“Of course there can always be a black swan event.”
A few months ago, I was speaking with a business owner who was thinking of selling his wine company. He asked the perennial question: “Is this a good time to sell?” Among my responses regarding the strength of his brand, the sustained growth and optimism in the wine industry as positive factors, I included one caveat: “Of course, there can always be a black swan event.”
From Wikipedia: “The black swan theory of events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.”
The wine country fires that have ravaged the North Coast wine region are certainly a “surprise”. Will they have a major effect on the winery M&A market? The short answer is that it’s too soon to tell, but here are some changes that I’ve seen as an advisor active in the market:
- A Napa Valley Winery owner cancelled a planned site visit scheduled for October 13th to see a property he was considering acquiring. His winery was under threat and he was evacuating his family. The site visit has not yet been re-scheduled.
- During the first week of the fires, and even through to the second week, deal closings came to a standstill. In part because the lawyers involved in the contract negotiations had been evacuated.
- The region and the industry really are in shock. If you didn’t lose a home, you know someone who did. The lingering effects of this trauma are unknowable, but certain to be there.
- Grape/wine supply scarcity was already a growing issue. Although the damage to vineyards and to wines was likely minimal in relation to actual production, markets are highly sensitive to perceptions.
- And finally… the vulture capital investors have shown up. I recently heard from an investor that hadn’t contacted me since the ’08/’09/’10 market.
My hunch is that these fires will accelerate trends that were already present in the market, rather than dramatically changing the market.
M&A activity in the wine space had already decelerated, mostly driven by buyer management capacity limitations (they’ve bought a lot and need to absorb the acquisitions they already have). That will likely continue, with a return to a “normal” from a “hot” market. Grape scarcity was already an issue. With this event it is certain that brands without either contracted grape and/or wine supply or flexible future sourcing options are likely to struggle to find a buyer.
On the other hand, while transactions that were well on their way to completion will be wrapped up in the next few months, there will likely be a pause in the launch of new selling efforts. I, for one, am advising my clients to sit tight until January.
