Over the last few years, the international wine market has witnessed increased activity as more players look to become global wine producers and capitalise on the growing demand for wine in developed and emerging markets. New World players have been at the forefront of acquisitions in both New and Old World countries, in a bid to increase production acreage, build brand portfolios and keep up with rising demand.
Flying high above the other deals taking place during 2003-2004 was Constellation Brands' acquisition of Australian wine producer BRL Hardy. Indeed, the BRL Hardy deal significantly increased Constellation Brands' competitive edge over the period, creating the largest wine company in the world by value.
Other thirst-quenching deals to occur included the acquisitions by E&J Gallo, the world's number one wine producer by volume, of the Louis M Martini Winery and the Mirrassou brand, and the takeover of California's Golden State Vinters' by US concern, The Wine Group.
Meanwhile, Britain's largest independent wine importer, marketer and distributor, Western Wines, is the most recent prize for North America's largest producer of wine and related products, Vincor International. With this acquisition, Vincor gains an impressive portfolio of premium brands including Kumala, the largest South African export brand.
Despite this new wave of merger and acquisition activity, consolidation in the wine industry is by no means over. Given the fragmented nature of the global market - compared to world market shares of nearly 27% for the five largest breweries, the top five wine producers account for approximately 8% - new research from Euromonitor International suggests there is still a great deal of room for further takeovers and investment.
Australia is likely to be the scene of significant further consolidation over the 2004-2005 forecast period, following the extensive phase of price promotion activity that has taken place in recent years, squeezing margins as never before. Australian wine producer, Southcorp, where much of the responsibility lies, has regularly been cited as a potential target. However, the company's recovery to profit for the full year of 2003 and its anticipation of growth in the current financial 12 months makes is far less of an attractive takeover proposition.
Nevertheless, with just two Australian wines in its portfolio at present, Euromonitor International considers US winery E&J Gallo Winery as a possible buyer for Southcorp's core premium brands Penfolds, Lindemans or Rosemount during 2004-2005. With the company's successful expansion to upscale, higher margin premium wines in recent years, it is likely that E&J Gallo will attempt to gain increased exposure in this market segment to further distance itself from its traditional low tier reputation.
North America is another region that is likely to throw up opportunities for acquisitions, according to Euromonitor International. Kendall-Jackson's insignificant presence in the export market puts it at a disadvantage compared to other premium wine producers, which are currently putting enormous effort into creating global brands. This leaves the company vulnerable both in terms of losing potential sales and as a possible takeover target. The most likely source of this is from a major, global alcoholic drinks company looking to extend its portfolio of premium New World wines. With the acquisition of BRL Hardy in 2003, Constellation Brands is garnering a broad wine portfolio, and it is possible that, despite pulling out of a possible acquisition with BRL Hardy in 2001, Kendall-Jackson will become the target of a hostile takeover bid.
Another potential US target is Brown-Forman, which recently announced a restructuring of its wine business, leading to 47 redundancies and the closure of the Jekel Vineyards wine-making facilities. With a strengthening spirits portfolio, the company may well be considering the future of its wine brands, should they continue to offset the progress made by the spirits side of the business.
Were Brown-Forman to decide to sell some of its wine brands, a possible purchaser is not immediately obvious. With the state of the Californian wine industry as it is, suffering from the tail end of a grape glut and a wealth of new entrants, only the most desirable global brands are likely to prove attractive to a buyer, and this is something lacking from Brown-Forman's wine brand portfolio. The ongoing collaboration between Brown-Forman and Bacardi, including their distribution agreement in the UK, suggests that further collaboration may be forthcoming. Although it is unlikely that Brown-Forman would allow itself to be taken over, a close strategic alliance between the two companies over the next few years should not be ruled out.
Bacardi has itself also been at the centre of a number of merger, takeover and alliance rumours in recent years. These have been fuelled by the increasing level of consolidation in the global drinks industry, with the flagship Bacardi rum brand being of particular interest to a number of competitors. Both Allied Domecq and Brown-Forman have been linked to Bacardi with regard to possible merger activity. In mid-2003, Allied Domecq's chief executive Philip Bowman met with Bacardi CEO, Ruben Rodriguez, for informal talks, although both were keen to squash merger rumours.
The competitive pressure resulting from consolidation within the industry has also led to an increased likelihood of Bacardi being floated on the stock market. A stock market listing would provide Bacardi with the flexibility and potential to raise the capital needed to allow it to buy or merge with competitors. However, Euromonitor International expects Bacardi to focus more heavily on broadening its spirits portfolio, following a stock market flotation, thereby making a divestment of its wine business a more probable scenario.
In February 2004, Pernod Ricard was again the subject of rumours with regard to a possible merger with Allied Domecq. Despite the inevitable denials from both companies, at the very least a close alliance between the two companies in the short to medium term looks highly possible.
Euromonitor International sees a certain synergy between the two companies, in that both of them see the long-term benefits of wine, as opposed to a declining spirits business. This sets them apart from Diageo in particular, which has provided little support for its wine brands in recent years, focusing instead on its high-profile spirits business, in addition to its beer portfolio, which it is hoping to expand. An Anglo-French alliance between Allied Domecq and Pernod Ricard would fill substantial gaps in both wine portfolios, giving Allied Domecq a key Australian brand (Jacob's Creek) and Pernod Ricard an important Californian brand (Callaway Coastal), which they are currently missing. A joint company would then be in a strong position to tackle the one remaining chink in the combined New World portfolio - a Chilean brand.
With growing consolidation in the global alcoholic drinks market, and a number of wines companies vying for shelf space, Euromonitor sees strong scope for further merger and acquisition activity. Industry consolidation is likely to make life harder for the smaller local wineries in the short term. Lack of capital is a major barrier to growth for smaller players, and one which leaves them open to acquisition by larger companies.
Other potential targets also expected to be at the centre of the merger and acquisition stage in 2004-2005 include California winery Robert Mondavi and family-owned Australian producer, Casella Wines, owner of the successful Yellow Tail brand. The coming eighteen months could turn out to be another interesting phase for the industry.
Reproduced with the kind permission of www.just-drinks.com