The Wine Group takes its golden opportunity
Following a frantic bidding war, the Californian wine producer, Golden State Vintners, was acquired last week by fellow US wine concern, The Wine Group. Olly Wehring takes a look back over the last two weeks and reviews the winning deal.
The buyout battle for California's Golden State Vintners (GSV) has been one of the biggest stories in the wine industry so far this year. The issue was finally settled last week after The Wine Group (TWG) emerged victorious from a hotly-contested scrimmage that also involved GSV's chief executive and the world's largest wine group Constellation, evidence of quite how highly GSV is rated as a wine commodity.
Over-inflated wine acquisitions have dominated wine trade headlines in recent years, but many of GSV's attributes suggest it actually warrants the hype. It not only lays claim to be the largest outsourcing supplier of premium wine to the California wine business, with a total production of around 12m cases, but it also owns about 9,000 acres of vineyards.
The bidding war for GSV started in early-March, when the company announced that it had agreed to a bid from the O'Neill Acquisition Company, led by GSV's CEO Jeffrey O'Neill, for an initial bid of US$6.85 per share.
This was simply the beginning of what turned into a very colourful few weeks. Nine days later TWG, rated by Wine Business Monthly as the third biggest wine company in the US, countered O'Neill's offer by upping the ante to $7.25 per share. At the same time, GSV had to deal with disgruntled shareholders who threatened to take the company to court to have the O'Neill deal nullified.
With the ball back in O'Neill's court, only a week went by before it was smashed straight back at TWG. This time, the O'Neill group matched TWG's offer, and sat back as GSV accepted its offer.
It was the catalyst for some heated exchanges. David B. Kent, CEO at TWG came out fighting. "GSV's announcement (that it had accepted O'Neill's offer) made a point of noting that (our) offer was not subject to a financing condition," he said at the time. "But the merger agreement approved … by GSV's board with the O'Neill Group is still subject to a financing condition. If their financing does not come together, for whatever reason, the stockholders of GSV are left with no liquidity event.
"We don't understand how a properly functioning board of directors, when presented with our offer, can agree to a transaction that is contingent on the ability of a newly-formed company to raise such a substantial amount of money," Kent reasoned. "The Wine Group's offers to acquire GSV have never been conditioned on financing. We have concluded that under these circumstances it does not make sense for The Wine Group to bid against itself."
In other words, game, set and match to O'Neill, with TWG taking its ball home, or so it seemed.
However, two weeks later, TWG were back again with an improved offer, this time offering $7.75 a share. If things were complicated before, they were about to get a whole lot more interesting, as the new TWG bid prompted Constellation to weigh in on O'Neill's side, by helping the CEO finance a bid of $7.80 per share.
One final twist was yet to come, however, with TWG surpassing O'Neill's Constellation-assisted bid, by offering $8.25 per share, which valued the company at $111m. This final bid was accepted by GSV's board late last week.
So what has TWG bought for its US$111m? Formed in the early-1980s, GSV prides itself on being the largest outsourcing supplier of premium wines to the branded wine industry, through its five regional wineries in California. As such, it is the premier supplier of wine to many of California's leading branded wineries, including Constellation, Diageo, Mondavi, Trinchero, and Fetzer.
According to Wine Business Monthly, GSV's total volume is roughly equivalent to 12m cases, making it about the fifth largest US wine company in total volume. The company owns 9,000 acres of varietal grape vineyards. GSV also produces wine under its own brands, which account for about 10% of its total production.
John McLaren, the UK director for the Wine Institute of California, sums up GSV's position in Californian wine perfectly: "GSV is held in quite some affection by the Californian wine industry. You'd have to be if you supplied so many Californian wine companies," he told just-drinks.
Robert Nicholson, the principal of International Wine Associates, a merger and acquisition specialist, offers a look at the company's attractive position going forward: "GSV is one of the most effective service providers in the Californian wine industry," he says. "Their facilities vary from bulk wine processing to smaller, high-quality winemaking facilities. Although they did very well in the 1990s, GSV suffered leaner times after they went public (in July 1998), but they are now well-positioned to continue on an upward growth trend. GSV has very good production assets to offer the Californian wine industry."
Such a bidding war often leads to over-inflated prices but in this case observers believe otherwise. "It's still a bargain," Jon Fredrikson, president of the Wine Institute of California, told just-drinks. "GSV has valuable wineries and licences, with an array of ongoing global business relationships."
It is how TWG now manages those relationships, with many companies that are effectively its competitors, that looks set to be of greatest concern to California's wine industry and is perhaps why Constellation backed O'Neill.
In the 12 months to December 2003, GSV was California's largest bulk wine exporter. That TWG has successfully acquired such a sizeable business will certainly be a concern to its competitors and GSV's customers. "From an international perspective, if TWG were to prevail, then GSV's international wine relationships would change," Nicholson said before TWG's bid was accepted.
McLaren expands on what he believes may be TWG's motivation. "TWG probably wants to sit in the middle of the spider's web of supplying everyone," McLaren says. "By buying GSV, this is the obvious route to doing this."
The temptation may be there to absorb at least some of GSV's capacity into TWG's own brands, instead of carrying on with business as usual. John McLaren is quick to point out, however, that it may be unwise to tamper with GSV's strengths. "GSV is very consumer-led, as opposed to most Californian wine companies who tend to be product-led," he told just-drinks. "GSV is not led by any specific brand, so it can respond more easily to demand."
As the dust settles on the bidding war and TWG makes its plans for GSV clear, quite why this battle became so frantic will no doubt become more apparent. It will certainly be entertaining to watch developments unfold from the sidelines.
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