October 2008 Issue of Wines & Vines
New winery finance options for tight-credit times
Those alternatives often are still viable, but many new sources of financing have developed for small- and medium-size wineries, including sale and leaseback arrangements and mezzanine loans from non-traditional sources.
To discuss these alternatives for wineries, Farella Braun + Martel, a law firm active in the wine business, arranged a seminar featuring speakers who represented four different approaches to raising money:
- Silicon Valley Bank, which serves many boutique wineries;
- Sale and leaseback specialist Global Wine Partners with its VinREIT Real Estate Investment Trust;
- Mezzanine finance provider Bacchus Capital Management;
- Buyout specialist Vinum Capital Management.
Banks obviously are the first places most businesses look to for money, but they offer many services beyond loans. This sets them apart from other sources of capital and makes them a vital partner for every winery.
A number of banks have teams that specialize in the wine business, and some, like Silicon Valley Bank (SVB), have made the wine business a prime focus. Many regional banks in the wine country do the same. They often also provide private banking for typically high-worth winery owners as well.
Many other local and national banks offer services to the wine industry, but Aguilar said that prospective clients also should evaluate other benefits such as the bank's connections and other clients, who often can prove useful.
Some banks offer special services such as SVB's database of benchmarks, which helps clients to understand how they're performing against competitors. Many banks also perform research, offer assessments about business conditions and recommend direction to clients.
Real Estate Investment Trust
The Real Estate Investment Trust (REIT) is a relatively new player in the wine business, but it's a popular financing vehicle in many other industries, including shopping centers and commercial properties. From a winery's viewpoint, it's a source of purchase and leaseback. A REIT buys property including vineyards and production facilities, and then leases them to a winery, generally with buyback terms at the end of a certain period.
The REIT provides the winery with capital for planting, construction and operations or expansion, yet it secures its sources of grapes and production.
Though one wine-oriented REIT, Vintage Wine Trust, recently initiated liquidation, selling its properties to its investors and others, VinREIT, a joint venture between Global Wine Partners founded by Vic Motto and Mike Fisher, and large Entertainment Properties Trust REIT traded on the New York Stock Exchange, was just involved in a major acquisition.
Don Brain is the president and CEO of Entertainment Properties Trust and a partner in Global Wine Trust. He ticked off the advantages offered by the REITs: 100% financing, complete control by the tenant, a long-term horizon, a buyback option and the possibility to build equity. He added that REITs don't contain as many covenants as many loans, and typically require no personal guarantees because the title passes to the REIT. Best of all, "It frees capital for business growth."
VinREIT helped Ascencia, a new wine company, acquire a number of vineyards and wineries from Constellation Brands. Ascencia was created by former management of some of those brands when they were owned by Allied Domecq. VinREIT bought the real properties for $115 million and leased them back to Ascencia, while Ascencia amassed $94 million from other sources for the brands, inventory and other assets to create the company.
The annual rent is usually in the high single-digit percentage of the purchase price and escalates over time, perhaps to close to 11%. It's a triple net deal; the tenant pays all taxes, insurance and maintenance expenses. "It's just a financial transaction to us," she emphasized. "The tenant is in charge of all operations."
Collison mentioned that wineries sometimes are approached by fans of their wine, and wealthy individuals who would like to play in the wine business. But, she noted, "We're a lot easier to get rid of than a wealthy investor."
In addition, VinREIT's Brain noted, "We are prohibited by law from being involved in the business of our investments." That might be desirable to many executives, though some of the alternate options promote their ability to help their investments with advice and connections.
Though Wall Street largely has walked away from public offerings of wine companies, a new interest has developed in mezzanine financing of wineries. One example is Bacchus Capital Management. As its name implies, it was created to serve the wine business, offering financing that bridges the gap between senior secured bank debt and equity.
Bacchus was created in 2007 by Sam Bronfman -- a familiar figure in the wine business from his family's involvement with Seagram, which owned Sterling and Beaulieu Vineyards -- with Peter Kaufman and Henry Owsley of the Gordian Group, a New York investment bank.
