Wineries hit by soft economy, wine glut

By Melinda Fulmer
Los Angeles Times

First it was the tech bust. Is California now in the midst of a "grape crush?"

Just as the tech bust led to "For Sale" shingles on many Silicon Valley assets, more and more vintners are being forced to put California vineyards and brands on the block to keep their wineries afloat in a flooded market.

Famed financier William R. Hambrecht, for instance, is selling off hundreds of acres of prime vineyard property in Sonoma and Mendocino counties to pay off his winery-related debts. Although he managed to reach an agreement with his lenders last week to keep his prestigious Belvedere Winery in Healdsburg, he reduced his 58 percent stake in Napa's Carneros Creek Winery to 49 percent, with winery founder, Francis Mahoney, upping his investment and returning as manager.

Hambrecht's problems may be the most visible example of the toll taken by a soft economy and a flood of cheap, high-quality imports that have pushed down prices on California wine. But, analysts say, he's not alone. A significant number of wineries will have to refinance debt, take on a merger partner or sell off assets this year.

"During the boom times, wineries borrowed more money and increased their debt to increase production to meet a growing demand and a growing price," said Daniel Cohn, an attorney with San Francisco-based Farella Braun & Martel, which represents wine companies in business transactions. But these days, "prices aren't increasing."

In fact, vineyard prices are falling, as winemakers work to move surplus wine piled up in their warehouses that is worth less today than when it was bottled. And that means less cash coming in, and less valuable inventory to use as collateral to secure large revolving lines of credit.

And that's a problem, Cohn says, since many wine companies also have off-balance sheet deals or "synthetic leases" that have yet to be accounted for.

Although a significant part of California's wine industry will weather the downturn well, others will have little choice but to sell their vineyards, a label or even a winemaking facility.

Chalone Wine Group's Dynamite Vineyards recently sold its Vintage Lane winery near Glen Ellen in Sonoma County to fledgling winemaker John Lasseter, the creative force behind computer animation firm Pixar Animation Studios, for an unspecified amount, keeping only its inventory, its contracts for grapes and its brand.

The Vintage Lane sale came after Chalone had already sold its Carmenet brand and inventory to Beringer Blass Wine Estates.

Many who bought vineyards at the peak of the market in the late 1990s will be forced to swallow a loss, as Oakville, Calif.-based Robert Mondavi Corp. did with its recent $3.1 million quarterly write-down on a Central Coast vineyard that it has contracted to sell.

Yet Mondavi and other big wine companies such as E&J Gallo and Constellation Brands also have the most to gain from the industry shakeout, scooping up vineyard properties that wouldn't have even been on the market a few years ago, and at reasonable prices.

"Over the last year, people are looking to buy vineyards, they are looking for deals and there are deals to be had," said Michael De Loach, president of De Loach Vineyards.