Sunday, August 25, 2019

How Much is Your Winery Worth Today?


Change Creates Opportunity


The 2019 SVB State of the Industry Report helped change the narrative in the wine business this year. While the industry remained focused on premiumization, I had to report in January that the positive elements that created the industry's astounding success over the past 25 years were hitting a wall. We predicted that M&A would slow this year and thus far, that appears to be a good call, notwithstanding the massive sale of about thirty of Constellation's wine brands to Gallo for $1.7BN.

There is plenty of activity still. Probably once a week both buyers and sellers ask me, "what are average winery multiples?" What they are really asking is "how much is my winery worth?" But there is more to the question. They also want some color on the business environment.

As a banker, I love those questions because it means there might be a financing opportunity (...yes I do have a day job making loans, as boring as that might sound.). 

The short answer to the headline question for today, is there are still plenty of buyers but overall they are being a little more selective, and your winery and vineyard are probably not worth more than they were last year.

Without going into details on a long topic, we are presently oversupplied on grapes and bulk wine from most regions, and the upside to higher sales is for today - more limited than the past when the rising tide of higher boomer incomes along with the belief in the health benefits of moderate wine consumption lifted all boats. Today millennial consumers are spirits and beer consumers, and are trying to cut their alcohol consumption for health reasons.

There are activities that with certainty will return the growth rate in demand that we've been used to,  but that is another VERY long topic for another day. Buyers believe in the strength of the product and know there is upside given time, expertise, and focus.

As it stands, shrewd buyers and sellers are still finding agreement on price and repurposing valuable assets for tomorrow. Investors with a long view recognize the opportunity this current market change is creating. But with any sale, there has to be an offer, and an answer to the question, "How much is my winery or vineyard worth today?"


The Alcohol Beverage Market



If you understand valuation theory and want to go straight to the answer to the question of multiples and valuation, skip down the page to the Current Public Company Multiples. If you want some of the basic thoughts on valuation first, please continue reading.

Valuation Theory


Still with me? The answer for alcohol beverage companies is that multiples for spirits companies are at the highest among alcohol beverage companies, not wineries. That's a change from the past, but it makes sense because spirits companies currently have superior growth metrics compared to wine and beer.

How does the growth rate in an industry segment impact the value or multiples of a company? A buyer of any company wants to be in a high demand-driven market because that spells opportunity. If you are buying a stock, you are betting that will go up in value and its the same thing with the buyer of a company. Everyone wants to see higher sales, leading to better profits and will pay more for that.

Unique Premium Wine Company Factors


Most luxury wine company buyers are individuals, strategic buyers or Private Equity firms who have a longer investment horizon versus public companies. There are a few public companies but they have to focus on quarter-to-quarter results -  in an industry that otherwise gets one harvest a year.

Put in financial terms, the ROI of a luxury wine asset is negatively impacted by comparatively lower year over year earnings upfront, but is then dominated by the amount and timing of the terminal multiple, or exit value of the investment. That long term math doesn't suit Wall Street.

There is a difference between production wineries and premium and luxury wine companies because the latter are tied to terrior. The properties are always small, and value is often hidden from current earnings and instead housed in the increasing value of unique vineyard assets. That makes current returns less than competing investment choices, and the time horizon to see a real return in the wine business longer than almost all public companies can tolerate.

In fact, the landscape is littered with public company acquisitions of wineries or brands, and subsequent failures as the public company drives sales higher with grapes from increasingly widening sources, and/or spins off their vineyards acquired to improve current period ROA.

Because winery investments run the gamut from one-of-a-kind to a commodity, putting a value on them isn't easy. So for a real winery valuation, I'll send people off to appraisers or people who value businesses for a living, and M&A professionals if they are interested in selling.

Having worked for over 30 years in the business now, I can normally get pretty close for a starting discussion point, or at least frame up a good discussion and narrow down some options which is what I hope you can do when you're done reading.


Winery Value - The Big Picture



The 30,000-foot view of what your winery is worth has to start with understanding the value of two basic elements; the value of a flow of cash/profits, and the net value of assets.

The first is to recognize buyers are essentially purchasing a stream of profits from you. They will pay more for your company if it has strong earnings. So using a multiple of earnings in the headline chart, if your company has $1,000,000 of EBITDA, the company could be worth $14,700,000.

Said another way, the buyer is buying 14.7 years of profits. That gets back to the old "everything is for sale and everyone has a price" chestnut. If someone is going to offer you 75 years of the future profits of your company today almost anyone is going to take the money and clip coupons.

But what if your company is showing a huge loss? Applying the 14.7x multiple to a losing company means in theory, you have to pay someone to take the winery off your hands. That is a possibility which is why winery sellers take losses at times. In the worst cases, it's why we have a bankruptcy code, but we seldom see those in practice. Of course, there is another value even for a company losing a modest amount of money that is held in the asset and the brand value, net of debt.

Each winery is going to be a little different when it comes to valuation, but essentially the value attributed to a company will decrease as EBIDTA approaches or passes zero. At that point, the value will be all in the assets and brand value. Said another way, the higher the earnings of a company, the less physical assets impact the valuation.

In practice, the value of cash flow is calculated at 100%, and the value of assets is calculated at 100%, then the valuation analyst determines what the split will be, based on the stronger component. After that, discounts are dropped in for the lack of liquidity in a non-public company, for a minority interest if ownership isn't controlling, and for other factors.

