Winemaker Is Hoping for High-End Harvest
For nearly 40 Septembers, R. Michael Mondavi has helped the iconic Napa Valley winery built by his father harvest some of the world’s best wine grapes.
This year, he is reluctantly watching a harvest of another sort -- the famous Oakville winery itself.
Over the objections of family members, Robert Mondavi Corp. announced plans this month to sell the winery that bears the founder’s name and produces Cabernets Sauvignon that go for as much as $125 a bottle. It will divest some of the best vineyards in the Western Hemisphere and other assets, including several smaller premium wineries and its 50% interest in Opus One, the expensive vintner it co-owns with the French wine house Baron Philippe de Rothschild.
In essence, Mondavi is holding what looks like the wine world’s largest garage sale to raise money for its “lifestyle wine” division at the company’s sprawling Woodbridge winery near Lodi, Calif. That part of the business churns out 8 million cases of wine that sell for less than $15 a bottle; company executives believe it represents the best prospects for growth.
After an emotional board of directors meeting this month, Michael Mondavi was asked to give up his position as an officer and vice chairman; he remains a director.
In an interview, Mondavi said he and his brother and sister were exploring ways to purchase the Oakville winery and nearby vineyards. Collectively, they hold about $150 million in company stock, which they could trade for the winery in a tax-free exchange that would benefit both parties.
Mondavi acknowledges that any bid by family members could face competition from other wealthy individuals and the largest wine companies in the world. Moreover, analysts say that by announcing the restructuring plan and asset sale, the board has in effect put the company into play.
For bigger competitors such as Constellation Brands, Allied Domecq and Diageo, it might make more financial sense to purchase the entire company, including the Woodbridge business, rather than pay a premium to pick off the luxury-wine business, said Tim Ramey, an analyst with D.A. Davidson & Co. in Lake Oswego, Ore.
According to people familiar with the internal struggles at Mondavi, the company took the first steps toward a breakup last year when the board and management concluded that significant changes were necessary to reverse several years of lackluster financial results. Profit plunged from a peak of $43 million in fiscal 2001 to $26 million in 2004, a 39.5% slide. Sales fell 7.5% over the same period, from a high of $506 million to $468 million.
The company’s shares fell 11 cents Friday to $38.58 on Nasdaq.
The debate accelerated last December when patriarch Robert Mondavi retired from the board and Ted Hall, a former McKinsey & Co. consultant and corporate governance expert, stepped in to help the company sort out how to deal with its position as both a public company and a family-controlled business. At 91, Robert Mondavi is no longer active in the business. Much of his holdings are pledged to his favorite charities.
Within a month, the board named Hall as the first non-family chairman of the company, replacing Michael Mondavi.
At the direction of Hall and Chief Executive Greg Evans, the company looked at a variety of plans, and in August it said it would create two distinct divisions, one for luxury wine and one for the less expensive lifestyle brands.
It also decided to put all shareholders on equal footing by converting the family’s super voting shares to regular stock. That move, expected to be approved by shareholders next month, will lower the Mondavis’ voting control to about 40% -- the size of their combined stake in the business.
Michael Mondavi liked the idea of separating the businesses but keeping the company whole. The expensive wines are sold primarily through restaurants and wine stores, he said. About 85% of the lifestyle wines, by comparison, are sold through supermarkets and mass retailers.
He also believed that the luxury end of the business was starting to come around. Thanks to a recovering economy, more business travel and a fine 2001 red wine vintage, sales of Mondavi’s high-end wines have grown at a 15% annual rate over the last 18 months, he said.
What the business requires, he said, is patience with the long-term nature of the luxury wine business, in which wine is aged for at least three years and sometimes longer before it is sold.
In recent months, however, the non-family members on the board started to retreat from the two-division plan. They believed that the quicker sales cycle of less expensive wines was better suited to Wall Street’s relentless drumbeat for consistent growth in profits and sales.
The luxury wine business, said Evans, with its long time frame and small production, doesn’t lend itself to that financial model. In fact, Mondavi is one of only a handful of public wine companies. Big names such as Gallo, Sutter Home, Kendall Jackson and even Charles Shaw are all owned by private family companies.
Moreover, the board was tempted by the fact that the wine market values the Robert Mondavi winery and other luxury wine assets more than the stock market does. Wall Street tends to value a business based upon the amount of cash it throws off -- in the case of Mondavi’s luxury wine business, that’s about $11 million annually. That would give the businesses the company plans to sell a value of $100 million to $120 million, based on average prices for alcoholic beverage companies.
