Learnings from the recent spate of actual and rumoured sales of prestigious French and Italian wine estates

With the recent acquisition of the Burgundy property Bonneau du Martray (BdM) by American billionaire Stan Kroeneke, the Louis Vuittonification of Burgundy rolls on. BdM is one of the most prestigious estates on the hill of Corton with its 11 hectares dedicated solely to the production of the Grand Crus Corton and Corton-Charlemagne. This Burgundian biodynamic pioneer had been owned by the same family for over 200 years prior to the announcement of the sale to the Screaming Eagle owner.

Announcements -- or rumours -- of the sales of prominent French and Italian wine estates seem to be hitting with increasing regularity. The table below lists the recent sales and rumors with which I am familiar.

Recent Actual and Rumored Sales of Estates of Significance

Deals	Region	Estate	Size (ha)	Purchaser	Purchase Price	Acquisiiton Year
Verified	Barolo	Vietti	35	Krause Holdings	€50 million+	2016
		Enrico Serafino	12.14	Krause Holdings	€6.1 million	2015
	Burgundy	Bonneau du Martray	11	Stan Kroeneke	N/A	2017
		Clos de Lambrays	8.84	LVMH	€100 million?	2014
	Tuscany	Biondi-Santi	150	EPI Group	N/A	2016
Rumored	Barolo	Roberto Voerzio	21.04	LVMH	N/A	N/A
	Loire Valley	Clos Rougeard	10	Martin Bouygues	N/A	N/A

I have previously written on the Vietti sale (and its potential implications) and Voerzio rumor and some of the factors that are potentially driving this wave. In this post I would like to highlight some of the things learned as a result of this spate of activity.

First, these deals take time. According to Jacopi Biondi (Decanter, January 5, 2017), the talks with EPI for the acquisition of the majority of the shares of Tenuta Greppo took 6 months. This leads to the conclusion that the Vietti sale had been in the works long before its actual announcement. It also leads one to speculate that there are discussions currently underway which will lead to future sale announcements.

Second, most of the sales transfer majority ownership to the acquirer, leaving some ownership (and upside potential) in the hands of the former owners. As both Antonio Galloni and I have pointed out, the lack of retention of any ownership by the Vietti family is one of the troubling aspects of their deal.

Third, buyers are aiming for the most prestigious estates in the region. That is, they are not seeking to gain a foothold in the region by buying underperforming assets and building them up. They are after the highest value estates and paying top Euro, thus driving up the value of all market players. This gets to the motivations of the buyers. In the case of LVMH and EPI, their acquisitions are focused on brand-building. And not building the brand of the acquired companies (although this may result), but extending the brand of the parent company as a purveyor of luxury goods. By acquiring these properties LVMH and EPI are able to cross-sell their luxury brands to a wider customer base and to increase the prices of the acquired products as a result of the cachet associated with the brand. I address the motivation of someone like Kroeneke in the below while I think that Krause truly wants to build a franchise in Piemonte.

Fourth, in this new environment, winemaking could become more a value-retainer than a raison d'etre. With the prices being paid for these luxury estates, the investment will not be recouped by the sale of wines. Players like Kroeneke have a very good understanding of the sports-franchise business model. In this model, you can never pay too much for the product as the new purchase price sets the industry floor. As a participant in that industry, all you have to do is to maintain the value of your franchise, hold that franchise operationally profitable for X number of years, and then capitalize on a sale sometime down the road. In this case, the value of the estate to the owner is not the wine that it produces today. Rather, it is the value that it will yield in the sale tomorrow.

Fifth, family-owned estates cannot compete in this acquisition market.

Sixth, conditions are ripe for more deals of these types. Buyers are motivated and sellers are torn. In the case of France, the difficulties of paying the inheritance taxes on these estates are well known. It is much simpler for a family to transfer assets to the upcoming generation as part of a payout on a sale rather than as a transfer upon the death of a p(m)atriarch. In addition, the economics are heavily tilted to selling if you are a family in Barolo, for example. If you use Vietti as a case in point, Luca could theoretically invest the family's €50 million at 5% compounded and in 10 years would have €84 million in hand (One would expect that his daily needs would be met by the salary he will now be drawing as the leader of the Krause Barolo holdings.). Try as he might, Luca would not have been able to approach those types of returns for his family by continuing to operate Vietti as a family holding. These operators are torn between upholding tradition and cashing in in a real big way on the works of the generations that have gone before.

Further, if the industry is becoming a real-estate play, and you are a viticulturist/winemaker, then you are miscast. You are not truly equipped to play in that game as an owner (and may not be motivated to) so why not cash out.

Seventh, in the majority of cases, the acquirer is retaining the services of the current operator. In the Vietti acquisition, Luca has been retained as the CEO while Jacopi and Tancredi Biondi will oversee vineyard operations and winemaking and serve as brand ambassadors for Biondi-Santi. In the latter case, EPI will have control of the business point of view. In the case of Clos de Lambray, LVMH retained the services of its longtime chief winemaker Thierry Brouin, the architect of the previous 35 vintages of the estate's wine. BdMs current Estate General Manager, Jean-Charles Le Bault de la Morinière, is the exception to this trend in that his position will be taken up by Armand de Maigret, the French general manager for Mr. Kroenke’s vineyards, after a "suitable" period of time.

Eighth, given their prestige, and the motivations of today's buyers, I predict future acquisition activity in the Cote-Rotie and Champagne regions, in addition to ongoing activity in the regions currently under "siege."


