Author: Mike Fisher

Analyzing the 2024 Duckhorn Transaction

Since the sale of Duckhorn to private equity firm Butterfly was announced on October 7 for almost $2 billion, many have questioned the basis for this valuation. Of course, this is almost double the valuation placed on the company by the public market the week before the deal was announced. When one looks at the details of the deal, the valuation is in line with recent private winery transactions.

What did Butterfly buy?

  • 2,250 acres of vineyard (mostly Napa, Sonoma and Anderson Valley) at an estimated value of $300 million.
  • $500 million in annual sales[1], $250 million in gross profit and $120 million in EBIT.
  • Annual sales of 3 million cases.
  • A stable of very strong brands.

What are the resulting valuation multiples? [2]

  • 3.4 times revenue
  • 6.8 times gross profit
  • 14.2 times EBIT[3]

What does this mean?

  • The public market doesn’t understand the premium wine business. What’s new?
  • Private equity continues to have interest for strong wine industry players and the long-term viability of the premium wine business.
  • Although the valuation is in line with other winery transactions, the value is higher than other transactions of consumer goods companies of similar size and profile. Could it be the “sizzle” of the premium wine business and the long-term asset appreciation of production facilities and vineyards?

With Butterfly do we have a new wine industry M&A player?

[1] Financial results and case sales are for the fiscal year ended July 31, 2024 adjusted for a full year of Sonoma Cutrer which closed April 30, 2024.

[2] Our methodology reduces the gross value of the transaction by the value of the vineyards to calculate the multiples.

[3] EBIT (earnings before interest and taxes) is used here rather than the commonly used metric of EBITDA (earnings before interest, taxes, depreciation and amortization). Analysts use EBTIDA as a proxy for free cash flow. However in winery financial statements, total depreciation is rarely itemized, and often includes barrel depreciation expensed in COGS. From an economic standpoint, barrels should be treated as a cash production cost since 25% to 35% of barrels are typically replaced annually. Thus EBITDA in winery financial statements where barrel depreciation is included may overstate free cash flow as it is typically understood in financial analysis.  EBIT allows for more consistent comparison between transactions.

Cabernet Sauvignon Wine vs Grape Pricing

close up of purple grape cluster on the vine

What determines grape pricing and how does this pricing affect wine pricing?

“BECAUSE NAPA GRAPE COSTS ARE THE HIGHEST IN CALIFORNIA, VIRTUALLY ALL RED WINE MADE WITH NAPA GRAPES MUST BE RETAIL PRICED AT $40 OR MORE PER BOTTLE FOR THE WINERY TO RECEIVE A REASONABLE PROFIT”

As we wrap up the 2016 harvest, wineries and growers begin to settle up for grape deliveries. What determines grape pricing and how does this pricing affect wine pricing? 

Because Napa grape costs are the highest in California, virtually all red wine made with Napa grapes must be retail priced at $40 or more per bottle for the winery to receive a reasonable profit. The majority of Napa’s production is from two Bordeaux varieties, Cabernet Sauvignon (43%) and Merlot (11%). When the other three Bordeaux varieties, Cab Franc, Malbec and Petit Verdot are added, production totals 59% of Napa’s grape crop.

hand holding glass of red wine in a winery tank room

PHOTO CREDIT: JOHN CORCORAN

Napa’s lower priced grapes are dominated by white varieties, Chardonnay and Sauvignon Blanc, representing approximately 25% of Napa production. 

Since Cabernet Sauvignon is the dominant variety in Napa, let’s focus on the economics of its production and pricing. For a winery to experience a reasonable profit, grape costs should not exceed 25% of the wine’s selling price. As a consequence, the tonnage grape to retail bottle price ratio should range from 100 for lower priced Napa Cabernet Sauvignon to as high as 140 times for more expensive Cabernet. 

The attached winery profiles show the economics at various wine pricing levels. In each of these profiles, the winery realizes a profit equal to 15% of sales. Most Napa Valley wineries sell a mix of retail and wholesale through distributors. Traditionally, sales to distributors are at 50% of the retail price. As the wine price goes up, generally a higher portion of wine is sold retail, so while wine production costs increase in absolute terms, they will decrease as a percentage of sales. Offsetting this increased gross profit are higher selling and administrative costs per case due to the combination of lower sales volume, a higher percentage of retail sales and a lack of scale.

Cab Chart showing statistics and income statements.

Bottom line, if Napa Valley wine is retail priced outside of this 100 to 140 times grape cost to bottle price range, the economics don’t work for the winery.

“BOTTOM LINE, IF NAPA VALLEY WINE IS RETAIL PRICED OUTSIDE OF THIS 100 TO 140 TIMES GRAPE COST TO BOTTLE PRICE RANGE, THE ECONOMICS DON’T WORK FOR THE WINERY.”

Sparkling Wine – It’s Not just from France Anymore

two glasses of sparkling wine on a ledge overlooking a body of water

“IN THE US, SPARKLING WINE CONSUMPTION HAS DOUBLED FROM 2003 TO 2013”

Bubbly, Champers, Sparklers, Fizz – when consumers are looking for sparkling wine, they are no longer simply being offered French Champagne. Other country’s products, like Italian Prosecco, Spanish Cava and US Méthode Champenoise are flooding the market. 

estate on a hillside partially obscured by foliage

PHOTO CREDIT: JOHN CORCORAN

In April, I gave a presentation at the 2016 Sparkling Wine Symposium in Oregon and here are a few of the interesting details from that presentation. 

According to the Organisation of Vine & Wine (OVW), France accounted for 22% of the sparkling wine production for 2013 with Italy and Germany close behind at 20% and 16% respectively. 

The category, has seen an increase of 40% since 2003 to 200M cases annually in 2013 representing 7% of global wine production.

Not only is more sparkling wine being made – more wine is being drunk.

In the US, sparkling wine consumption has doubled from 2003 to 2013. A report from the Wine Institute states that in 2014, 80 California producers shipped 9.4 million cases to US markets alone. In 2013, for drinkers in foreign markets, Germany lead with 34M cases and France and Russia followed with 23M cases each. Overall, from 2003 to 2013, sparkling wine consumption has increased by 30%. 

For producers & winemakers, there are some barriers to entrance in this market – most notably production costs (especially for Méthode Champenoise) & global competition but sparkling wine lovers now have more options by price point, style of wine and country of origin than ever before. Cheers to that.

“SPARKLING WINE LOVERS NOW HAVE MORE OPTIONS BY PRICE POINT, STYLE OF WINE AND COUNTRY OF ORIGIN THAN EVER BEFORE. CHEERS TO THAT.“