Debt Load, Grape Glut Crush Wineries
Silicon Valley had a tech bust. Now, Napa Valley and the rest of California wine country are beset by a grape bust.
And just as the tech bust led to the hanging of “For Sale” shingles on many assets, more and more vintners are being forced to put their land and brands on the block to keep their wineries afloat in a flooded market.
Financier William R. Hambrecht, for instance, is selling hundreds of acres of prime vineyard property in Sonoma and Mendocino counties to repay winery-related debts.
After defaulting on a $732,693 loan, Hambrecht reached a preliminary agreement with lenders this week to keep his prestigious Belvedere Winery in Healdsburg. But he reduced his 58% stake in Napa’s Carneros Creek Winery to 49%, with winery founder Francis Mahoney upping his investment and returning as manager.
Hambrecht’s problems may be the most visible example of the toll taken by the soft economy, the grape glut and a flood of cheap, high-quality imports that have pushed down prices for California wine.
But, analysts say, he is not alone. A significant number of wineries are expected to refinance debt, take on a merger partner or sell assets this year.
“During the boom times, wineries borrowed more money and increased their debt to increase production to meet a growing demand and a growing price,” said Daniel Cohn, an attorney with San Francisco-based Farella Braun & Martel, which represents wine firms in business transactions.
But these days, wine prices are falling, as vintners work to move surplus stock that has piled up in their warehouses. That means less cash coming in, and a less valuable inventory to use as collateral to secure large revolving lines of credit.
To be sure, analysts say, most California wineries should weather the current downturn just fine in the end. Yet in the meantime, even some of the industry’s biggest players find themselves caught up in the shakeout.
Chalone Wine Group Ltd.’s Dynamite Vineyards, for example, recently sold its Vintage Lane winery near Glen Ellen in Sonoma County to fledgling winemaker John Lasseter, the creative force behind computer animation firm Pixar Animation Studios, for an unspecified amount. Dynamite kept the inventory, its contracts for grapes and its brand.
The Vintage Lane sale came after Chalone had already sold its Carmenet brand and inventory to Beringer Blass Wine Estates.
Many companies that bought vineyards at the peak of the market in the late 1990s will be forced to swallow a loss as they sell off their property, as Oakville, Calif.-based Robert Mondavi Corp. did with its recent $3.1-million quarterly write-down on a Central Coast vineyard.
At the same time, other big wine companies such as E&J; Gallo and Constellation Brands have the most to gain from the industry’s turmoil, scooping up vineyards that wouldn’t have even been on the market a few years ago, and at reasonable prices. Gallo, for instance, snapped up two family-owned California wineries late last year -- Louis M. Martini and Mirassou Vineyards.
“Over the last year, people are looking to buy vineyards, they are looking for deals, and there are deals to be had,” said Michael De Loach, president of De Loach Vineyards, which owns about 900 acres in Sonoma’s Russian River Valley.
De Loach said he was entertaining offers for all parts of his business, from the popular brand name to prime real estate.
But despite uncertainty surrounding his biggest customer -- financially strapped United Airlines -- and a slowdown in the restaurant business, De Loach still believes that his family can afford to hold out for the right offer.
“We’ve listened,” he said, “but we haven’t heard anything that would make us consider a sale.”
Meanwhile, some investment funds are hoping to change the minds of owners such as De Loach. With the stock market yielding lousy returns, portfolio managers are starting to make new sorts of investments, including in wine properties.
Interestingly enough, one of these wine funds is being launched in the coming weeks by Hambrecht’s investment firm, WR Hambrecht & Co.
“There’s a real potential for consolidation out there,” said Bob Hambrecht, William Hambrecht’s son and a director of the investment firm. “We are trying to focus on helping people find funding and pull assets off their balance sheet.”
Likewise, Wells Fargo Securities is exploring the idea of developing a vineyard real estate investment trust. That would allow families to exit the wine business or sell their vineyards and then lease them back, said F. Van Kaspar, the investment bank’s chairman.
Ultimately, not every firm will be able to rescue itself from its economic problems. Some are sure to default on their loans and lose property in foreclosures. Others may file for bankruptcy protection, as did Sonoma Creek Winery, a “virtual winery” that had no vineyards, just a popular brand and a supplier.
As Kaspar noted, the wine business is notorious for wreaking financial havoc on even the most shrewd investors: “It’s like that old saying, ‘How do you make a million dollars in the wine business? You start with $5 million.’ ”
