Mondavi Suitor Could Face Hefty Corkage Fee

One Wall Street analyst called it a “connoisseur’s” bid. Another labeled it “stunning.”

But the question about Constellation Brands’ $970-million pitch for California winemaker Robert Mondavi Corp. is whether it will be enough.

“Mondavi is one of the strongest wine brands in the world,” said Robert Nicholson, an investment banker who heads International Wine Associates in Healdsburg, Calif. “I don’t think the rest of the industry is going to stand by without taking a look.”

Tim Ramey, an analyst with D.A. Davidson & Co. in Lake Oswego, Ore., predicted that another offer “may very well materialize” and named California vintners E. & J. Gallo Winery and Kendall-Jackson Wine Estates as likely bidders. Others pointed to international spirits giant Allied Domecq as a potential suitor.

People familiar with discussions taking place at both Constellation and Napa-based Mondavi, however, think the chances of a bidding war are slim. Instead, they said, Mondavi is looking for ways to raise the value of a massive restructuring plan it launched last month so it can match or exceed the $53 a share that Constellation is offering for the company’s Class A shares.

That would either fend off Constellation’s challenge to swallow the company whole or force the Fairport, N.Y.-based beverage behemoth to offer more money.

Under the restructuring, which Mondavi executives outlined last month, the Robert Mondavi winery, its Napa vineyards and other luxury wine assets would be sold. The executives said the divestitures would raise more than $400 million, which would be used to build sales of wine produced at the company’s sprawling Woodbridge facility near Lodi. That wine sells for well under $15 a bottle, whereas the high-end Mondavi labels retail for as much as $125 a bottle.

The company said the restructuring would eventually create a business with a value of $749 million to $929 million.

Constellation, the world’s largest wine company, pegged its bid to exceed the top end of that range, hoping to short- circuit the plan and force Mondavi’s board to the negotiating table, said one source familiar with Constellation’s tactics. “They wanted to embarrass the board,” the source said.

But the initial bid wasn’t enough to hook Mondavi. Ted Hall, the company’s chairman, said that it would be evaluated along with the restructuring plan and that the board would decide which approach would “bring the most shareholder value.”

Now “they are looking at whether there are more bullets to fire to increase the value of the restructuring plan,” said a source familiar with Mondavi management’s thinking.

The source familiar with Constellation’s strategy said it wouldn’t be surprising to see a higher bid, especially if Mondavi’s board agreed to negotiate. As it is, the offer represents a 37% premium over the closing price of Mondavi’s Class A shares on Oct. 11, the day before the confidential proposal was made. Including the assumption of debt, the total value of Constellation’s bid is $1.3 billion.

Investors appear to believe that a deal would be concluded at more than $53 a share. Mondavi rose 57 cents Friday to close at $53.20 on Nasdaq. Constellation shares fell 28 cents to $38.90 on the New York Stock Exchange.

Sources said it was unlikely that Mondavi’s board would make any significant moves before Nov. 30, when shareholders are expected to approve a recapitalization plan to convert two classes of stock into a single tier and reincorporate the business as a Delaware company.

Though Constellation would like to get Mondavi into negotiations sooner, it doesn’t believe there is much chance of other bidders coming out of the woodwork in the next month.

Among the other possible bidders, Allied Domecq of Britain has said Mondavi “is not something high on our radar.”

Kendall-Jackson declined to comment. Although the company might be interested in some of Mondavi’s premium labels and vineyards if the business is broken up, Kendall-Jackson wouldn’t want to take on Woodbridge, which is more of a commodity business, industry sources said.

Gallo also declined to comment. California’s largest winemaker has typically made only small acquisitions, instead preferring to create and build its own brands.

Moreover, a Gallo bid might run into antitrust hurdles. Gallo accounts for 27% of California wine shipments and Mondavi 4.6%, said wine industry consultant Jon Fredrikson; Constellation has a 14% share. Although Constellation has left the door open for members of the founding Mondavi family to have some undetermined role in the company should a deal be completed, it looked increasingly unlikely that the family would be part of the business, sources said.

The three children of patriarch Robert Mondavi -- R. Michael Mondavi, Tim Mondavi and Marcia Mondavi Borger -- have said that they would like to find a way to buy the namesake winery in Oakville and surrounding vineyards but that they might not have the financial wherewithal to pull off such a transaction.

In any event, the Constellation bid puts greater pressure on the board to get top dollar for every asset sold if it breaks up the company.

The family would own about $400 million in Mondavi stock, assuming a $1-billion valuation for the whole company. But Robert Mondavi accounts for about half of that, and most of his shares are pledged to philanthropic endeavors. Beyond that, Michael and Tim Mondavi have about $65 million in stock pledged as collateral on personal loans, according to a Securities and Exchange Commission filing.

Both Michael Mondavi and his sister Marcia declined to comment about their finances or plans. Tim Mondavi and Robert Mondavi could not be reached for comment.

Even if they are unable to keep any of the assets in the family, they at least face the prospect of a handsome payday.

“Emotionally, the family might not like to see the company sold,” said one analyst with a Wall Street arbitrage firm that is tracking Constellation’s offer and who asked not to be identified. “But a sale at a high price has to be financially welcome to them.”