WineRick wrote: ↑Thu Mar 07, 2024 4:51 pm
New owners of Accolade now looking at a merger with Australian Vintage, which includes Nepenthe. Weird stuff happening in the industry - too many vines in the ground, resulting from accelerated depreciation of vineyards introduced in 1993. Within 10 years, vineyard area in Australia trebled! Way too big 'an egg in the snakes neck'.
OK I did a bit more research.
I have also read that both Australian Vintage (the old McGuigans) and Pernod Ricard are being talked about as possible contenders for a merger with Accolade.
Bain Capital is a specialist in distressed loans, so my thinking is they will probably want to either break it up and sell it in bits and pieces (aka the Wall Street movie) or lock in a buyer with some skin in the game - ie. already in the industry.
There was an ASX announcement from Australian Vintage on 26 Feb saying they are in very early discussions about a potential merger.
Australian Vintage could be an option with them taking over managing the business or something like the Chemist Warehouse and Sigma merger currently being touted as an ASX listing.
Bain Capital could make a lot of money out of this turning it into a merger with an ASX listing via Australian Vintage (AVG).
Good for Australian Vintage too, because they would pick up some premium wine brands lifting their margins.
Pernod Ricard owns Jacob’s Creek, but the Australian wine business is only a tiny part of their global empire. So this is less likely perhaps, but their name often gets a run when takeovers are suggested.
In 2021 there were reports from the UK about Pernod Ricard considering a takeover of Treasury Wine Estates, but nothing came of that. In the end it was just a sugar hit for the TWE share price for a while.
Only last year it was reported that JP Morgan was trying to offload their Australian wine assets - which they have owned since 1989. So rather than picking up more, possibly Pernod Ricard is also looking for a buyer for their Australian wine brands.
The flip side is the acquisitions Pernod Ricard has done in liquor and spirits are about strengthening their premium brands portfolio. So they could be looking at adding on the Accolade brands to Jacob’s Creek for that reason.
But their last acquisition in the wine industry in 2022 was a Provence Rose maker Chateau Sainte Margueite. That was regarded as a “bolt-on” for them or simply adding a money earner in what is a very popular niche market. That is a long way from what Accolade is offering anyone.
Another name that hasn’t been mentioned for a while is the US based Constellation Brands. They are the largest imported beer company in America with brands like Corona and still have a substantial wine division incl. Robert Mondavi and Kim Crawford.
But they do not have any Australian wine brands. They had bought BRL Hardy in 2003, but sold it in 2018 to private equity manager Carlyle. Constellation had already reduced its holding in Accolade to 20% by then. Most of it was being held by an Australian based fund manager named Champ.
At the time Constellation had $7B debt. They were shopping around other parts of the business and buying up others with various swaps and deals going on for mostly spirits companies. They even got into the marijuana business in Canada and the USA, incl. products such as cannabis-infused beverages.
It is unlikely Constellation would want to have another go - especially as a long-term owner of Australian wine brands. It was a killing ground for them as well as the wineries they owned.
More interesting is the involvement of Champ in this.
They paid $290 million for an 80% stake in the Australian and UK wine divisions of Constellation Brands in 2010. They added on a few more wineries like Grant Burge, Petaluma and St Hallett renaming it Accolade. At the same time tightening up costs and renegotiating the debt packages with GE Capital in particular. They also took advantage of the export boom happening, so that two thirds of Accolade’s revenue was in overseas markets.
In 2018 they sold Accolade to Carlyle for $1B taking a big profit on the deal. Obviously the new owners incl. Bain Capital would like to repeat that. It is just a question of how they do it.
Recent moves by the big corporates have been more about those portfolio bolt-ons or dumping their underperforming wine brands - or both. But things are a little bit different now.
The free for all came to a grinding halt with not just the China tariffs, also the massive hit on supply chain costs and getting labour back into the country post Covid. Are asset prices inflated or a bargain? Where is the capital going and who is reinvesting in the wine industry now?
Interestingly the big global players like LMVH, Diageo, Constellation and Pernod Ricard had been running big profits - based on their liquor and spirits assets, not wine. They have strong cash flows and because of that been able to lower their debt to earnings ratios.
They are actually in much better shape now to fund any asset buys with borrowings if they wanted to. But they have already been allocating that capital to new, big breweries and distilleries in Mexico, USA and China - not so much wineries or vineyards here.
The biggest player here is Treasury Wine Estates. The China tariffs hit them, because this has been a huge growing market and where they got their biggest margins. The UK and USA are tough markets for them. Indicative of that is they have been buying more luxury US brands like Frank Family and DAOU Vineyards, not Australian brands. Australian wine is out of favour with the money, not just drinkers.
They are also switching out of bulk wine and cheap brand names into premium wine brands. So is everyone else it seems. This is having a rippling effect across the wine industry. Recently it has been reported that Riverland growers who sell grapes for most of the bulk or cheap wine in Australia could go out of business.
During the week a couple of Riverland grape growers were being interviewed on A Current Affair. They were talking about the lower grape prices they get now, in particular from their contract with Accolade. They are saying it will put them out of business if it doesn’t improve. The hard truth is it isn’t going to - especially if these aren’t grapes the wineries need for premium wines.
All of the big wine companies currently have the same problems. There is a grape glut, also far too much Australian wine is being produced that nobody overseas is drinking and the China tariffs have hit this wine industry very hard - and changed it.
They are in survival mode - cutting costs and shifting their marketing into what they call premium brands. You would describe these Accolade brands as premium, but it is like pin the tail on the donkey guessing who wants to risk their money to take another punt on them.
Disclosure - I currently own AVG shares.
