“The wine M&A market is small principally because there are few buyers, which tend to be other wine companies."
To quote HRH the Queen of England circa 1992, 2019 was an “annus horribilis” for winery and wine brand acquisitions.
The trouble started at some point in late 2018, when Goldman Sachs - which had the mandate to sell 30 of Constellation’s lower-priced wines – went to its M&A advisory “bag of tricks”. [i] It was a leak to Reuters about the sale, then “valued” at $3.0bn. This caught everyone’s attention in the industry. As a wine M&A specialist, my reaction to the leak was that it appeared Constellation’s advisors didn’t understand the dynamics of the wine industry, where distributors are a force to be reckoned with. A disclosure like this in the beverage alcohol space can do very dramatic damage to brands because distributors, faced with the possibility of losing the business to the buyer’s distribution network, can take their shoulder off the wheel of the brands that are for sale.
It further appeared that in taking this risky step, Goldman had run out of ideas about buyers and was hoping to find someone in the global landscape that they hadn’t contacted during their confidential process. Months later, a quote from Constellation’s CFO at an industry event - that they were only looking for 7X EBITDA for the brands - seemed to signal that there was a potential bidder they were trying to bring back to the table.
Finally, in April of 2019 a deal between Gallo and Constellation, by then worth (only) $1.7bn, was announced. The parties intended to close by the end of May 2019, but in mid-May the FTC put the transaction on hold as it reviewed issues related to competition. During what became a protracted process, originally thought to end by November 2019, rumors (which turned out to be true) circulated that the consolidation of a substantial portion of low-priced sparkling wine and brandy brands, in addition to grape concentrate (which is a winemaking input) was deemed to be anti-competitive, and those businesses would be taken out of the deal. The transaction was now slated to close by the end of February 2020 with Gallo paying $850MM for the remaining brands, plus an additional $250MM if certain sales targets were met.
What does this one transaction have to do with the wine M&A market as a whole? First, that market is small. Smaller than people think. Based on research I conducted and published with Wines and Vines a number of years ago[ii], the average transaction volume is about 20 deals annually. According to public reporting as tracked in our office, only 13 deals were announced in 2019. (Compared to 20 completed and announced in 2018.) The wine M&A market is small principally because there are few buyers, which tend to be other wine companies. When two of the biggest and most active buyers are locked up in their own deal, and when there are rumors that some large acquisition targets for other active buyers (Cooks Sparkling, Paul Masson Brandy) might be had at bargain prices…. The already small pool of buyers shrinks further. And the result is transaction activity 2/3s of an already small “normal”.
As I write in March of 2020 the Constellation/Gallo deal has not closed. Industry contacts assure me that it will. When? No one knows. We have recently seen some green shoots of business activity (including Gallo’s own acquisition of the Pahlmeyer brand). It is still too soon to tell, but let’s all hope 2020 will be a “normal” year for winery and wine brand acquisitions.
[i] This story that I am telling about the Constellation/Gallo deal is gleaned from public announcements and rumors and a little guesswork – I have no inside information.