Gallo to buy Asti winery, Souverain brand

E&J Gallo is once again expanding its holdings in Sonoma County, striking a deal to buy the historic Asti winery - one of the largest production facilities in the county - and the Souverain brand from Treasury Wine Estates.

The deal represents two very different strategies from two of the biggest wine companies in the world. For Modesto-based Gallo, it represents another bet on the lucrative premium North Coast wine market, following on the heels of its purchase of J Vineyards and Winery in Healdsburg in March.

For Australian-based Treasury Wine Estates, however, the sale is part of a retrenchment in the North American market after a deal to be bought out by private equity firms collapsed last year. The company is struggling with how to market the historic Beringer brand, which is more moderately priced, together with premium brands such as Chateau St. Jean in Kenwood and St. Clement in Napa County.

“Treasury is looking for shorter-term wins, and Asti would have been hard for them to justify in (the) short to medium term. It will be a valuable asset for Gallo over the long term,” wine industry consultant Jon Moramarco noted in an email.

Under the agreement, Gallo will buy the 535-acre Alexander Valley property that is home to the Asti winery, including 275 acres planted with grapes, as well as the Souverain brand. Treasury will enter into a long-term lease agreement with Gallo to obtain grapes from the portion of the vineyard that has traditionally provided it with fruit for its luxury-tier wines.

International Wine Associates represented Treasury in the sale while Gallo represented itself. Financial terms were not disclosed, but with planted vineyard prices ranging from $80,000 to $95,000 per acre in the Alexander Valley, the vineyard value could easily reach $25 million.

The Asti winery is capable of crushing 35,000 tons of grapes, according to Gallo. According to Sonoma County records, its production facility is the sixth-largest in the county and has a permit to produce up to 2.5 million cases. Gallo already has the capacity to make up to 4.9 million cases annually in its Healdsburg facility, the largest in the county.

“It’s historically been one of the largest wineries in Sonoma County. It’s being underutilized by Treasury now,” said Joe Ciatti, a partner at Zepponi & Co., a mergers-and-acquisition advisory firm based in Santa Rosa. “You’re not going to get a facility that big created in Sonoma County again. It’s a safety valve for (Gallo).”

According to Shaken News Daily, the Souverain brand had sales of about 80,000 cases last year, a sharp decrease from its 220,000 cases in 2004.

“Add to that the unique and almost limitless nature of the historic permit, and I can see how this would allow Gallo to transition some existing brands into this facility, of course, but equally important, look to Alexander Valley cabernet to fill some much higher-price (wine),” Rob McMillan, executive vice president for Silicon Valley Bank’s wine division, said in an email.

There is also a major historical component to the deal. Located in the northern part of the Alexander Valley, the Asti Winery was established in 1881 by Italian immigrant Andrea Sbarboro. Known then as Italian Swiss Colony, Asti Winery became the biggest winery in California by producing a variety of wines from numerous local vineyards.

“The property is filled with rich history and is located in a growing wine region that consumers recognize as being among the world’s best,” Roger Nabedian, senior vice president and general manager of Gallo’s premium wine division, said in a statement. “We look forward to bringing the Souverain brand into our expanding premium portfolio, in order to keep pace with growing consumer demand worldwide.”

In the 1960s, Italian Swiss Colony was even larger than Gallo and both companies pursued the same consumer market, McMillan noted.

“I’m sure the symmetry of this historic purchase was not lost on (CEO) Joe Gallo for a second,” McMillan wrote in an email.

The property has a county permit to hold six events of up to 1,000 people and 30 events with up to 500 customers, which is a valuable asset given the industry is under increasing pressure from residents to greater restrict such winery events.

Gallo spokesman Lon Gallagher said his company does not have any plans to open the tasting room on the property. Approximately 50 people work at the Asti winery and they will be allowed to interview for jobs with Gallo, Gallagher said.

The sale is scheduled to close July 31. It is part of a plan disclosed by Treasury in March to optimize its supply chain and sharpen its focus on its luxury wine brands. The Australian company said it will post a $7.5 million loss on the disposal of the assets when it reports its year-end earnings.

Ciatti said he expects further deals to come in the North Coast, given an environment of low interest rates for borrowing combined with the demand in the premium wine market. Earlier this month, Constellation Brands Inc. purchased the Napa Valley-based Meiomi wine brand for $315 million.

“This isn’t the end,” Ciatti said. “The drumbeat is out there.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.