REITS, private equity, others show increased interest in wine industry

TERMS TIGHTER, BUT MORE DOLLARS AVAILABLE FROM VARIETY OF SOURCES

ST. HELENA – Real estate investment trusts, private-equity groups, hedge funds, mezzanine lenders and minority-investment firms are among the funding options that have been coming or returning to the wine business in the past few years.

A 3-year-old REIT focused on the wine industry has been making significant investments this year. VinREIT, a subsidiary of publicly traded Entertainment Properties Trust of Kansas City, Mo., provided $116.5 million in June to acquire four wineries and 565 acres of vineyards as part of Healdsburg-based Ascentia Wine Estates’ $209 million-plus deal with Constellation Brands. Ascentia now has long-term net leases with VinREIT for the properties.

The VinREIT portfolio currently has 1,590 acres of vineyards and 10 wineries, including RB Wine Associates’ Rack & Riddle custom winery in Hopland, Billington Imports’ Havens Wine Cellars in Yountville and Cosentino wineries in Napa County’s Pope Valley and the Lodi area.

In the third quarter, the trust also invested $6.9 million in RB Wine’s continued expansion in Hopland. VinREIT acquired the facility in April 2007 for $12.2 million and leased it back on a 10-year triple-net term. The trust also invested $8.5 million to build the 250,000-case-a-year Carneros View custom winery, which just started construction in Sonoma Valley, according to company filings and public records.

In late September, VinREIT obtained an expanded credit facility from a $65 million to $90 million limit obtained in March to $129.5 million to $170.5 million. The trust sometimes does cash deals for quick-close opportunities, but often the transactions involve half-cash and half-financing, according to Vic Motto, CEO of St. Helena-based investment bank Global Wine Partners, which administers VinREIT for Entertainment Properties Trust.

There was a catch for the new money though, according to Mr. Motto.

VinREIT still would be able to lend against 65 percent of its collateral up to the facility limit, but the group’s revolving credit now has a two-year window. And instead of credit with no recourse, which meant VinREIT wouldn’t have to make up for shortfalls in loan-to-value or debt-service-coverage ratios, the new credit requires the trust to guarantee 30 percent.

“Credit is tighter and banks are more cautious, so when they make a loan it is not open-ended,” Mr. Motto said. “So they say, ‘This is the criteria for today, and if you want more come back later.’”

The private-equity market has renewed vigor for wine deals. Such capital isn’t new to the industry. Texas Pacific Group sold the Beringer-led portfolio of wineries to Foster’s Group in 2000 for a then-record $1.2 billion.

A recent private-equity play was Menlo Park-based GI Partners’ 2007 acquisition of a majority stake in Napa Valley’s Duckhorn Wine Co. for an estimated $250 million.

Interest in the wine business from various funding sources has even pitted one against another. On Oct. 14, Bear Stearns Merchant Manager III LP, which operates separately from the former investment bank, sued trial attorney Jayson Pahlmeyer’s two-decade-old Napa wine company and Demeter Financial Group, a San Francisco-based investment bank focusing on food, wine and other beverage businesses.

According to the Bear Stearns’ complaint filed in federal district court of southern New York, the investment bank had Demeter on retainer since 2005 to find acquisition targets. Demeter brought the Pahlmeyer prospect to Bear Stearns in mid-2007, and exclusive talks started in March of this year, according to court documents.

Bear Stearns alleges Pahlmeyer broke off talks in late May because of a competing offer from GI Partners.

Jeff Menashe, CEO of Demeter, said the suit was “baseless” and noted that GI never purchased Pahlmeyer.

Bear Stearns wants $3.75 million in damages. The first court hearing is set for Dec. 3.

A new private-equity investor focused just on the wine business is Vinum Capital Management of San Anselmo. The firm launched in April of this year with $250 million to spend on providing $5 million to $50 million in majority or minority equity financing to California, Washington and Oregon wineries producing 10,000 to 150,000 cases annually.

For winery or vineyard owners not wanting to give up too much control of the company, in addition to REIT sale-leasebacks, there is mezzanine financing. Sam Bronfman II, former president of Seagram Chateau & Estate fine wine group, helped start Bacchus Capital Management of San Francisco last year to provide supplementary funding for growth, liquidity or acquisitions. The firm provides $3 million to $15 million second-lien notes with three- to five-year terms.

Bacchus inked its first deal last month, providing a five-year loan to San Francisco-based negociant Cameron Hughes Wine. “There is an increasing demand for wine, especially super- and ultrapremium brands, and a growing need for capital and industry experience,” Mr. Bronfman said.

The prevalence of owner-entrepreneurs in the wine business is part of its charm, but Mr. Motto said it also is slowing the flow of more alternative capital, especially institutional investment. An increasing shift of professional management coming to family businesses is changing that, he noted.

“We’re at the very beginnings of other kinds of capital being interested in the wine business,” he said.