Defining the term "Multiple"


If you have a working knowledge of the term "multiple." skip down to the break in the page.

A multiple is a number derived by dividing a company's total value by some other metric. Generally, multiples are implied to be a multiple of cash earnings or EBITDA, but it can also be a multiple of sales. Here's the basic math using a hypothetical public beverage company.

FYETotalMarketTotal Sales EBITDA
CompanyShare $SharesCapSalesEBITDAMultipleMultiple
Bev Co. $ 241.79    12.8  $ 3,082.82 $ 739.05 $140.56 4.17 21.93 

Since this is, in theory, a public company, its easy to figure out how the market values the company. That's the Market Cap calculation which is just share price times shares outstanding. Then to get to the EBITDA Multiple, you divide the Market Cap by EBITDA. The Sales Multiple is the Market Cap divided by Sales. Why can this be useful in valuing non-public investments?

It is useful because we don't have many public valuations in the wine business. But in theory, you can take the average winery multiple in public companies, apply that to your own sales or EBITDA and voila, you know the exact theoretical worth of your company - presuming 100% of the value is in earnings instead of assets.

~~~~~~~~~~~~~~~~~~~~~~~~Break in the Page ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 Current Public Company Multiples


Here courtesy of Cascadia Capital, LLC is a breakdown of the average sales and EBITDA multiples of public wine companies as of August 2019. (You can click on the image for better viewing, or [here] for the complete Cascadia Capital research.)


While you could do the quick math (Your EBITDA * 14.7, or Your Sales * 2.4) and come out with a valuation, to get a better valuation you need to strip out the personal expenses in the company first which gets you closer to the free cash flow a buyer is really getting.

Because there are always personal expenses in a family company, I tell our clients contemplating selling their business that they should start at least three years before sale, and really scrub the financial statements to isolate personal expenses. At a minimum, they should be able to pull the personal expenses out, and at least get review quality financials prepared by a CPA. The quality of the financials will give the buyer more comfort with price, and you will get a bigger return by doing the early work.

Private Wine Company Multiples


Before finishing I should answer the question some of you will ask which is, where are multiples for wineries now? The answer is they are lower than they were before 2007 when people seemed to focus on a 20x multiple and came to the conclusion the value of their company was worth a small third-world island country.

As long as there is scale to a business and it's not a hobby, private wine company multiples always seem to carry higher valuations than many other private businesses. The Pepperdine Private Capital Markets Survey of 327 private equity companies done in late 2011 concluded the following:


To the point, wine company multiples have a tendency to fall between 8x - 12x EBITDA which if you own a winery, should be good news versus the averages shown above. And if your winery is one with a strong brand, decent size, and a good following your multiple should probably exceed 12x. If you are selling just a brand, it might fall below that range.

Now that you get the theory and practice, you know that if your winery isn't EBITDA positive and there is no sales momentum or strength, you might need to discount the market value of your hard assets to get someone to buy your business.


What do you think? It's a complex question and I'm hoping some are more enlightened versus more confused. 

Where do you see winery multiples headed? Do you think wineries are a good investment or are people crazy to think of the business as an investment?

 

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8 comments:

  1. That Constellation/Gallo deal is NOT A DONE DEAL yet. Stay tuned...

    ReplyDelete
    Replies
    1. Thanks for logging in Anti.
      True comment. Something will happen though. My understanding it's being held up by a single varietal/beverage which when added together, gives Gallo over 50% share of the sales of that varietal/beverage in the US. That can be fixed as long as Gallo doesn't use the sale to take another bite out of the apple.

      I'm sure the employees in Constellation are living on a razors edge trying to figure out what to do with supply. It can't be easy.

      Delete
  2. "Said another way, the buyer is buying 14.7 years of profits."

    This is definitely a 30,000 foot view. Climate change will affect those 14.7 years. Napa Valley Alicante Bouschet or Russian River Rubired may push that timeline out a bit or reverse it altogether.

    ReplyDelete
    Replies
    1. It's a little off target to bring climate change into the discussion. Practically speaking, there is no analyst that currently can factor that into multiples. There's no denying climate change, but there is no accurate prediction for timing and scope and buyers aren't factoring that into decisions either.

      Delete
  3. Rob-
    Thank you for this analysis. It is very interesting.
    Maybe I just missed it, but how would you breakdown the components of a wine business out of the 8x to 12x EBITDA number, between:
    Intellectual Property
    Inventory
    Winery Facility
    Vineyards

    Given that different wineries have these in very different ratios.

    To describe two ends of the football field (Ceteris paribus):
    What is EBITDA Multiple for a negotiant?
    What is EBITDA Multiple for a monopole?



    ReplyDelete
    Replies
    1. Anon - there is no good answer to your question regarding breakdown of components.

      A negociant will have a multiple based on sales and brand value. Vineyards can carry a lot of value and drive up multiples so brands and negociants will normally fall below 8x-12x but I don't have any good metrics to cite.

      I don't know what a monopole is? Is that what happens when a frog lays one egg?

      Delete
  4. Rob, thank you for this! When we spoke at AV growers last IPM meeting, I may have mis-articulated my question. This info is a great help to the overall picture I'm trying to paint for our winery owners. Thank you!

    ReplyDelete

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