September 2013 Issue of
Wines & Vines
What Finance Insiders Think
An influential panel shares its views on trends, deals and interest rates
This year Wines & Vines surveyed six of the most knowledgeable executives in North American wine industry finance about the past year and what’s ahead. These banking veterans weighed in on the availability of credit, supply and demand, risk, interest rates and investment potential in areas from real estate to vineyard development to private equity.
What has changed during the past year in wine finance?
Rob McMillan: One of the biggest changes: Everybody is looking for property. That’s produced a bit of a run on vineyards and vineyard financing.
Next, a continuation of what we’ve seen for several years: the roll ups of wineries, and investments from internal wine players and externally. There’s been a lot of talk of China investing in the U.S., but you can pretty much name your country and (they’re) looking for deals. There’s a pattern of rolling up wineries.
Vic Motto: Activity has picked up some (on the M&A [mergers and acquisitions] side), with more sellers and somewhat improved buyer interest, but it’s still narrow.
There was a period when private equity institutions—REITs, PE, hedge funds—were very interested in the wine industry, though they knew very little about it. That has substantially diminished.
In commercial banking it seems more competitive. They’re aggressively seeking business. Banks are competing for loans.
Quinton Jay: What has changed the most is that the economy has improved and deals are happening: deals that people want to do and deals that got closed.
We’re also seeing a lot of vineyard deals because wineries clearly need grapes for their projects, and there was no increase in plantings the past four to five years. No one was putting sticks in the ground.
Mark Brody: There’s a greater sense of confidence as a result of DTC (direct to consumer), distributor wine sales and merger and acquisition activity. All those things give people a greater sense of a sustained recovery, greater confidence in the value of a property and more confidence going forward in building their brands. That confidence leads to more financing opportunities with the right kinds of players, and the banking industry has responded.
Perry DeLuca: The market is very competitive, and the competition continues to intensify. Banks are competing very heavily on deals, on the commercial banking deals they consider to be creditworthy—and getting increasingly so.
Ernie Hodges: We view the wine industry in a much more positive vein, particularly in the Central Coast. We see positive winery performance with improving sales, increased winery investment in equipment and an increase in winery startups. Demand has picked up, quality has improved, land values have picked up because the prices people are willing to pay have improved, and the overall view is positive. In general, outlook is positive and improving.
As to vineyards, if a good piece of vineyard land goes on the market, it’s going to attract a lot of interest in a short period of time. Also, there’s a lot of pending appraisals out there. There is a lot of demand. There is a statewide shortage of quality appraisers; all the lenders are scrambling to get appraisals done.
How have loan interest rates been affected?
Rob McMillan: We’re at an all-time low for interest rates in my memory.
Mark Brody: Rates have certainly dropped over the past year both in terms of compressed spreads for banks and the benign interest rate market that has existed, but we’ve seen a pretty dramatic change in the past six weeks with long-term rates up 50-plus basis points. I have a sense we’re off the bottom and will remain off the bottom.
For the very best deals there’s going to be an extreme level of competition—but probably less so as one goes to the next tier down.
Ernie Hodges: They didn’t have far to go down at the beginning of the year. It’s been four-and-a-half years since the Fed raised the discount rate. We’re seeing some evidence of spread compression for better quality deals, and we’re seeing new entrants into the market.
Rates until the last 45 to 60 days have been very stable and at historically low levels at both the short- and long-term side. In the past 45 to 60 days there has been a very significant increase in long-term rates. The Fed has said it’s not increasing short-term rates for a couple of years, but bond and general financial markets have already started increasing long-term rates by 60 to 75 basis points.
Perry DeLuca: We’re a LIBOR (London Interbank Offered Rate) based lender, and LIBOR has been consistently low. Our spreads have not changed over the last year. We see competitors put pressure on us on deals, with rates being very competitive, but it’s hard for me to say spreads have tightened over the past year. It was very competitive to start the year, and it’s very competitive now.
What was the deal climate over the past year?
Rob McMillan: We’ve had fantastic years. It’s a combination of continued efforts, low interest rates and refinancing. It’s just a continuation. It’s been a good couple of years for sure.
Vic Motto: Deals are getting done, but there are fewer deals in the industry than in the past, and the deals are smaller. I’d characterize the majority of what was sold as wineries sold under duress by the lenders and wineries not doing well that sold. Of course I’m talking about M&A to describe the sale of an operating business—not the sale of a vineyard or an underutilized or unused winery. That’s not M&A; those are asset sales.
I’m seeing people talk about vineyard sales going crazy, but I’m not seeing it. Any vineyard producing a good crop, those always sold. They sell in good times and bad as long as they are good properties. People saying vineyards are going crazy are the people trying to sell them.
Have the players, type s of deals, risk tolerance or deal terms changed?
Rob McMillan: For loans, there’s still a lot of competition for the best deals. I’d underscore that. That’s where you can find sub-prime pricing on those deals. Now more than ever we’re seeing other banks, which come in and out of the business, coming back in. They tend to wait for the water to be fine to jump in; that’s an indication of the (perceived lower) level of risk—and a sign of more competition for the best deals.
Vic Motto: For M&A, buyers are much more averse to risk and conservative in decision-making.
