6/11/2008: E1: Jim DeBonis is suddenly in charge of one of the largest wine companies in Sonoma County.PC: Jim Debonis started Ascentia Wine Estate, a new wine company that he formed after acquiring eight brands from Constellation Brands.

Lawsuit: Healdsburg wine giant Ascentia is insolvent

KEVIN MCCALLUM
THE PRESS DEMOCRAT

One of Sonoma County's largest wine companies, Healdsburg-based Ascentia Wine Estates, is insolvent and on the brink of financial collapse, according to an explosive lawsuit filed by one of the company's owners.

W.J. Deutsch & Sons, the powerful White Plains, N.Y. wine sales and marketing company, filed the suit last week in Delaware, where Ascentia is incorporated.

The complaint, with allegations of fraud and mismanagement, threatens to undermine the young wine company at a crucial time as it works to build its own sales and marketing team following a break-up with W.J. Deutsch two weeks ago.

"The company is insolvent, and its imbalance of assets and liabilities is worsening," the suit claims.

Bill Deutsch was a key player in the complex $209 million deal that created Ascentia in 2008 and allowed it to purchase eight wine brands in three states from wine conglomerate Constellation Brands.

Deutsch's company markets a portfolio of domestic and imported wines including Kunde Family Estate in Kenwood and Yellow Tail from Australia, which sells more than 8 million cases in the United States.

Deutsch's clout with distributors and his equity stake in Ascentia were cited at the time as keys to the new wine company's success. Now he is predicting the company in which he invested $16 million cannot survive as currently structured.

"The business of the Company is to sell wine, yet the Company, with its worsening insolvency and unworkable business model … cannot remain in business," the lawsuit states.

Ascentia's chief executive officer, Jim DeBonis, would not discuss the litigation, a company spokeswoman said. In a statement issued earlier this week, DeBonis said he regrets his partner's move.

"It is not our preference to resolve disputes either in the media or in the courts, and we regret that Deutsch is choosing to do so," DeBonis said. "We are confident, however, that all matters with Deutsch will be resolved favorably for Ascentia.

"The work that our sales force is doing directly with distributors is going extremely well, and we continue to remain focused on making and selling outstanding wines of exceptional value," he said.

Deutsch also regrets having to take legal action, said his New York attorney, Howard Graff. But he felt compelled to do so after Ascentia put him in the impossible position of being unable to speak openly with creditors or other investors about the true financial condition of the company.

"He didn't have a choice," Graff said. "His choice was between a rock and a hard spot, and the lawsuit is simply trying to resolve this dilemma."

The fate of three of Sonoma County's best-known brands is at stake in the fight.

Ascentia owns Geyser Peak in Geyserville, Buena Vista Carneros in Sonoma and Gary Farrell in Healdsburg. Other local wine brands include XYZin, a Sonoma County zinfandel, and Atlas Peak, a Napa cabernet sauvignon. The company also owns Covey Run winery in Central Washington and the brands Columbia Winery and Ste. Chapelle from Idaho.

The company employs 250 people through the organization and last year sold 760,000 cases of wine, according to DeBonis. When the brands were sold, Constellation said they produced over 1 million cases in 2007.

According to the suit, Ascentia is overleveraged and cannot pay the mountain of debt it borrowed to acquire the brands.

Ascentia raised $209 million for the deal from a variety of sources. The largest chunk was $115 million from St. Helena-based real estate investment firm VinReit, which purchased the wineries and vineyards and leased them back to Ascentia.

San Francisco private equity firm GESD Capital Partners brought together several other investment funds to finance the deal, including Golden State Investment Fund, LLC; GE Capital Equity Holdings, Inc.; and Pacific Beverage Investments LLC, according to the suit.

Constellation Brands financed another $12.5 million, agreeing to be repaid over time.

And Deutsch, who invested $16 million, got a seat on the five-member board of managers alongside DeBonis and three GESD Capital representatives.

The deal was Deutsch's first foray into owning a wine brand. At the time, he said his company's representation of Kunde Family Estate convinced him it would be wise to have an ownership stake in some premium California wineries.

As a sales and marketing company, W.J. Deutsch's role was to build the Ascentia wine brands by working with distributors and retailers. Given the company's representation of the Yellow Tail brand, many saw the enlistment of Deutsch as a coup that would ensure the wines were given the full attention of distributors.