©Wine -- Mise en abyme

Practical implications of the Vietti sale

One of the most significant events in Piemonte so far this summer has been the recent purchase of Vietti by Krause Family Holdings for a figure north of €50 million. I shared my thoughts on the deal in a recent post and review its practical implications herein.

The acquisition and sale appear to have been more opportunistic than strategic. Krause has reportedly long been on the hunt for Langhe properties and recently bought the Enrico Serafino property for around €6 million. In the case of the Vietti owners, there is no tradition of vintner-selling of property in the region (Elena, Luca's wife, even said that during our recent tour of their facility), nor has Luca previously evinced any broader vision -- for his winery or the region -- which would serve as evidence of a strategy-based sale. Rather, in his discussion with Tom Hyland, he indicated that the family had been approached by Krause. In the podcast with Levi Dalton, Luca indicated that the family discussed the offer and, while everyone did not agree with the direction, the decision was taken to accept the offer. So the evidence clearly points to tactical decisionmaking (and that is a statement of fact rather than a judgment).

With the foregoing in mind, let us take a look at the potential synergies that may accrue to the Krause family as a result of the acquisition. First, it should be noted that Vietti and Enrico Serafino were acquired in separate transactions by the holding company. This implies separate and lengthy due diligence activities and a judgment that each would be profitable in its own right. And that each would be managed separately in order to meet its individual ROI goal (That being said, it should be noted that the cost of the Vietti acquisition was almost 10 times the cost of the Serafino acquisition and that the cachet gap is probably of similar size.).

In both the Hyland and Levi Dalton interviews, Luca indicated that his remit would remain Vietti but, in the Hyland interview, he indicated that both he and Mario Cordero would act as consultants to Enrico Serafino (It cannot hurt Enrico Serafino to have one of the leading vintners in Piemonte providing advice and counsel regarding its operations.). And the relationship is already bearing fruit for Krause in that Dalla Terre, the long-time distributor of Vietti in the US, has now agreed to distribute Enrico Serafino wines in the US. It is not clear that that would have happened without the current linkage.

The figure below shows the location of the sources of Krause Barolo-targeted Nebbiolo grapes. The data included on the map was culled from a variety of sources to include the Vietti website (instrumental in identifying single-vineyard designates), Barolo MGA (Vietti plots in Barolo crus not previously identified), Galloni (Perbacco and Barolo Castiglione sites), and the Hyland interview with Luca (Enrico Serafino sites).

In his discussion of the Barolo Castigliione and Perbacco grape sources, Antonio Galloni stated that he had, on previous occasions, asked Luca why some of the components had not been bottled as cru wines and had been told that the "sites were not consistent enough from year to year to merit vineyard designated bottlings." In discussing the deal with Tom Hyland, though, Luca indicated that the holdings of the two estates might allow for the development of future vineyard designates. When I look at the map above (and assuming accuracy of the data), I do not see significant enough vineyard overlap to overcome the objections to designates raised with Antonio.

In discussions with Antonio, Luca said that the Serafino holdings might provide him the opportunity to improve the quality of the Perbacco and Barolo Castiglione wines. The question is why? Especially when, as Antonio stated, these wines are already of very high quality. If the winery cannot raise the price of the wine to accompany this increase in quality, then it has embarked on a fools errand. And customers may be resistant to a price increase based on a qiuality improvement that they may not be equipped to detect.

Further, the CEO of Enrico Serafino may be resistant to a potential decrease in the quality of his/her portfolio to benefit the Vietti labels. Just last night I saw a job listing on Linked In for a CEO for Enrico Serafino with clear responsibilities for attainment of the unit's business goals. That is not to say that Krause will not institute mechanisms to incentivize resource-sharing, but they are still in the early phases of building what could be a much larger portfolio of properties (The Vietti sale could give permission to other willing vintners to pursue a similar path and if they could sell and still retain autonomy -- a la the Vietti model -- then Krause would be the preferred home.).

On the other hand, if Krause sought to really extract the synergies of its charges, the potential exists for doing Vietti vineyard designates from sites -- Le Coste, for example -- that it had no access to prior to the sale and to fill the gaps that this might create in the Enrico Serafino portfolio with Perbacco and Barolo Castiglione grapes. This, of course, assumes that these sites merit single-vineyard designation. And, if they merit such designation, the return to the enterprise would be much higher if they were Vietti rather than Enrico Serafino designates. Such an approach would also meet Luca's promise of not increasing the number of bottles produced by Vietti.

From a Krause portfolio management perspective, if growth on the Vietti side exceeds any negative impact on the Enrico Serafino side, then it would have been a win for the enterprise. The challenge for them then, is to put mechanisms in place to allow team play and win-win situations.

Luca has talked about a partnership and it has not been readily apparent to observers. But this may be the area where that partnership plays out. If he can create new products and, in his inimitable style, drive them into the markets successfully, that would result in significant ROI from the Krause Enrico Serafino investment; albeit in a backdoor way. And Luca, having played a principal role in the realization of that new revenue source, could share in the proceeds.

So may, just maybe, this acquisition could have been strategic after all. Krause could have seen the potential of marrying his under-exploited crus with a legendary single-vineyard-producing estate and approached Luca with the idea. The selling point for Luca here would have been monetizing the Vietti property while remaining in control and, in addition, creating new single-vineyard designates from properties which were not available to him. Finally, the family could continue to benefit through sharing in any upside from the agreement. Obviously I have no facts to back up the foregoing but it falls within the realm of possibility.


©Wine -- Mise en abyme