You might think publicly-traded companies and blackjack gamblers are different. But Treasury Wine Estates, one of the world's five largest wine companies, just staked more than 10 percent of its business on a risky bet.
TWE agreed to pay at least $900 million, and possibly $1 billion depending on sales, for Daou, a Paso Robles winery that was founded just 16 years ago. Daou has been phenomenally successful, doubling its sales to more than 600,000 cases in just the last two years, which is one reason TWE – now valued at $8.7b – wanted it.
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Daou has done brilliantly with Wine Advocate reviews, with most wines scoring over 95 points.
"Daou's estate vineyards (which emphasize Bordeaux varieties) are planted at high density on steep slopes in Adelaida District in a site once singled out by the great André Tchelistcheff for its potential," wrote the Advocate's Erin Brooks. "Grown in these soils and in this climate, Daou's vines produce grapes with an extraordinarily high phenolic content, to which the estate's winemaking has gradually adapted ... There's no one else making Cabernet Sauvignon like this in Paso Robles."
Credit to the Daou brothers, engineers who were born in Lebanon, for building something so quickly and making it so popular in US restaurants.
But you have to wonder if TWE paid attention to the phrase "past performance does not guarantee future results". Treasury has not been good at brand building or even brand maintaining. It already owns Beringer, Stags' Leap, Beaulieu Vineyard, Sterling, Etude and Frank Family Vineyard, and if it had done a good job at marketing those brands, it wouldn't need Daou.
Instead, Treasury announced that Daou will fill a "key gap" in its portfolio of wines priced between $20 and $40. Look at that list of wineries above. They make wines in that price range. What happened to them?
Goldman Sachs, the great vampire squid wrapped around the face of humanity (H/T Matt Taibbi), praised the deal, saying: "Treasury Americas will become the leading player in US luxury (wine)." This shows how little Goldman Sachs knows about the US wine market, but that's not uncommon for US business analysts. Australian analysts have been a lot more skeptical.
We'll have to see, but I'm with the Australian analysts. I'm a journalist not a stockbroker, but this deal seems overpriced to me. If Dave Phinney, who created The Prisoner, wanted a $20-40 Cabernet brand, he would just invent one and buy the grapes for it, with little startup cost or longterm risk. That's why Phinney is successful, and he's just one guy. TWE has a lot more resources.
It hasn't been too many years since Treasury's last successful brand creation, 19 Crimes, which attracted young men, a difficult audience to reach for wineries. Brand spokesman Snoop Dogg may be losing his influence by being overexposed, but why couldn't TWE create something like that again? Is the Daou brand really worth $900 million?
Treasury did get 400 acres of vineyards in the deal in Paso's Adelaida district. I didn't see any of the financial analysts mention the vineyards, nor does the abbreviated version of TWE's press release sent to the wire services mention them. I think the reason the vineyards weren't played up in describing the purchase is that they don't matter much to Treasury. If TWE wants to make twice as much Daou wine in the next five years – I'll bet that's a conservative estimate – the vineyard sourcing must expand.
Ben Dollard, president of Treasury Americas, confirmed to Shanken News Daily that success in the $20-40 range is what TWE was looking at, and said that two more things that made Daou attractive are its visitor center and its app, "which he called a gamechanger in terms of connecting with consumers across multiple demographics", Shanken reported.
Did anyone tell TWE they could build their own app?
Growing the brand
Here's what I expect from the deal. What big companies do is buy a great winery like, say, Ravenswood that is famous for making a specific wine from specific vineyards, and turn it into a brand that contains anything from anywhere. You'll probably soon see $20-40 Daou Chardonnays and Sauvignon Blancs with fruit from Fresno, and they just won't be the same. It's a strategy for short-term sales, not long-term success.
That's the point, said wine mergers and acquisition expert Pat DeLong. I spoke to DeLong about this a couple days after the sale. He is the founder and principal of Azur Associates, a Napa-based wine M&A company. Earlier in his career he worked for Robert Mondavi Winery when it was publicly traded.
"Treasury is a public company. They have a growth mandate," DeLong said. "I think people know that about public companies but they forget in the wine space. In the equity space they're competing against Apple and whoever. They've got to show growth. But that's a disadvantage for Treasury.
"I think Gallo [which is not publicly traded] buying Rombauer is good for everybody," DeLong said. I don't have worries about Gallo trying to grow too fast or trying to launch a lower-priced tier. They're mindful and longterm thinkers. Treasury has to go fast. Public companies and the wine industry are not a good match. They haven't done well over time."
DeLong said Azur has spoken to a number of analysts in Australia who all say there are three prongs to TWE's strategy:- Growing US distribution (a goal that some Australian analysts openly mocked, because TWE has already been here for decades);
- Creating a lower-price-tier line, which seems likely to undermine Daou's brand image the way Woodbridge undermined the Robert Mondavi brand;
- Taking Daou to Asia.
The focus on the Asian market is interesting. China's punitive tariffs on Australian wine were a body blow to the whole Aussie industry, and it's still trying to recover. This might be why Penfolds, owned by TWE, is making a wine in California now: it's a Penfolds wine that's not from Australia. Now Daou will be another TWE wine that's not from Australia.
"Treasury has been scrambling to keep its Penfolds brand alive in China since the tariffs," said Mike Veseth, an economics professor who blogs as The Wine Economist. "Daou would give them another good brand to work with and build in China, especially until the tariffs are lifted, which will take some time."
"Not a lot of competitors would have this perspective," DeLong said. "Most of their competitors in California are focused on the US market. They've had outsized success with Penfolds. If you talk to them, Penfolds is their winner. They're constantly looking for the next Penfolds. The question that looms out of this is, can Daou become the next Penfolds for them?
But Treasury doesn't look far into the future, and that brings up an issue with this deal that would make it unattractive for companies that do. Paso Robles is the warmest fine-wine region in California. Currently it produces a lot of high-quality grapes, and lower real estate prices mean they are much cheaper than grapes of equivalent quality from Napa or Sonoma.
But as global warming accelerates, Paso is likely to become too warm for good Cabernet long before those other regions. Daou's vineyards have some elevation and I'm not a climatologist and I don't know whether we're talking 10 years or 50 years. But still, paying a high premium for land in Paso to grow Cabernet – not Zinfandel, not Mourvedre, not a more heat-loving grape – doesn't seem like the right move for the next generation.
"I would say (the deal is) a wonderful statement for Paso Robles," DeLong said. "Look at us, having a billion dollar brand here. But will the growth sustain? Time will tell, none of us know. That Adelaida district up in the mountains is quite special. The quality is there in that district. The question is, is that where the growth is?"