But according to the lawsuit, the new company ran into a "liquidity crisis" a little over a year after its formation and was forced to seek an additional $16 million in capital in late 2009.

The company told potential investors that the ownership transition was responsible for its slow sales, according to the suit. But eventually Deutsch came to another conclusion.

The real problem, Deutsch claims, is that the revenue projections for brands used to justify the acquisition were "artificially inflated," according to the suit.

Deutsch now claims the "fantastical" revenue projections were based on sales while the brands were owned by Fortune Brands, the owner of Jim Beam bourbon. Fortune Brands marketed the wines through its spirits division, "providing marketing and price supports far in excess of those associated with wine sales," the suit said.

Fortune sold its entire wine portfolio to Constellation Brands in late 2007 for $885 million. Constellation kept two wineries, Geyserville's Clos Du Bois and Wild Horse in Paso Robles. It sold the five remaining Fortune brands and three Northwest brands to Ascentia, a startup created by DeBonis, who was chief operating officer of Fortune's Beam Wine Estates division.

"Unless the company maintained the same level of support, the brands could not possibly achieve the level of sales they experienced when Fortune owned them," the suit states.

Despite these troubles, the company was able to raise the additional $16 million. But its executives have not been able to "resolve the company's worsening insolvency," the suit said.

It lays out several indicators of the company's continuing financial troubles:

— Ascentia began withholding Deutsch's marketing fees in March 2009 and continued to withhold them after raising new capital.

— Ascentia deferred payments to its landlord, VinREIT.

— The company has defaulted under its credit agreement with General Electric.

— The company "has recognized that it will run out of cash unless extraordinary measures are taken — potentially including asset sales."

Deutsch claims he began pressuring the company in early 2010 for greater information about its financial health.

It was not until April that he was given the financial information he sought, according to the suit. The information included a confidential financial report prepared by a consultant hired by a creditor whose loan was in default.

Upon reading the report, Deutsch felt the consultant had been given false and misleading information "designed to create a false sense of security that the company might have some chance of survival," the suit states.

"In truth, the company could not survive without reorganizing its overleveraged debt structure and/or liquidate itself," according to the suit

As a member of the management board, Deutsch felt he had an obligation to share what he had learned with others. But he could not because the company "threatened" him and insisted on a "cone of silence" that prevented him from having any contact with any of the company's creditors, according to the suit.

Placed in such an "untenable position," Deutsch resigned from the board of managers April 19, according to the suit.

The suit asks a judge to invalidate the confidentially agreement and allow the information to be shared, or direct the company to share it, with all creditors and members.

It also asks the court to declare that Deutsch "may seek judicial dissolution of the company" and to return his $16 million, plus legal fees.

Deutsch is not seeking to harm the company, Graff said. In fact, he has tried everything in his power to set it on a path to success but has been rebuffed.

"We believe in this case. Bill Deutsch has been a tremendously constructive, positive force for the business and wanted to continue to do so," Graff said. "He certainly is extremely disappointed at where we are."

Graff declined to describe what kind of reorganization Deutsch envisioned for the company.

The deal was risky one from the beginning, said one wine industry executive who asked to remain anonymous because of the sensitivity of the subject. Ascentia acquired the brands at the height of the market, with expensive private equity and a sales and marketing partner that was taking commissions, all making profitability virtually impossible.

"It just doesn't add up in the best of times," the executive said.

The most immediate problem for Ascentia now is the prospect that distributors will be reluctant to carry Ascentia's wines if they worry about the company's financial health, according to another industry veteran, who also requested anonymity because of the sensitivity of the subject.

Contacted last week about the end of the partnership with Deutsch, DeBonis said he was planning to hire an additional 20 people as he builds an internal sales force. He said the company was growing, increasing sales from 690,000 cases in the first year to 760,000 cases last year. The brands were not selling over 1 million cases when Ascentia acquired them, he said, estimating the number was "under 900,000 cases."

A drop from 900,000 to 690,000 cases in the first year would be a 23 percent drop in sales.

Asked if the drop in sales precipitated the end of the partnership with Deutsch, DeBonis declined to discuss the matter.

"I'm just trying to move forward and not make a big deal about it," 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