Two non-financial benefits of the group are potential counsel from Bronfman and Bacchus president Mike Jaeger, who have wide experience in the wine business.
Anheuser-Busch is a significant limited partner in the fund, and has expressed interest in testing wine distribution services, too, although Kaufman spoke before Anheuser was acquired by InBev.
Kaufman outlined three scenarios where Bacchus would be of most value to boutique wineries:
- Growth capital: Many wineries need additional funding to implement their strategic plans or operational goals.
- Liquidity issues: Many winery owners need cash to buy the shares of family members, investors or partners.
- Acquisitions: Bacchus can provide mezzanine financing as part of a traditional financing package for acquisitions.
It should be noted that Kaufman is also an investment banker, a service that might be useful for wineries, too.
The structure of the load includes both regular interest and in-kind payments that consists of some portion of the equity value at the end of the term. It might be 6% of the value of the equity -- but not actual equity ownership. Kaufman said the fund looks for 12 to 14% of return on the equity portion of the deal.
The previous speakers focused on providing capital for owners to grow and operate, but the final session was on pure buyouts for someone wanting to exit the business (or at least parts of it).
Since the firm acquires wine companies to operate them, many of its partners have extensive experience in wine. They include Thomas A. Thornhill III, a primary owner of Mendocino Wine Co./Parducci, and Bob Steinhauer from Beringer. "We want to take great properties and make them better," Kuhn said. Vinum expects growth through improved operations.
Thornhill added, "We might take a look at a tired brand if we think we could revive it."
Kuhn said, "We see significant demand for equity capital, but relatively few players offering it." These include individuals seeking lifestyle wineries as well as large companies making strategic moves -- though some, like Constellation, are selling as much as buying.
Kuhn also noted that some financial buyers are interested in the wine business, but not necessarily ones with wine industry experience.
He added that his group might take less than 100% of the equity, perhaps even a minority interest, "But we won't take a position where we can't control the property for our exit." Vinum does like to have the management continue to be involved. Kuhn said he envisions two or three core substantial properties, and maybe 10 in total.
Continuing the buzz about generational transitions that underlaid the seminar, Kuhn observed that 80% of California's wineries are still owned by their founders. He regards that as a big opportunity. And in spite of a few high-profile deals, Farella Braun's Katherine Philippakis said that s he hasn't seen a large uptick in the number of acquisitions. "This might be a good time to buy or sell, since the market isn't saturated with deals."
Speakers at the seminar outlined new options available to winery owners seeking funds for acquisition, expansion or operations, or simply to exit the business. They focused on established wine companies, though Silicon Valley Bank has funded start-ups.
"We have to be comfortable that there's a growth potential," said Aguilar, who added that the bank has financed some of its best wineries since start-up. That includes so-called "virtual" wineries without vineyards or production facilities of their own. "We've financed virtual wines since we started," Aguilar said. SVB's focus is on wineries, not vineyards. Aguilar said bluntly, "You can't pencil out if you buy land and sell the fruit in Napa or Sonoma. The land is too expensive." He pointed out that the return is presumed to come when the land is sold.
|Secured Debt||"Cheapest" form of financing, relatively easy to obtain||Financing limited to the asset value of land, inventory and receivables|
|Real estate investment trust (REIT)||100% fair market value for property; owner retains control, receives extensions and repurchase opportunities||Relatively "expensive" and requires sale of land asset|
|High-yield debt||Liquidity option for some companies that have maxed out on secured bank debt and are unwilling to relinquish equity||Relatively "expensive" and typically requires an offering of greaTer than $100 million|
|Mezzanine debt||Offers borrowers additional liquidity on top of asset-based lending without significant dilution of equity, accompanying loss of control or board seats||More expensive than secured bank borrowing and is available only up to a certain multiple of cash flow (approximately 8 x EBITDA)|
|Private equity||Rich sale prices in the industry can make equity financing a profitable endeavor in many circumstances||Possible loss of control; limited access to equity financing due to small size; investors have limited appetite to be a minority equity owner in a family venture; need to "open kimono" to outsiders|
Source: Bacchus Capital
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