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Vintners Seek Fruitful Merger

Constellation and Rothschild bid for Chalone to produce premium California wine as consolidation activity grows.

May 18, 2004|Jerry Hirsch | Times Staff Writer

Paul Masson wants to go into business with Baron Rothschild.

In the latest sign of consolidation sweeping through California's $14-billion wine industry, two of the biggest names in the business said Monday that they wanted to acquire Napa-based Chalone Wine Group, maker of the Chalone, Acacia and Echelon labels.

Constellation Brands Inc., the world's largest wine company and producer of Paul Masson and dozens of other brands, and Domaines Barons de Rothschild, owner of France's famous Chateau Lafite-Rothschild of Bordeaux, would use Chalone as a platform to create a vintner that would specialize in higher-priced California wines.

The offer, which values Chalone at about $112 million, was made in a letter to the company's board.

"This might not be a huge deal in dollars, but it marks an interesting evolution of the business in California because of who the players are," said Robert Nicholson, an investment banker and consultant with International Wine Associates in Healdsburg, Calif.

Analysts said the bid also was further indication of stepped-up merger-and-acquisition activity in the wine industry as it recovered from a three-year slump caused by a grape glut, a slack economy and intense competition from foreign producers.

Last month, San Francisco-based Wine Group won a bidding war for Golden State Vintners Inc., agreeing to pay $82 million for the Napa-based bulk-wine producer. In March, E. & J. Gallo Winery purchased 105-acre Bridlewood Estate Winery in the Santa Ynez Valley for $14 million. And in recent weeks, Trinchero Family Estates, owner of the Sutter Home brand, has been in on-and-off negotiations to purchase Folie a Deux Winery in St. Helena.

On Monday, Rothschild, which already owns a major stake in Chalone, offered $9.25 a share for the 54% of Chalone it does not own. New York-based Constellation would put up $54 million of the purchase price and Rothschild an additional $10 million.

The offer represented an 8% premium over Chalone's Friday closing price of $8.58.

Chalone's shares jumped $1.09, or 13%, to $9.67 on Nasdaq on Monday as investors anticipated a higher bid for the company.

The price surge was reminiscent of the Golden State Vintners situation, in which a group of company insiders started the bidding at $6.85 a share, well below the winning bid of $8.25 a share from Wine Group.

"I don't think many shareholders are going to be happy with the price" being offered, said Andy Beckstoffer, one of Napa's largest growers of premium wine grapes and a Chalone shareholder. Chalone went public at $8 a share in 1984.

If the Rothschild-Constellation transaction were completed, Chalone would be taken private.

In planning for the proposed takeover of Chalone, Constellation, Rothschild and a third party -- the Huneeus family of Northern California -- formed a holding company to make premium California wine. Rothschild would bring Chalone to the venture. The Huneeus family would add its Quintessa Napa winery and vineyards. And Constellation would contribute its 280-acre Oakville, Calif., vineyard.

Rothschild also would use cabernet sauvignon and merlot grapes from Oakville to develop a top-of-the-line label for the company.

Constellation would wind up owning 39% of the business, the Huneeus family 32% and Rothschild 29%, a Constellation spokeswoman said. Augustin Francisco Huneeus, former chief executive of Constellation's Franciscan Oakville Estate winery, would serve as CEO of the new venture.

Beckstoffer, who sells grapes to Chalone and Constellation, said the enterprise "would be a major league premium wine player."

Jonathan Feeney of Wachovia Securities in New York agreed. He said the deal would allow Constellation to take advantage of "consumer trends toward higher-end wines" with a "minimal capital investment."

Nicholson, the investment banker, said that becoming part of a business backed by industry giant Constellation would improve Chalone's ability to reach retailers and restaurants. Chalone sells 675,000 cases annually, he said, and has an average retail price of $17.16 a bottle.

Although Chalone is known for making good wine under 13 labels, it has been "a perennial underperformer -- just a collection of small brands," said Timothy Ramey, an analyst with D.A. Davidson & Co. in Portland, Ore.

That held true Friday, when Chalone reported a first-quarter loss of $607,000, contrasted with a profit of $64,000 a year earlier. Revenue dipped 9% to $12.7 million.

The company blamed deep discounting, which eroded sales, and start-up expenses for three new brands.

Although Rothschild has had a 15-year association with Chalone and holds three seats on the company's board, the bid came as a surprise to Chalone Chief Executive Thomas Selfridge. "I learned about it over the weekend," Selfridge said.

He said the board would appoint a special committee to review the offer and make a recommendation to shareholders. "Until then, it is business as usual," Selfridge added.

In its offer, the Rothschild-Constellation venture said it would maintain a program providing discounts of the Chalone brands to investors who own 100 or more shares. The discount program has helped Chalone, a small concern by Wall Street standards, build a base of 13,000 shareholders despite the fact that Rothschild owns 46% of the company and another family owns 18%.

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