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Nov. 17, 2021, 12:01 p.m. EST

Why Wall Street is pouring into the wine business

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By Joy Wiltermuth

Sycamore Partners, a New York-based $10 billion private-equity giant, has been known for turning high-profile bets on clothing chains and shoe stores into a fortune.

Now it’s splurging on wine, with its $1.2 billion purchase of Washington state-based Ste. Michelle Wine Estates, the company behind Chateau Ste. Michelle, Erath, Stags Leap and other premium brands, in a deal that closed Wednesday.

“It is the biggest winery by quite a bit in the Pacific Northwest, and it is one of the largest in the country,” said Adam Beak, head of the beverage group at Bank of the West, which led the financing with a syndicate of banks for Sycamore.

It also marks the private-equity industry’s largest deal yet for a U.S. winery. Sycamore made the purchase from tobacco giant Altria Group Inc., /zigman2/quotes/208895754/composite MO -1.12% which took ownership in 2009.

“Traditionally, it’s been a difficult business for Wall Street and private-equity firms to participate in,” Beak said, pointing to agricultural, weather and heightened wildfire and climate risks , but also changing consumer preferences and the pandemic, which crushed winery sales to restaurants .

However, the flip side of the pandemic has been plunging yields and record stock prices /zigman2/quotes/210599714/realtime SPX -0.15% , which have raised the profile of alternative investments.

Beak said interest from professional money in the U.S. wine industry hit a new stride after the Duckhorn Portfolio’s /zigman2/quotes/225456824/composite NAPA -4.52% initial public offering in March, a rarity for California’s famed Napa Valley , and other recent Wall Street financings that helped companies like Vintage Wine Estates /zigman2/quotes/214912950/composite VWE -3.75% grow their portfolios.

“This is the highest level of interest I’ve seen in my career, which goes back 25 years,” Beak said, in a phone interview.

Land prices matter

So, why would a high-flying private-equity firm like Sycamore go after a large Washington winery instead of one from California’s Wine Country?

“Washington can produce some really, really high-quality fruits. But it’s able to do that at a much lower cost,” Beak said, mainly because land in Napa and Sonoma counties can fetch at lot more per acre.

The Pacific Northwest’s famed Rocks Region, where wines go for $50 to $120 a bottle, starts at about $40,000 to $50,000 an acre for bare land, according to a local banker.

That compares with roughly $130,000 an acre for bare land in Napa Valley’s Carneros region, to $400,000 and up in Howell Mountain and Oakville, said David Ashcraft, founder of real-estate and winery brokerage Vintroux. Sycamore declined to comment for this article.

But Beak said wineries also need to produce enough of what customers want to buy, and at the right price.

“There’s a changing demographic of the wine consumer, as Baby Boomers age out of their prime drinking years,” Beak said, adding that millennials look less likely to spend as much on wine, in part because they are unlikely to have “quite as much disposable income,” even through they grew up largely with high-quality products.

Ste. Michelle produces about 60% of Washington’s annual wine sales.

Under Altria’s watch, net revenue grew to $177 million in the third quarter of 2021, from $75 million in the first quarter of 2009, according to its company filings. Wine shipment volume also rose to 1.8 million cases from 1.2 million during the same stretch.

“There are a lot of headwinds for those small guys,” Beak said, pointing to climate change, water shortages and higher insurance costs as factors, in addition to disruptions during the pandemic.

“It’s a hard business,” he said. “But I believe it will always exist.”

Read next : What California’s fading cotton crop in favor of almonds reveals about premium farmland and a warming planet

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