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April 13, 2021
Two of the wine industry’s leading premium producers—The Duckhorn Portfolio and Vintage Wine Estates (“VWE”)—have recently announced public offerings, a dynamic that is expected to continue to fuel an already robust M&A environment for the beverage industry in 2021 and beyond. The wine segment hasn’t seen a pure-play IPO since Crimson Wine Group in 2013.
Robust market dynamics and strong retail investor appetite have rewarded Duckhorn with a market cap of over $2 billion and it is expected VWE (which was recently acquired by a SPAC), will also garner a compelling public market valuation and an attractive currency to continue their acquisition strategy. Furthermore, these two producers’ ability to tap the public markets will provide meaningful validation of the attractive return potential for private equity investors, who have historically been averse to investing in the wine industry.
COVID-19 turned many wine producers’ sales channels upside down in 2020, with the decline in on-premise sales hitting small and mid-tier producers especially hard. In tandem, wildfires (and the associated smoke taint) damaged or devastated vineyards, production facilities, and properties across California and Oregon. Despite these challenges, and now with the gradual rollout of the COVID vaccine shining a light toward the end of the tunnel, the market is well-positioned for a significant rebound in M&A activity as earnings improve and buyer appetite increases.
The long-awaited completion of the Gallo/Constellation transaction may also signal a return to the M&A market for two of the industry’s largest suppliers, and both VWE and Duckhorn have cited M&A as a cornerstone of their future growth strategies.
Overall, the current public and private market dynamics create a compelling opportunity for small and mid-tier producers to consider M&A or an investment strategy to accelerate growth, find a strategic partner, or provide an opportunity to transition the business and obtain liquidity at an attractive valuation.
Special Purpose Acquisition Company, Bespoke Capital, announced the acquisition of VWE on Feb. 5, 2021 for a purchase price of $690 million, with an additional $50 million in future potential consideration. The acquisition provided VWE with a significant deleveraging event ahead of the anticipated public offering. “At some point, it takes a lot of capital to be in the wine business, and we needed more capital to continue our growth,” cited VWE CEO Pat Roney.
Notably, the SPAC that acquired VWE was initially raised to acquire cannabis brands. Given the turmoil in the cannabis market and the number of SPACS that had originally targeted the space, this could suggest that additional capital pools could turn their sights to beverage alcohol.
VWE has a track record of continuously and opportunistically acquiring and rolling up smaller brands, and has historically been a more value-driven buyer. In 2018, the company raised $75 million from leading agriculture-focused investment firm AGR Partners, which provided the company with a meaningful growth capital investment to continue to invest in building its portfolio to its current scale. We expect that with a public currency and deleveraged balance sheet, VWE will become an even more aggressive acquirer, becoming more competitive on higher-quality assets and brands of scale.
VWE has a broad portfolio across price points, varietals, and regions—spanning California, Washington, and Oregon. The company will likely continue to look at a wide array of assets that can leverage its value proposition, including sales and marketing infrastructure, supply chain synergies, and back-office support. The company’s infrastructure provides an attractive alternative for some smaller brands that want to focus on growing and winemaking instead of the commercial aspects of selling wine through wholesale and direct-to-consumer channels.
Duckhorn completed its $300 million IPO on March 18, 2021, issuing 20 million shares of common stock for an initial offering price of $15 a share, with shares soaring over 20% on the debut, translating to a market cap of over $2 billion. The IPO provides TSG Consumer Partners—Duckhorn’s majority owners who acquired the company in 2016 for approximately $600 million—with a compelling return.
With the IPO complete, Duckhorn will become a benchmark for how private equity investors can create meaningful value in the beverage alcohol category with a premium brand portfolio, laser-focused distribution strategy, and strong management team. Historically, the wine industry’s exposure to agriculture and the associated risks, as well as the significant working capital investment required to age inventory, have limited broader private equity interest. However, we believe that with both the VWE and Duckhorn transactions, we will see a significant increase in private equity and institutional investor interest.
Under TSG’s ownership, Duckhorn successfully executed on a growth plan to expand the portfolio to multiple brands and varietals while also staying true to the company’s core luxury strategy. Management has developed a best-in-class sales and marketing team that has successfully activated the portfolio across the retail, direct-to-consumer, and on-premise channels, and has had tremendous success growing its more moderately priced Decoy brand ($20-$35/bottle) in recent years, which has provided a “an incredible funnel for people to luxury wines,” said Duckhorn CEO Alex Ryan.
Duckhorn also completed two accretive acquisitions in recent years, including highly regarded Sonoma Pinot Noir producer Kosta Browne and Central Coast Pinot Noir producer Calera. Ryan told MarketWatch following the IPO, “Growth will continue to be internal,” but that the company would take a “very diligent and careful” approach to exploring acquisitions. “There are a lot of great wineries out there…maybe some will fit our culture and growth profile,” Ryan said.
In any such acquisitions, it is unlikely Duckhorn would stray too far from the luxury and ultra-luxury categories, likely looking for trophy assets of reasonable scale, varietals to round out its portfolio, or bringing Oregon assets into the fold to complement its existing Washington and California portfolio.
With a robust public market environment and revenues for many beverage suppliers expected to rebound strongly this year with on-premise re-openings, we believe it is an opportune time for small and mid-size suppliers to consider M&A or an outside capital raise as a way to enhance supply chain and route-to-market capabilities and capture additional scale with a strong strategic or capital partner. Potential sellers evaluating the market should also consider possible capital gains tax increases looming in 2022. Attractive brands and cash-flowing assets will have the opportunity to achieve attractive valuations from investors during this unique period while capturing maximum proceeds from a tax perspective.
The Cascadia team has extensive industry experience and is in regular contact with investors and strategic buyers across the beverage industry. Please do not hesitate to reach out as you consider your M&A and capital-raising alternatives.
For more information please contact a member of our Food, Beverage & Agribusiness investment banking practice:
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