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<\/a><\/div>\nEarlier this week Ste Michelle Wine Estates<\/a><\/b> (SMWE) announced it had purchased Oregon\u2019s A to Z Wine Works<\/a><\/b> and Rex Hill Winery<\/a><\/b>. The reasons why the winery did so are simple says CEO David Dearie.<\/p>\n \u201cLike everyone else, we’re looking for growth and saying, \u2018Where is the growth likely to come from?\u2019\u201d<\/p>\n For many in the wine business lately, the answer has been from Oregon.<\/p>\n Oregon wine has two clear things going for it in the market at present. The first is an abundance of high quality Pinot Noir, a variety that has been on a long run of success with consumers. The second is the higher cost associated with those wines. This puts the offerings in a sweet spot.<\/p>\n In Silicon Valley Bank<\/a><\/b>\u2019s 2022 report<\/b>,<\/a> they noted that last year premium wine sales reached growth highs not seen for over a decade (though they noted some concerns as well). Northern Oregon wineries at the same time reported the second highest revenue growth in the nation last year. (Washington was first.) As a result of these trends, the mergers and acquisitions market has been more active than ever<\/a><\/b>, with Willamette Valley wineries often at the center of activity.<\/p>\n \u201cLooking at the numbers, Oregon is a growth category,\u201d says A to Z and Rex Hill CEO Amy Prosenjak. \u201cSo at all price points, when you have Oregon in your portfolio, it’s a profitable business for you, and it’s a growing category.\u201d<\/p>\n Two of a kind<\/i><\/p>\n On paper, the pairing of SMWE and A to Z\/Rex Hill makes immediate sense. Ste Michelle has a portfolio of premium wines with a consistent focus on quality. A to Z has made its mark by offering premium, high quality whites, reds, and sparkling wines. Ste Michelle also has a number of luxury brands in its portfolio, where Rex Hill fits in nicely.<\/p>\n Still, for the obvious compatibilities, the acquisition was equal parts fortuitous and opportunistic for both parties. On the Ste Michelle side, the company was looking for growth.<\/p>\n \u201cOur focus for the future is on premiumization, like everyone else at the moment,\u201d Dearie explains. \u201c[When we looked at where to get growth from], we had a list of potential acquisitions that may or may not be available that fit into the profile, and A to Z\/Rex Hill were right at the top of the list.\u201d<\/p>\n A to Z\/Rex Hill might have topped Ste Michelle\u2019s wish list. However, they were not necessarily available.<\/p>\n \u201cWe were never interested in selling,\u201d states Prosenjak. \u201cWe were interested in finding good partners.\u201d<\/p>\n While Ste Michelle was looking for growth opportunities and A to Z\/Rex Hill for a partner, the acquisition was ultimately kindled by one simple spark. Both companies have a relationship with lender Bank of the West<\/a><\/b>.<\/p>\n \u201cOur banker brought the two parties together and said, \u2018You know, maybe something could happen here,\u2019\u201d Prosenjak recalls. \u201cWhen we sat down and had the first conversation with David and the team, we could just see the synergies.\u201d<\/p>\n Ste Michelle\u2019s expansion in Oregon<\/i><\/p>\n Ste Michelle made its first foray into Oregon in 2006 when it purchased Erath<\/a><\/b>, one of the state\u2019s founding wineries. The company has since grown that brand from approximately 70,000 cases to 300,000 cases annually. While Dearie says Erath continues to have growth potential, A to Z \u2013 one of the largest wineries in the Oregon \u2013 gives the company much more. Additionally, the Erath and A to Z wines taste different.<\/p>\n \u201cThey’re both from Oregon, but they’re very different in the look and feel and their flavor profile,\u201d Dearie says. \u201cSo we see them as complimentary even though they compete on the shelf.\u201d<\/p>\n At an annual production of 7.3M cases across all its brands, SMWE has long been the largest winery in Washington, headlined by Chateau Ste Michelle<\/a><\/b>, 14 Hands<\/a><\/b>, and Columbia Crest<\/a><\/b>. With the acquisition of A to Z and Rex Hill, SMWE now becomes the largest winery in Oregon as well according to the company. The combined production of Erath, A to Z, and Rex Hill will be 700,000 cases. Moreover, Dearie believes that wineries in both states are positioned to grow \u2013 and Ste Michelle along with that.<\/p>\n \u201cWe see tremendous growth opportunities from Washington, and we’re very well positioned to be able to take advantage of those growth opportunities at various price points,\u201d he says. \u201cWe see the growth of Oregon. We think there’s a long-term potential. This acquisition gives us the opportunity to grow both.\u201d<\/p>\n A year of change at Ste Michelle<\/i><\/p>\n The acquisition comes after a year of transition for SMWE. The company itself was purchased by Sycamore Partners<\/a><\/b>, a New York based private equity firm, last year for $1.3B, with the deal completed in October.