Finding the Exit
Succession in wine industry an existential contest
Mark Freund likes Oregon wine very much. In fact, he travels north several times annually from Napa Valley, where he directs Silicon Valley Bank’s wine division, a component of this highly regarded, innovative financial institution.
The bank claims more than 320 winery clients, and its annual “State of the Wine Industry” report sources its analysis from more than 650 companies and maven consultants.
The 2015 overview estimates 70 percent of winery owners surveyed say they would happily sell their interest in their wineries.
There is only one problem with the report — and it’s as old as the battles President Andrew Jackson had fought with the Bank of the United States, which he closed down. It is the antipathy existing between bankers and farmers. It doesn’t take a Wharton MBA to recognize Silicon Valley Bank’s report is a “selling” document.
As Freund told me during a phone interview in October, “If you are selling premium wine, we want your business.”
Fair enough. So, if you make only value wines for the broader market, SVB is likely to pass — the free market is free before it’s fair.
But there is something radically wrong with this picture — like those kiddie puzzles that put tires on the dog’s feet or fish fins on feline.
Jim Bernau, the founder and CEO of Willamette Valley Vineyards in Turner told this writer, “Wineries don’t conform to the bankers’ view of the world with its quarterlies. Wine [business] represents a long-term commitment. Bankers and their investors want to make money and winemakers want to make their wine.”
We ought to recall that Silicon Valley Bank established its wine division in 1994, as relaxed banking regulations were being phased into practice. Freund notes how his company entered the sector as Bank of America and Wells Fargo slithered out, seeing more ready return on real residential and commercial property financing, in contrast to servicing loans for vineyards, farm equipment and inventory as it rested in oak barrels. SVB calculated it could fill the void neatly and did so.
However, the banking scenario is not simply concerned about equipment loans, checking accounts or processing credit card sales. It is about the endgame: the transaction that ultimately separates founders from what they founded by outright sale, merger or even a public offering. The bonuses and the perks for leveraging such a deal are obscene. The compensation for overseeing the deal sets other priorities into motion having little to do with the wine business itself.
Recent history provides the mother of succession mishaps.
The year prior to SVB’s entry into wine, Goldman Sachs took Robert Mondavi Wines public, raising a half-billion dollars. Robert Mondavi (1913–2008) needs little introduction as he not only helped Napa Valley winemakers make waves in the world’s wine purview, but also set the standard for how we label wine by varietal. He was a tough customer with a heart that turned to missions of philanthropy and education. But the old man didn’t know how to let go.
When the offering occurred, Mondavi was a 100-million-dollar privately held concern with an unhealthy load of debt, the result of aggressive if ill-conceived practices. With the stock sale, the Mondavis, as individuals, became very wealthy. Unfortunately, the new bundles of bucks only allowed the fighting family to embark on some new and sometimes imprudent paths. Still, Bob Mondavi was on top of the enterprise.
Worse, the only voting shares belonged to the family and its court of retainers, a “nice added touch” from Goldman, a brokerage house later forced to fall on its sword in 2008–2009 for, among other things, betting against the bad real estate packages it assembled — Bank of America did the same thing and got away with it; the media reported, “too big to fail.”
Mondavi wanted to build a tradition in California wine worthy of Bordeaux and Burgundy, using his considerable mix of aplomb, experience and toughness. Instead, his wines lost their institutional memory — Robert M. Parker noted the 1998 and 1999 vintages were MIA.
The 2005 acquisition of the whole shebang for $1.36 billion by Constellation Brands has provided the needed leadership to continue the brand, although it will never be the same.
The man who created a legacy ultimately could not find the exit in time enough for his heirs to take over.
Readers of OWP may recall the June 2015 coverage of the 50th anniversary of Pinot Noir planting in the Willamette Valley as celebrated by the actors in this now long-running show. It is no mistake that Elk Cove, Eyrie, Ponzi and Sokol Blosser have all made succession successful and that some even along the way worked with Freund’s bank. The succession process compelled Susan Sokol Blosser to write her second book about turning over the business to her children.
Recalling the event and tale from Napa, Bernau quipped, “Well, those of us around early in the Valley are moving towards stepping aside.” Just then, he added “I think we are a more collaborative lot,” alluding to the far more familiar names from the California wine industry.
Willamette Valley Vineyards took a different tack than the iconic Mondavi brand. The Oakville mission-style plant opened in 1966. Thirty years passed before the company went to the public market to raise money, and they did so because they needed it.
Bernau followed contrary advice. Early in the life of the company, he intended to obtain public money but without the strings attached by going down a path strewn with bank loans.
“We wanted investors willing to hold their shares for a long time. And we wanted them to get in or out without our being in the middle of that decision or its being carried out,” Bernau continued. “Above all, we wanted to make our wine without the oversight of people whose interests were only about returns on their dollars. They liked the idea of owning winery shares, but ignored our priorities because they don’t work the property or make the wine.”
He added that as an equity holding, wine keeps its own counsel.
The difference is profound in these respective scenarios. The current preferred stock offering occurred the day of our interview. And they’re voting shares. For everyone. Bernau’s more substantial holdings from previous raises are placed in trust, so that their legatees will be able to manage the winery’s future activities and operations with the assurance they can plan and act decisively. The business model contains an element of Zen.
Bernau recalls a trip with fellow winemakers to Burgundy, only to be berated by the host who said American winemakers meddle too much with their product. “Have the courage to do nothing,” said that Burgundian.
Paradoxically, by bringing in the public at various stages of Willamette Valley Vineyards’ evolution as an enterprise with its own commercial ecology, the company has cultivated not only 645 acres in Oregon country, but has established a succession path with the exits marked clearly so no one will stumble off the stage when that moment arrives.
Might we aver that succession in the wine business is a stage drama with dirt where the footlights should be?