Too Big to Fail - Wine Industry Style

In all of the hullabaloo regarding the housing industry, the banking industry, the oil industry, and the meltdown of the global economic system as we know it, the wine industry felt left out – until now.

Let's start with the everyday, run-of-the-mill, garden-type-variety insanity.

Michael Havens was a professor of English in the University of California system. He caught the wine bug, cut his teeth making wine for Truchard Winery in the Carneros region of southern Napa Valley, and he and some friends eventually opened the Havens Winery in 1984, specializing in Bordeaux- and Rhone-style wines. The winery flourished, becoming known for a Cheval Blanc homage known as Bourriquot and even making some wine for an upstart restaurateur -- with a wine bug himself -- named Manfred Krankl. In 2006, Mr. Havens was approached by one of his distributors (Billington Imports) who liked the wines so much, they wanted to buy the company. Billington bought the brand and the vineyard holdings and winery facilities were sold to a company called VinREIT (Real Estate Investment Trust), which leased the facilities to Billington.

Billington, a significant importer of South American wines, fell into financial troubles when it lost the right to import the wines of Nicolas Catena and Alamos wines from Argentina in late 2008. The next thing you know, Billington defaults on the lease, goes into receivership, and its assets are liquidated. No Havens, no more. And VinREIT is now in financial straits as several of its other winery holdings are in foreclosure.

Here is a slightly different twist with, hopefully, a better outcome. Diageo, the London-based alcohol conglomerate which owns such iconic labels as Johnnie Walker whiskey, Smirnoff vodka, and Guinness stout, notified the public and its shareholders that it is selling most of its Napa Valley wineries and vineyards, including its flagship brands of Sterling Vineyards and Beaulieu Vineyards, to Realty Income Corporation (another REIT) for the tidy sum of 269 million dollars.

That is not necessarily big news given the economy, but the company also announced that it would turn right around and lease these same properties back for a period of 20 years. Diageo Chateau Estate Wines will continue to manage and operate the properties and will retain ownership and marketing of the wine brands. This will, hopefully, provide Diageo with some much-needed capital with no discernible effects on the wine-drinking public. Hopefully, the investment will work out better for Realty Income than similar investments have for VinREIT; and we won’t have to worry about iconic symbols of Napa Valley being foreclosed.

Finally, news came out a short time ago that Southern Wines and Spirits, arguably one of the largest, if not THE largest wine and liquor distributor in the United States, is in negotiations with Bank of America for two billion dollars in loans in an attempt to restructure the company’s existing debt. Terms of the deal with Bank of America include a $1 billion line of revolving credit and a $1 billion term loan, both of which would mature after five years.

Given than Southern has an estimated 20+% market share, what would be the implications if they were not able to restructure their debt or that this loan is only a stopgap measure? Are they “too big to fail” a la Lehman Brothers and AIG? Also, given the timeframe of the loans, does that indicate that Southern anticipates another 2 to 3 years of economic hardship before they see a rebound in sales?

Only time will tell.