For loans, banks are aggressively competing with each other for good business. If you have good credit, it’s a great time for you; rates are very low and projected to remain there. It’s a great time to get long-term money if you can qualify for it.
We’re slowly getting back to the conditions we were at before financial meltdown, and I see slow movement each year, but we’re not back yet. It is easier to qualify for a loan than it was a year ago.
Banks are risk averse and cautious and want the best credits. Businesses with a predictable income stream and good balance sheet can get what they want today. Marginal and startup businesses will find it hard.
Mark Brody: Every downturn some businesses shrink, go away or get acquired. The strong companies that emerge really differentiate themselves. In some ways it’s clear who’s doing well and who’s not at this stage of the recovery. It’s easier to spot the companies you want to do business with as a banker.
Perry DeLuca: A lot of the banks emerged from 2007-08 very healthy and liquid. You actually see more competitors on the lending side. There aren’t any lenders that I know of sitting on the sidelines waiting for the market to come back. I don’t see a shaking out there. Over the last year, it’s clearly been a very strong robust market.
Ernie Hodges: We believe some of the new players might be willing to compromise on terms and conditions that we are not willing to. They’re throwing some really low rates out there, and in some instances they are getting some of those deals.
There have been other commercial banks that have started forming agricultural lending that weren’t there three or four years ago. Ag is one of the real bright spots in the California economy, and banks are starting to notice that. It’s very profitable, but there’s a lot of risk. You better know what you’re doing when you get into ag lending.
Has deal size on M&A or loans changed?
Rob McMillan: Yes, if you’re working on real estate, that goes up. In addition, the rollup players have a tendency to move prices up. Multiples are increasing as well—not to top-of-the-boom multiples, but still very healthy. Purchases that are happening are good deals, not troubled, so the prices go up.
Sales multiples are all over the map because the wine business is not a homogeneous model; some don’t own vineyards, some do. If you look at a normal period, in a normal business environment, you’d expect to see businesses selling in the eight to 12 times EBITDA range. You probably move that up to 10 to 14 times EBITDA in wine.
Vic Motto: Deal size is shrinking. Partly because of distressed deals, partly because valuations on deals are shrinking, and partially because there are not as many large offerings. Consolidation has substantially happened, not taken a pause.
We’re seeing smaller transactions. Most of the large winery consolidation has slowed as larger wineries have consolidated. Valuations are tighter, but you must distinguish between distressed sales versus sales of functioning businesses, as there are both types happening.
Quinton Jay: On the M&A side, deal sizes are relatively the same because of the way the wine business is. Large conglomerates fill up holes and have specific ones to fill, e.g., Constellation and Mark West; they needed a Pinot Noir at that price point. For (those sort of) transactions to happen for the big guys, a winery needs to be of a certain size before it’s interesting and yummy. They’re not looking for 10,000 to 12,000 cases.
Beyond those large consolidation deals, deal sizes have always been the same. Deals at the 20,000-50,000-case level, up to 100,000, are where the majority fit, and that’s why deal sizes are always going to be the same.
On the banking side, with the economy getting better, you’re getting more lenders coming into the mix. More banks are coming in, but they’re coming in cautiously. They’re still ratio-driven: If you don’t make the ratios, they don’t want you.
Mark Brody: Deal size is about the same for those of us that play on all three categories: small, medium and large. Medium ($5 million-$25 million loans) is where we will spend most of our time. Very large deals will tend to be multi-bank deals, and we’ll do those as well.
If you look at the large companies, they’re buying up vineyards. We’re seeing a lot of confidence expressed, at least by the bigger players; people wanting to control, quantity wise or quality wise, the fruit that they use. I think that trend is going to continue.
Perry DeLuca: Replanting and acquisition of new vineyard land is where we are seeing the most activity.
What does the supply-demand balance look like now?
Rob McMillan: Borrowers with A credit have the power now; the established brands that have been around since the 1980s survived the downturn swimmingly, and they came out with guns blazing and looking for growth. Those established brands have power.
Vic Motto: For M&A it’s a buyer’s market. There are more people who’d prefer to sell than who’d prefer to buy. The number of buyers has consolidated, leaving fewer buyers. A lot of larger buyers who were filling in gaps have filled them. We’re now seeing small and medium size wineries looking to grow their business by acquisition.
Sellers are still in love with what th ey own, and buyers are cautious because they see a lot of turbulence in the market.
Quinton Jay: On the banking side, the wineries that are healthy everybody wants to talk to. For those without as strong a balance sheet it’s, “We can wait.”
On the private equity side there’s still relatively the same number of players. There’s not a tsunami of players coming in, no ramping up or a bidding war. The ones that are there have their own specialties and people know what they are willing to do, they haven’t acted irrationally. It’s still a buyer’s market.
Mark Brody: If you’re a well-run company it’s a buyer’s market. If you’re less well run, it’s a lender’s market. The borrowers that are creditworthy have been able to get all the credit they need at pretty attractive terms.
Perry DeLuca: It’s a healthy environment with a lot of competition. Competition brings out the best in all the participants.
Ernie Hodges: Demand has increased, and there is significant competition. It is a borrower’s market with several commercial banks jumping back in due to improved outlook for California agriculture and the wine grape industry. There’re a lot of people out there that want to dip their toes in the market, so borrowers have got some choices.
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