Wednesday, August 17, 2016

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

No comments:

Post a Comment