Private Equity and Wine: A Blend That Works

When Chateau Ste. Michelle Wine Estates sold for $1.2 billion in October 2021, its record-breaking price was only one of the reasons it grabbed global headlines.

The other was the buyer: A private-equity firm.

Historically, the wine industry has been of somewhat limited interest to private equity. But, that’s been changing, and New York-based Sycamore Partners’ monumental transaction for Chateau Ste. Michelle further solidified this shift. In fact, private equity deals for vineyards, wineries, and distributors jumped 75 percent through the first nine months of 2021 compared to the prior year.

One wine industry insider not surprised by private equity’s growing appetite for wine is Adam Beak. The Managing Director of Bank of the West’s Beverage Vertical pursued the Chateau Ste. Michelle deal for more than 25 years—even while understanding the inherent challenges.

“From a private equity perspective, it’s not an easy business to grow,” Beak says. “That’s why this deal is so significant. It shows how private equity can provide the expertise a winery needs to flourish.”

The Chateau Ste. Michelle transaction—the largest purchase by private equity of a US winery—illustrates how and why the growing domestic wine industry is changing and why private equity investors are rushing in.

PRIVATE EQUITY’S OBSTACLES TO UNCORKING THE WINE BUSINESS

Private equity is viewed by many as something of a mismatch with the realities of wine.

Traditionally, private equity investors want to improve the value of a business quickly. Winemaking, of course, is not known for speed. Six years can pass between planting a vine and wine that’s ready to drink. Adding to the risks, there may often be more than three years of inventory on the books.

The wine business is also fraught with other risks: a three-tier distribution system, climate risks such as wildfires and drought, inventory management, marketing, brand development, and, of course, the inherent vagaries of agriculture. Business execution is crucial.

Now, scale up those challenges to the size of Chateau Ste. Michelle: the third-largest premium winery in the US, and the largest in the Pacific Northwest, with thousands of acres of vineyards spread across three states. Chateau Ste. Michelle produces 60 percent of Washington State’s annual wine sales with its popular brands, including Chateau Ste. Michelle, 14 Hands, Erath, and in California, Stags Leap. Simply put, the scope of the sale was as enormous as it was complex. But its success highlights changes in the wine industry that are attracting the interest of private equity.

An Industry Rooted in Relationships

The US wine industry, which ranks fourth in wine production globally, is dominated in relative numbers by boutique vineyards, corporate wineries, and family-owned businesses that often lack succession planning. The US has the largest wine consumption worldwide, and the number of wineries nearly doubled between 2009 and 2021. In Napa Valley, 95 percent of wineries are family-owned.

Family-owned wineries sooner or later confront succession planning, where private equity can also play a role.

Beak says, “Does this second or third generation in these family businesses want to continue to operate their company, or do they want to try to transact and take some money off the table?”

In businesses built on relationships and longevity, these factors are essential in a successful transition, too. With private equity investors, trust and past successes matter.

Of course, building relationships and trust takes time, and Bank of the West’s wine team has been building a name for itself for many years and earning praise along the way. The bank worked with The Duckhorn Portfolio, which went public in March 2021, after being earlier acquired in 2016 by private equity firm TSG Consumer Partners. In 2014, they were instrumental in one of the early wine industry transactions with private equity firms on both sides: the majority sale of Sonoma Valley’s Kosta Browne Winery to J.W. Childs Associates. And more than a decade ago, Beak and his team provided financing and guidance to Oregon-based A to Z Wineworks as it evolved from a relatively small winery through the industry challenges of the recession and capital needs of the 2010s to today, where A to Z represents 10 percent of Oregon wine sales.

Following its acquisition of Duckhorn in 2016, TSG Consumer Partners President Jamie O’Hara said, “They brought a deep understanding of the wine industry and a solutions-oriented approach to help us close this important transaction.”

A Record-setting Deal Reaches Maturity

Throughout all of those years and transactions, Chateau Ste. Michelle was on Beak’s radar. But the timing just wasn’t right.

“This is a deal that we’ve been pursuing for decades,” Beak says. “The company, historically, had been owned by a very strong, publicly traded company. They didn’t need much banking or finance services before.”

So, when Chateau Ste. Michelle finally came up for sale by Altria Group Inc. in 2021, Beak’s phone began ringing as interested private equity firms reached out. At that point, one client introduced the Bank of the West team to Sycamore Partners, the eventual buyer.

Chateau Ste. Michelle’s size gives Sycamore Partners attractive options in the future, including potentially taking the business public, Mario Zepponi, of wine industry M&A firm Zepponi & Company, told Winebusiness.com last summer.

By the time all was said and done, the Chateau Ste. Michelle sale to Sycamore Partners involved more than 50 people, including 16 lenders. It was complex, decades in the making, and historic in size. But because of years of groundwork and relationship building, the sale was also smooth as a sip of fine Cabernet Sauvignon.

“Bank of the West executed this complex transaction flawlessly,” says Paul Fossati, Managing Director of Capital Markets with Sycamore Partners. “Bank of the West brings a unique combination of wine sector expertise, local market knowledge, flexible financial solutions, and broad investor reach. Their holistic view of the ecosystem was critical in this effort.” In the end, the $1.2 billion deal was completed in months.

Chateau Ste. Michelle Points toward the Future

While 2021 had other large deals, including the $690 million merger of Vintage Wine Estates with special-purpose acquisition company Bespoke Capital Acquisition Corp., the Chateau Ste. Michelle transaction stood out for both its size and the big names involved. It also points to potential brighter days ahead for the wine industry— a future bolstered by private equity’s growing interest.

“Having the big private equity firms dance in the wine sector is bringing more capital into the space, which is a positive,” Beak says.