M&A: Pernod Ricard is Potential Takeover Target
July 02, 2019
The number of mergers and acquisitions has increased steadily since 2008, a trend that is expected to continue through 2020, according to Mario Zepponi, of Zeppponi & Co.
Potential acquisition targets include Pernod Ricard, the number two alcohol beverage company in the world, Zepponi said June 25 during the California Association of Winegrape Growers’ summer conference.
A potential deal is among a number of transactions Zepponi said could take place in the near future.
Pernod Richard’s wine holdings include Kenwood Vineyards, Campo Viejo in Spain and Jacob’s Creek in Australia, Brancott Estate Wines and Stoneleigh Wines in New Zealand.
Activist investor Elliott has put pressure on the company over the past year to raise profit margins, Zepponi said.
Pernod Ricard is primarily a distilled spirits company; its wine division represents a small part of its portfolio and may drag down profits, according to Zepponi’s presentation.
“The consensus here is that the wine division is on the market,” Zepponi said.
One potential buyer: The Carlisle Group.
Chateau Ste. Michelle, Washington state’s biggest wine producer with more than 2 million cases a year, could also be a potential target for a mega deal, Zepponi said. Parent company Altria Group is a tobacco behemothm, Zepponi said. “They see cannabis as the future.”
Chateau Ste Michelle’s holdings include Stag’s Leap Wine Cellars in the Napa Valley, and Patz & Hall in Sonoma. Zepponi represented Patz & Hall’s founders when they sold their company to Chateau Ste. Michelle in April 2016. “It's a shame if they actually do sell because it was really a good, a good fit,” Zepponi said, referring to Chateau Ste. Michelle and Patz & Hall.
Duckhorn, a phenomenally successful company, could potentially also be sold a third time, Zepponi said.
Owner TSG Consumer Partners purchased Duckhorn from GI Partners in 2016. Dukhorn’s brands now include Kosta Browne and Calera, with the majority of wines priced in at more than $20.
TSG Consumer Partners in the past three years has teed up the “perfect portfolio to sell,” Zepponi said.
TSG Partners may sell Duckhorn while the market economy remains good and the private equity firm still might have the ability to go public, he said.
Brand relevance, consolidation and premiumization drive mergers and acquisition.
Pending Constellation-Gallo Sale
Zepponi reflected on the pending $1.7 billion deal between Constellation Brands and E&J Gallo. Federal regulators have asked more queries, delaying the sale until later this year.
Wine companies look for brands to stand out to consumers, he said.
Brand-related merger and acquisition activity is no longer about volume. “Now you have to have a specific identity to go ahead and stand out for a buyer like a Constellation or a Gallo because they have crowded portfolios,” Zepponi said.
How do wine brands become relevant in the market place in an era as companies consolidate and at a time when the traditional three-tier system has been turned upside down?
Keep the marketing message simple, Zepponi said. Brands also need fewer SKUs.
The architect of brand identity “leading to brand relevance and value” is Derek Benham, owner of Purple Wine + Spirits, according to Zepponi. He did a sales process twice, first with Blackstone in the early 2000s when he and his brother, Courtney, sold the brand to Constellation Brands for $140 million. Derek Benham sold Mark West for $160 million to Constellation in 2012.
“The DNA of these brands was simple. The brand identity has to stand for a varietal, has to stand for a retail price point, has to stand for a source, and then lastly has to stand for a preferred sales channel,” Zepponi said.
Blackstone was a Merlot, $8-$10 a bottle and California appellated and sold primarily through the three-tier wholesale system, Zepponi said. Mark West, a Pinot Noir brand took off right after the movie Sideways. It sold for $10 to $12 at retail, California appellated and also sold through the three-tier wholesale channel.
Another successful brand, Meiomi, a Pinot Noir, sold for $25 a bottle when the brand was purchased by Constellation in 2015. Its production was 650,000 cases annually and tri-county appellated. It was very focused on the wholesale channel, he said. There was only one SKU. It was “very simple for the wholesale system to understand it,” Zepponi said. It was also very simple for a buyer like Constellation Brands to figure out where Meiomi would fit in its portfolio, Zepponi said.
There are three types of buyers, Zepponi said: domestic and international strategic buyers that acquire brands and wineries and private equity firms.
The Distribution Funnel
The traditional three-tier distribution model has been turned upside down over the years.
There were 1,800 wineries in the United States in the 1990s, along with 3,000 distributors and even more retailers, Zepponi said. There are now nearly 9,000 wineries but fewer than 700 distributors and only a small number of key retailers, he added.
Consolidation is being dictated at the retailer level. Distributors are forced to consolidate in as they try to be relevant to retailers. Wineries then “bulk up” to be relevant to the distributors and retailers.
The top five retailers control 50 percent of US grocery sales. In addition, Wholefoods/Amazon may become the nation’s sixth top retailer. Retailers try to maximize their shelf space in an effort to maximize profits. To that end, there is proliferation of control and private label brands in an effort to maximize gross profits, Zepponi said.
Four distributors account for more than 60 percent of value in the wine industry, he said. That has made it challenging for wineries to have the attention of these consolidated distributors that are beholden to bigger consumers that have a lot more wine to move, Zepponi said. That in turn has driven the consolidation of wine producers. Nine wineries control about 77 percent of sales volume in the United States, he said.
“It’s a pretty darn competitive environment."
At the same time, premiumization continues, with wine sales of wine under $12 decline while wine $12 and more continue to increase. The wines sold under $12, altogether, represent twice the dollar value of those brands sold $12 and more, according to Zepponi quoting Nielsen’s data that captures between 30 and 40 percent of the market.
Larger wine companies reach out to brands that can make them relevant to consumers.
Wine is competing with spirits and beer, whose sales are trending downward, and cannabis.
Constellation Brands would sell 34 brands and six wineries to E&J Gallo under the tentative deal under review by federal officials.
Most of the brands Constellation Brands wants to sell are in the company’s lower-margin wine portfolio.
Zepponi encouraged the growers in the audience to diversity and spend time with their clients, attend winemakers’ dinners, winery promotions and other events.
“You’re more than a grower,” Zepponi said. “You’re in it together."