<\/p>\n At the time, some feared that Washington\u2019s founding winery might be sold for parts and quick profit. However, Sycamore\u2019s investment in Ste Michelle with the purchase of A to Z and Rex Hill would seem to indicate both companies are playing the long game.<\/p>\n \u201cObviously Sycamore is coming in as a private equity group. They will be looking to get growth,\u201d Dearie says. \u201cThey’re prepared to invest behind the portfolio and the brands to achieve that.\u201d<\/p>\n Sycamore\u2019s belief in the potential of the winery is due to the long-term strategy that Ste Michelle presented when it was looking for a buyer.<\/p>\n \u201cWe put a very simple strategy in place, which is fix, build, buy,\u201d Dearie says. \u201cFix some of the challenges we\u2019ve had; build on the core brands that we’ve got; buy where we see opportunities. Our intent is to grow and grow at the premium end. [The purchase of A to Z and Rex Hill] is just an extension of that strategy.\u201d<\/p>\n Prior to Sycamore purchasing the company, Ste Michelle had made a number of acquisitions over the years. Most recently, the company purchased Sonoma\u2019s Patz & Hall in 2016<\/a><\/b>.<\/p>\n However, this is the company\u2019s first acquisition since the Sycamore purchase and since Dearie became CEO in October of 2020. It is also the first since the winery hit a rough patch, with a decrease in production of 1.2M cases per year between 2016 and 2020. In 2020, former owner Altria announced a $292 million inventory write-off and $100 million in losses on non-cancellable grape purchases.<\/p>\n Since the purchase by Sycamore, Ste Michelle has made a number of changes. Some of those have come on the corporate personnel side, such as recently appointing Andy Feuerstein as senior vice president<\/a><\/b> of national accounts on\/off sale. Others have come in distribution, such as announcing a strategic partnership with Southern Glazer\u2019s Wine & Spirits<\/a><\/b>. The company also made several changes to its winemaking team last year<\/a><\/b> and this year<\/a><\/b>.<\/p>\n \u201cSycamore bought the business less than a year ago. We’ve done quite a bit in that year,\u201d says Dearie. \u201cWe managed to close down Woodinville [wine production], and then we’ve got a distribution contract with Southern. We’ve now bought A to Z. So it’s been a busy 12 months. Hopefully the intent is people see that we’re in this for the growth and for the good of the Pacific Northwest wine region in general.\u201d<\/p>\n Plans for the Woodinville property<\/i><\/p>\n While Ste Michelle\u2019s purchase by Sycamore initially caused trepidation in some corners, those concerns were heightened when Ste Michelle put its Woodinville property up for sale<\/a><\/b> in whole or part earlier this year. However, Dearie says any potential changes to the property would be both pragmatic and in the best interest of growing the brand.<\/p>\n \u201cWe’re not in any need to move anywhere,\u201d Dearie explains. \u201cWe’re just looking to see what have we got and what can it be worth, and the intent is for us to invest behind our brand building efforts.\u201d<\/p>\n Ste Michelle made the decision to list all or part of the property for sale after moving its white wine production to eastern Washington starting this vintage. Red wine production has long taken place there.<\/p>\n \u201cWe have got to be good stewards of the land, and we’re focused on that,\u201d Dearie says. \u201cWhen we started to look at the amount of diesel that we were using to bring grapes backwards and forwards, it made much more sense to have those wines processed in eastern Washington where the grapes are grown.\u201d<\/p>\n The exploration of whether it could sell part or all of its Woodinville property was a natural follow on to that decision.<\/p>\n \u201cLike anything else, we\u2019ll explore all of the options, but if we don’t like any of the options for the site here in Woodinville, we won’t take any of the options,\u201d Dearie says. \u201cYou’ve got to look at where the best places to deploy capital are. We’ve got some assets, like part of the Woodinville site here, that is excess to our needs, and if we can redeploy the capital in there, we should.\u201d<\/p>\n Dearie says he doesn\u2019t expect moving production and potentially selling parts of the property that were used for that purpose to negatively impact consumer experience at the winery.<\/p>\n \u201cThe consumer is coming to the Woodinville site not to see the winemaking production facilities. They\u2019re coming here for the consumer experience of tasting wine, sitting on the lawn, watching the concerts. What we want to do is give more wonderful experiences to consumers who come into the site.\u201d<\/p>\n What\u2019s next for the A to Z\/Rex Hill team<\/i><\/p>\n<\/a><\/div>\n<\/a><\/div>\n<\/a><\/div>\n