A new Rabobank report notes the slow pace of M&A deals with smaller wineries to date in 2021, due to a massive difference in valuation expectations between buyers and sellers. Sellers view the recent IPO of Duckhorn – currently trading at ~20 times EBITDA – as the new standard for valuations in general. Buyers use other recent deals in the market, closed at much more muted valuations, as a reference.
May 4th – “This gulf in expectations will eventually narrow, and the ongoing recovery of the on-premise will play an important role in providing greater clarity. Some wineries will find that valuations will improve with time, but others may find that prolonging a sale may erode additional value,” according to Stephen Rannekleiv, Global Strategist – Beverages at Rabobank.
The Covid crisis and the recent wildfires have increased the number of small, family-owned wineries interested in selling, but there appears to be a significant gap between the expectations of buyers and sellers in terms of valuations. Part of that divergence stems from that fact that, among the high-profile M&A deals that have closed, there appears to have been some fairly dramatic variation in valuations. The IPO of Duckhorn valued the company at 15 times trailing EBITDA, but the stock price rose immediately and, at the time of writing, reflects a valuation of ~20 times EBITDA. On the other hand, the recent sale of Constellation’s brands to E&J Gallo appears to have been closed (by most industry estimates) at well-below ten times EBITDA.
“So while the high levels of liquidity in the market may provide some upward pressure on valuations for specific types of deals… 20 times EBITDA is not the normal, benchmark metric for wine deals getting done. On the other hand, of course, the Constellation-Gallo deal is also not representative of where most valuations will fall,” says Rannekleiv.
Given that the decline in sales to on-premise channels has been one major point of disruption in revenues for small wineries, the pace of recovery of this channel will likely play a role in aligning valuation expectations between buyers and some sellers.
Robust growth in sales to the on-premise expected in the second half of 2021
The good news is that, as we move into the second half of 2021, the recovery of the on-premise is in full swing. There is pent-up demand, consumers are anxious to begin going out and socializing again, and wholesalers indicate that they are seeing sales in many of the bars and restaurants that have completely reopened reaching levels at or above those seen in 2019.
Some important challenges, however, remain and will constrain growth. “In addition to the loss of accounts due to permanent closures, many restaurants are paring down wine lists in order to better manage cash and improve operating efficiency,” explains Rannekleiv. “This is likely to favor larger, better-known brands and create more intense competition for placements among smaller wineries,” he says.
The pace of recovery of the on-premise will be felt unevenly across restaurant chains vs. independent restaurants, with the former recovering more quickly and gaining share from the latter. The growing share of chains will be more favorable for larger, more well-established brands.
The gap in valuation expectations will eventually resolve itself
The ongoing recovery of the on-premise is good news for the industry and may provide some wineries with the improved profitability needed to align price expectations with potential buyers. Furthermore, those wineries that were able to effectively shift sales away from on-premise channels to e-commerce/direct-to-consumer channels during the pandemic may find themselves relatively well-positioned.
Tech deals taking center stage in wine M&A
Retailers and tech companies in the food and beverage space are looking to the alcohol category to buoy their e-commerce growth and investing big money to build out their online alcohol infrastructure.
“Despite massive growth in 2020, alcohol remains vastly underpenetrated and underpromoted across most major e-commerce channels,” says Bourcard Nesin, Analyst – Beverages at Rabobank. “Alcohol is perhaps the last of the low-hanging fruit in the online food and beverage world, a bright spot in an otherwise challenging moment for e-commerce players,” he explains.
What does all this mean for alcohol brands? These investments into the alcohol category all but guarantee that the alcohol category will continue its strong momentum over the next two to three years even as we move beyond the coronavirus pandemic. As retailers and tech companies start building dedicated e-commerce teams for the alcohol category, they will turn to alcohol brands for support, leadership, and guidance.