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Winemaker Is Hoping for High-End Harvest

Michael Mondavi and his siblings may bid for the assets Robert Mondavi Corp. plans to divest as it focuses on its less expensive wines.

September 27, 2004|Jerry Hirsch | Times Staff Writer

For nearly 40 Septembers, R. Michael Mondavi has helped the iconic Napa Valley winery built by his father harvest some of the world's best wine grapes.

This year, he is reluctantly watching a harvest of another sort -- the famous Oakville winery itself.

Over the objections of family members, Robert Mondavi Corp. announced plans this month to sell the winery that bears the founder's name and produces Cabernets Sauvignon that go for as much as $125 a bottle. It will divest some of the best vineyards in the Western Hemisphere and other assets, including several smaller premium wineries and its 50% interest in Opus One, the expensive vintner it co-owns with the French wine house Baron Philippe de Rothschild.

In essence, Mondavi is holding what looks like the wine world's largest garage sale to raise money for its "lifestyle wine" division at the company's sprawling Woodbridge winery near Lodi, Calif. That part of the business churns out 8 million cases of wine that sell for less than $15 a bottle; company executives believe it represents the best prospects for growth.

After an emotional board of directors meeting this month, Michael Mondavi was asked to give up his position as an officer and vice chairman; he remains a director.

In an interview, Mondavi said he and his brother and sister were exploring ways to purchase the Oakville winery and nearby vineyards. Collectively, they hold about $150 million in company stock, which they could trade for the winery in a tax-free exchange that would benefit both parties.

Mondavi acknowledges that any bid by family members could face competition from other wealthy individuals and the largest wine companies in the world. Moreover, analysts say that by announcing the restructuring plan and asset sale, the board has in effect put the company into play.

For bigger competitors such as Constellation Brands, Allied Domecq and Diageo, it might make more financial sense to purchase the entire company, including the Woodbridge business, rather than pay a premium to pick off the luxury-wine business, said Tim Ramey, an analyst with D.A. Davidson & Co. in Lake Oswego, Ore.

According to people familiar with the internal struggles at Mondavi, the company took the first steps toward a breakup last year when the board and management concluded that significant changes were necessary to reverse several years of lackluster financial results. Profit plunged from a peak of $43 million in fiscal 2001 to $26 million in 2004, a 39.5% slide. Sales fell 7.5% over the same period, from a high of $506 million to $468 million.

The company's shares fell 11 cents Friday to $38.58 on Nasdaq.

The debate accelerated last December when patriarch Robert Mondavi retired from the board and Ted Hall, a former McKinsey & Co. consultant and corporate governance expert, stepped in to help the company sort out how to deal with its position as both a public company and a family-controlled business. At 91, Robert Mondavi is no longer active in the business. Much of his holdings are pledged to his favorite charities.

Within a month, the board named Hall as the first non-family chairman of the company, replacing Michael Mondavi.

At the direction of Hall and Chief Executive Greg Evans, the company looked at a variety of plans, and in August it said it would create two distinct divisions, one for luxury wine and one for the less expensive lifestyle brands.

It also decided to put all shareholders on equal footing by converting the family's super voting shares to regular stock. That move, expected to be approved by shareholders next month, will lower the Mondavis' voting control to about 40% -- the size of their combined stake in the business.

Michael Mondavi liked the idea of separating the businesses but keeping the company whole. The expensive wines are sold primarily through restaurants and wine stores, he said. About 85% of the lifestyle wines, by comparison, are sold through supermarkets and mass retailers.

He also believed that the luxury end of the business was starting to come around. Thanks to a recovering economy, more business travel and a fine 2001 red wine vintage, sales of Mondavi's high-end wines have grown at a 15% annual rate over the last 18 months, he said.

What the business requires, he said, is patience with the long-term nature of the luxury wine business, in which wine is aged for at least three years and sometimes longer before it is sold.

In recent months, however, the non-family members on the board started to retreat from the two-division plan. They believed that the quicker sales cycle of less expensive wines was better suited to Wall Street's relentless drumbeat for consistent growth in profits and sales.

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