Healdsburg wine company plagued by failure of partnership, lawsuit, mountain of debt

KEVIN MCCALLUM
THE PRESS DEMOCRAT

In 2007, Jim DeBonis set out to save three storied Sonoma County wineries.

Geyser Peak, Buena Vista Carneros and Gary Farrell were being sold to the world's largest wine company, Constellation Brands, and he feared for their future.

So DeBonis, chief operating officer of the company unloading the wineries, Beam Wine Estates, set out to buy them back from Constellation and return them to local ownership.

He would succeed in June 2008 after several nerve-racking months of negotiations. In a complex $209 million deal, DeBonis formed Ascentia Wine Estates and acquired eight wine brands in California and the Northwest from Constellation.

After years of watching local wineries get snapped up by huge companies based in London, New York and Chicago, the deal was a source of pride for many in Sonoma County and proof that its signature industry still had some control over its own destiny.

"It was a great story. Local brands, local ownership and competent management," said Mario Zepponi, a Santa Rosa-based wine industry broker and investment banker.

It was also an exhilarating highlight in the long career of a respected wine industry veteran and Sonoma County native.

"Making this whole thing come together is really a dream come true," DeBonis said at the time.

Two years later, DeBonis' young company is fighting for survival.

Its partnership with one of its key investors, W.J. Deutsch & Sons, which also marketed its wines, has collapsed. Deutsch responded by filing a lawsuit claiming Ascentia is insolvent.

DeBonis has dismissed the lawsuit as "phony," and denied the company is failing, suggesting W.J. Deutsch is responsible for its anemic sales. He said the Healdsburg company is executing a plan to build its own sales and marketing division and work directly with distributors.

"We have complete confidence in our growth strategy, which we are already executing," DeBonis said in a statement last week. He declined multiple requests for an interview.

But industry watchers say Ascentia faces an uphill battle as it seeks to put the W.J. Deutsch debacle behind it and recover its footing in a fiercely competitive wine market.

"It's a madhouse," veteran industry consultant Jon Fredrikson said of the current wine climate. "It's a jungle and it's survival of the fittest, and whenever you dress up a company with a lot of debt, it's a risky proposition."

After more than a year of mounting evidence that the recession is taking a financial toll on the North Coast's fine-wine industry, the challenges at Ascentia are emerging as the clearest example yet of the precarious position some local wineries find themselves in.

While predictions about Ascentia's fate vary, there is a growing consensus among industry watchers that something has got to give if the company is to survive. Ascentia's debt in particular is being cited by several industry observers as something that must be restructured.

Precise details of that debt were not available, but nearly all of the $209 million acquisition involved varying forms of debt, including tens of millions of dollars in private equity investments arranged by San Francisco-based GESD Capital.

Ascentia's massive lease payments for its wineries and vineyards is the single biggest obligation from the 2008 deal that will have to be renegotiated, several observers said.

VinREIT, a St. Helena-based investment group, spent $110million to buy four wine production facilities and 646acres of vineyards in the deal, leasing everything back to Ascentia. The wine company's total annual payments to VinREIT amount to $10 million, according to Deutsch's lawsuit.

A veteran industry executive familiar with the deal likened it to the kind of 100 percent financing that helped topple the residential real estate market.

"When you are borrowing in effect 100 percent of all the winery assets and of all the vineyard assets, you are creating a very tight situation," said the executive, who requested anonymity because he has business relationships with some of those involved. "You can't afford to miss your numbers."

But that's exactly what happened just months after the deal closed. When the financial crisis hit in the fall of 2008, consumers, restaurants and distributors all cut back sharply on their wine buying, especially at the higher end of the market.

According to DeBonis, the company sold 690,000 cases of wine in its first year, a 23 percent drop from the approximately 900,000 cases he estimated the brands were selling when Ascentia purchased them.

Before the first year was out, Ascentia began withholding commission payments to Deutsch in March 2009, according to the lawsuit.

As the market has tightened, the pressure on winery sales and marketing staffs has become enormous, as powerful industry interests jockey for the attention of distributors for space on increasingly crowded store shelves, Zepponi said.

A rift between a winery and its sales force is one of the worst things that could develop during such a period, Zepponi said.

"If you're on the outs with your sales and marketing company and partner, that's not good, because that's where you get your revenue," he said. "When you start eroding that top line, all the problems trickle down."

In late 2009, Ascentia and its private equity partner, GESD Capital Partners, secured an additional $16 million in funding from investors, including $8million more from VinREIT, according to Mike Fisher, chief operating officer of Global Wine Partners.

Fisher's firm is the financial adviser to VinREIT, a subsidiary of Entertainment Properties Trust, a $2 billion real estate investment trust that invested nearly $220 million in wineries and vineyards between 2006 and 2009.

Several of those properties, including Havens and Cosentino in Napa and EOS in Paso Robles, have since defaulted on their lease payments.

Ascentia has not defaulted on its lease payments, though it may be behind by "a month or two," Fisher said.

"If they're late in a payment, it's not by much," Fisher said.

Through a spokesman, Ascentia declined to comment for this story.

If Ascentia stopped making lease payments, it would be a blow to VinREIT's portfolio, since Ascentia represents more than half its assets. If that happens, as the owner of the properties VinREIT could seek other tenants, but it would prefer to work things out with Ascentia, Fisher said.

It is premature to talk about restructuring the leases, he said.

"We're concerned about this, but we're not at a point yet where we feel like we need to do anything," Fisher said.

One irony of the situation is that Ascentia's wine portfolio is fairly well positioned for the market changes that have occurred since the recession hit, several insiders said.

Wine drinkers have flocked to value, trading down from higher-priced vintages in search of deals.

While Ascentia has several brands priced at more than $20 per bottle, including Gary Farrell, Buena Vista and Atlas Peak, by volume the vast majority of its wines cost less than that. Geyser Peak in Geyserville sells most of its wine in the teens, and Covey Run and Columbia in Washington sell their wines mostly below $10 a bottle.

"It's not so much a winery problem or a wine brand problem," one insider said. "It's a marketing problem and a capital structure that was wound up like a rubber band."

Deutsch claims in his lawsuit that he was misled into investing in the deal by "fantastical" revenue projections for the brands that ignored the fact that the brands would no longer enjoy the price supports of a powerful spirits company. Beam Wine Estates' corporate owner was Fortune Brands, owner of Jim Beam bourbon.

Zepponi says he doesn't know what the projections were or should have been for the brands, but he said one of the most important elements of any deal is whether existing sales under one organization are sustainable under a new one, he said.

"That was one of the big hiccups here," he said.

The U.S. wine market, like the real estate market, went through a remarkable period of prosperity between 2002 and 2007, fueled by easy access to credit, Fredrikson said. Those days are gone, and the fiercely competitive, low-margin wine business of yore has returned, he said.

"Now the tide has gone out, and left a lot of people high and dry," he said.

UPDATED: Please read and follow our commenting policy:
  • This is a family newspaper, please use a kind and respectful tone.
  • No profanity, hate speech or personal attacks. No off-topic remarks.
  • No disinformation about current events.
  • We will remove any comments — or commenters — that do not follow this commenting policy.
Send a letter to the editor