But through the lens of Napa Valley land prices, the 1,200 bearing acres of prime vineyards marked for divestiture could sell for $100 million to $200 million, depending on how they are parceled out.
Add the Robert Mondavi winery -- likely to be sold as a package with a portion of the vineyard land -- the smaller vintners, the interest in Opus One, a joint venture with a Tuscan wine estate and the surplus Woodbridge vineyards, and the company could reap upward of $400 million in after-tax proceeds, Evans said.
Ramey, the Davidson analyst, estimates that the proceeds would be closer to $300 million.
Regardless of the number, Michael Mondavi questions whether it is wise to sever the top-end wines, which have made Mondavi’s reputation, from the rest of the business. “This is one harvest you won’t be able to do again,” he said.
He said his brother Tim Mondavi, who remains with the company as vice chairman and winegrower, and sister Marcia Mondavi Borger, also a board member, voted against breaking up the business.
The family could have used its voting control to change the board, but chose not to because it would have undermined efforts to be a model for corporate governance -- along with the company’s credibility on Wall Street. Ultimately, it also would have been more damaging for shareholders, Michael Mondavi said.
Still, the divestiture has left much of the wine world perplexed. Why forsake one of the best names in the business to duke it out in the most competitive part of the industry with the likes of Trader Joe’s $1.99 Charles Shaw and $4.99 Yellowtail, the hot-selling Australian import?
Mondavi has seen a steady erosion in this segment of its business in recent years. In its latest fiscal quarter, for example, the winery shipped 1.9 million cases of Woodbridge labeled wine, a 4% decline from a year ago. At the same time, revenue from the brand dipped 9% to $61.6 million.
“Woodbridge is a commodity brand that has struggled, and it is in the crosshairs of every upstart in the business,” Ramey said.
What the critics forget, said CEO Evans, is that the luxury wine business is a small portion of the company. The wines that come out of Woodbridge account for 94% of Robert Mondavi’s sales volume, 81% of its revenue and about 85% of its cash flow, depending on the measure.
“If you look at the amount of revenue and profit represented by this business, you see that we are already a lifestyle wine business,” Evans said. “We can be competitive worldwide, even against the Australians.”
But to become competitive, the company needs to whittle millions of dollars of expenses.
As part of its restructuring, Mondavi will dismiss roughly a third of its 940 employees, according to people familiar with its plans. Evans said layoffs were coming but did not provide a number.
The company plans to reduce the cost of the grapes that go into the less expensive wines by renegotiating or buying out long-term contracts signed during the industry’s boom years. High-priced contracts that are within a year or two of expiration won’t be renewed.
Mondavi also plans to sell a portion of its Lodi vineyards and buy more grapes from local growers, and Evans believes that he can trim $3 million a year in bottling and packaging expenses through better competitive bidding.
Combined, these measures will add up to savings of about $30 million three to four years from now, he said.
Selling the high-profile luxury brands would give the company the cash to fund these changes and to cultivate the lifestyle wine business, Evans said.
Without commenting on the family’s prospects for buying the winery, company executives have indicated that most of the luxury-wine assets probably would be sold to wealthy individuals and privately held companies. They believe that any of the big publicly held companies in the business would be deterred by the same Wall Street earnings requirements that bedevil Mondavi.
The prospect of buying a portion of those vineyards already has grabbed the attention of some of Napa’s largest wine grape growers.
“We have to be seen as a bidder,” said Andy Beckstoffer, the region’s largest independent grape grower. “Other growers are also going to take a look.”
And despite management’s view that the big public wine concerns will pass on the Mondavi assets, Allied Domecq, Diageo and Constellation Brands, the world’s largest wine company, are all expected to take a look, analysts say. Other possibilities include LVMH Group, which owns Dom Perignon and several other top Champagne brands, and Texas Pacific Group, which once owned the Beringer brand.
In the end, Michael Mondavi believes that the high price expectations the company has set for its luxury business could chase buyers away, leaving the family with a better chance to work out a deal.
“Just because you ask a lot of money for your house doesn’t mean you will get it,” he said. “There might not be any bidding war for these properties.”
If that’s the case, the Mondavis may be the ones doing the harvesting.
