California’s property market churns

The property market for wineries and vineyards in California is buoyant, reports James Lawrence. Not only have some high profile wineries been sold, but investors are looking further afield, to states such as Oregon. What’s driving this churn in wine property?

Notable transactions 2013
Notable transactions 2013, Source: International Wine Associates

In 2013, vineyard acquisitions and mergers on the US West Coast were a key talking point for industry insiders, with leading­ properties like Araujo, Mayacamas and Qupé dominating the headlines. Over fifteen estates were sold in California last year, ­according to IWA transaction data, ­following the ­general trend of a buoyant market in ­winery real ­estate with a notably higher number of transactions since 2012. There are now an unprecedented number of properties needing a buyer, with a complex set of circumstances fuelling this substantial increase in for-sale signs. Both local and international buyers are on the prowl and experts predict that the market for successful brands will be very strong, with values reaching “unpre­cedented levels” for some properties.

Robert Nicholson, president of the ­Californian Merger & Acquisition advisory firm International Wine Associates, confirms that the number of properties for sale has grown significantly over the past year, with the luxury sector enjoying particular growth. “The sales of estates like Lancaster and Mayacamas have demonstrated that there is a strong demand from foreign buyers looking to acquire luxury wine assets, particularly in the Napa Valley and Sonoma. Many of these brands over the past few years have naturally waited for the financial crisis to pass before wanting to come to market,” he explains. 

However, the market is clearly not limited to California, with Nicholson underlining the fact that many companies are also looking outside the state for vineyards, Oregon being the major favourite target. In the first half of 2013, Jackson Family Wines purchased about 1,100 acres of plantable land and vineyards in the Willamette Valley appellation. The company subsequently purchased the 250-acre Zena Crown vineyard in the Eola-Amity Hills sub-appellation. Resonance then sold to Louis Jadot in August 2013.

At first glance this all seems to suggest that buyers are perhaps spoilt for choice. That is ­until Nicholson reminds us that some of the wineries for sale are in dire financial shape. “There are actually only a few great ­winery deals that happen, like Mayacamas and Araujo,” he says. “The number of viable ­buyers has rocketed, whereas the number of viable opportunities is dwindling. Many wineries are upside-down and not making the business work. It’s clearly difficult and very costly to successfully restage a distressed winery.”

Charles Banks, the former co-owner of Screaming Eagle who now runs the investment firm Terroir Selections, agrees, admitting that the number of properties on the market is “unprecedented”. Of course, many of these properties keen to attract investment or sell-up would rather the outside world remain ­unaware, reinforcing the discreet nature of these transactions where nothing is made ­public until the paperwork is signed.

Banks and others concur that the most vulnerable sectors exposed to a distressed sale continue to be the smaller middle-market outfits. “Middle-of-the-road wineries with extreme cost structures and capex-heavy plans are definitely at risk,” he says. 

Peter Mondavi Jr., of Charles Krug fame, agrees: “The fighting varietals or popular priced wines are being consolidated to a handful of major competitors that are being distri­buted through a very small group of large ­distributors and the shelf space is becoming more limited for this sector.”

This booming market in winery real estate, Nicholson emphasises, has been driven by a mixture of factors and is not solely the result of unfortunate financial circumstances. Banks adds that, “although financial difficulties ­often drive wineries to sell up, many times this is self-inflicted. The wine business is quite ­robust these days, so the blame cannot be laid upon the general economy.”

Or perhaps just unfortunate circumstances are often a key cause? Kevin Chambers explains why he sold Resonance to Louis Jadot in 2013. “Our home had ­sustained wind damage during a bad storm in December of 2012,” he said. “We were faced with rebuilding or selling. We learned that Jadot might be interested, and that seemed like a very appropriate company to carry on our work.”

Banks points out that the market for wine in the US is continuing to grow at an ­impressive rate, both for domestic and ­export labels. So why then are so many properties looking to sell? “The sales ­today are driven by a multitude of factors: a ­consolidating distribution system, little intersect from the subsequent generations in family wineries, which although solvent may be experiencing lacklustre financial performance which can be wearing on the owners,” says Mondavi.

Nicholson expands upon the theme: “While there is rarely a single trend to point to, the most frequent reason we have seen recently for selling a winery is financial; however, the next largest category of sales has been generational, with 15 such transactions since 2010. Motivation for these sales may also come from tax and inheritance issues.” He says that  IWA’s sale of both Lancaster Estate and Sausal Vineyards last year and the sale of Seghesio and Clos Pegase were all examples of generational transactions.

“The third type of transaction we label ‘opportunistic’,” he continues, where a seller takes advantage of beneficial market conditions and liquidates a brand, winery or vineyard at a strong price. “The sale of the Mark West brand to Constellation for $160m is a prominent example of this type of transaction, and also the sale of Sloan in Napa, which reportedly fetched $50m for a 600-case brand.”

So as a key party in many vineyard transactions for several years, Nicholson is ideally placed to offer his predictions for the future. For one thing, he is certain that the market will continue to see significant increases in vineyard values in all the major North Coast appellations, particularly in the Central Valley and Paso Robles regions, as wineries seek to protect their supply through increased vineyard acquisitions. He believes the market may become more unbalanced in 2014, with “a large number of increasingly international buyers chasing a small number of coveted wine properties.”  This confluence of interest in certain estates, linked with rising vineyard values, can surely only mean one thing for the consumer – rising prices.

Rising retail prices combined with the constraints on domestic supply are also likely to open the door to imported wine, Nicholson suggests. “That’s an inevitability, with more imports targeted at the under-$10.00 market, and it’s foreseeable that we’ll see a 10% growth this year. I also believe that the sale of wineries for generational reasons will continue to grow, with a small number of private companies seeking an exit. It will be an unprecedented strong market for both (viable) sellers and buyers of wine industry assets,” he offers as his final thought.

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