important role here.”