What led to Ascentia's downfall?

The unraveling of Ascentia Wine Estates, the Healdsburg company that once owned Geyser Peak, is a cautionary tale of the dangers of leveraged buyouts, a reminder of the critical role that distributors play in the wine business, and an example of how hard wineries can fall when the economy slows.

Ascentia was formed in 2008, becoming one part of a complex $209 million entity led by San Francisco-based private equity firm GESD Capital Partners, which brought investors together to buy a portfolio of eight wineries from Constellation Brands.

Ascentia would own the brands and run the wine business. Its partner, VinREIT, a real estate subsidiary of Entertainment Properties, based in Kansas City, Mo., would buy the real estate and vineyards, contributing about $115 million to the deal.

The sale was viewed at the time as a boon to the North Coast wine industry, restoring local ownership to some of Sonoma County's storied wine brands, such as Geyser Peak, Gary Farrell and Buena Vista Carneros.

It all came to an end last week, when E&J Gallo announced it was buying Ascentia's last two remaining wine brands, ending a 13-month sell-off of the Healdsburg's company's wineries.

In hindsight, industry experts say the deal failed because the highly leveraged transaction relied too heavily on debt, with real estate and vineyards that were bought at the top of the market.

The company was also the victim of bad timing, forming just before a recession that decimated high-end wine sales as customers traded down.

And a failed relationship with distributor W.J. Deutsch & Sons, the White Plains, N.Y., company that invested $16 million in the deal, was a crushing blow to Ascentia's ability to survive the recession, they said.

"It really was a perfect storm of things that went wrong," said Deborah Steinthal, founding partner of Scion Advisors. "It wasn't one single thing, it was multiple. And none of it reflects, I think, on the potential of Geyser Peak. It really was about ownership decisions and a partnership that went wrong."

Ascentia CEO Jim DeBonis did not return multiple telephone calls seeking comment over the last two weeks. But a picture of the company's demise emerged from interviews with analysts and executives who were part of the deal.

GESD, the company that owned Ascentia Wine Estates and arranged the financing for the deal, secured commitments from VinREIT for $115 million and Deutsch for $16 million. GE Capital Partners, as well as other banks, invested undisclosed sums, sources said.

Just how much money GESD contributed to the deal was unclear, and the company did not return multiple phone calls placed over several weeks.

"They put in the smallest amount of capital, but they controlled the business," said Vic Motto, CEO at Global Wine Partners, the St. Helena investment bank that helped arrange the financing for the real estate acquired by VinREIT.

Motto did not know exactly how much money was lost by VinREIT and the other partners, he said.

In addition to over-leveraging, sources said GESD did not have experience running a major wine business.

"I think some really poor decisions were made on how they managed that business after they acquired it," Steinthal said. "They didn't have real knowledge or expertise on how fast they could grow that business, and what it would take in terms of resources to invest in it, to turn around the brands."

In 2008, it was easy to believe the portfolio was a good investment. At the time GESD acquired the brands, Geyser Peak's volume was growing about 14 percent per year, according to industry sources. Geyser Peak alone had annual revenues of about $30 million when it was for sale in 2007, and the sellers projected it would grow to $50 million in annual revenues by 2012, sources said.

Together, the Constellation brands packaged to Ascentia were pitched as producing about 1 million cases and generating almost $90 million in annual revenue.

But sales quickly fell below expectations. In its first year, 2008, Ascentia sold 690,000 cases of wine, DeBonis told The Press Democrat in a 2010 interview. Sales increased in 2009 to 760,000 cases, he said. But the brands were not selling more than 1 million cases when Ascentia acquired them, DeBonis said in that interview, estimating the actual number was less than 900,000 cases.

"The timing worked out terribly," said Robert Nicholson, principal at International Wine Associates, whose firm represented Constellation in the deal. "The financial crisis was at its height, and it was made very difficult for Ascentia to effectively reach the wholesaler and sell their product."

Nicholson's involvement with the brands spans decades. His firm also represented Jim Beam when the company acquired Geyser Peak from financier Henry Trione in 1998.