Diagio Completes $269 Million Sale Leaseback of Napa Valley Wineries

The Press Democrat - June 24, 2010

One of the largest California wine deals in years was announced Thursday, not that wine drinkers will ever taste the difference.

Diageo, the London-based alcohol conglomerate, revealed that it is selling most of its Napa Valley wineries and vineyards to an investment firm for $269 million, and then turning around and leasing them back for 20 years.

The sale-leaseback arrangement between Diageo and Realty Income Corp., an Escondido-based real estate investment trust, is the largest such transaction in the U.S. wine business, one that will help Diageo raise cash without impacting its wine operations, said industry analyst Robert Nicholson.

“It's a very meaningful development and it's a very smart move by Diageo,” said Nicholson, a principal at International Wine Associates, a Healdsburg consulting firm

The deal involves two of the best known Napa wineries. The historic Beaulieu Vineyards was founded in 1900 in Rutherford and, under the guidance of the famed viticulturalist André Tchelistcheff, helped spawn the valley's fine-wine renaissance.

Sterling Vineyards, the white stucco winery on a bluff south of Calistoga, was founded in 1964 by British international paper broker Peter Newton and has become one of Napa Valley's most popular tourist destinations.

Diageo Chateau & Estate Wines will continue to manage and operate the properties and will retain ownership and marketing of the wine brands. In return, it will enter into 20-leases for the buildings and 2,000 acres of vineyards. When completed, Diageo will become Realty Income's second-biggest tenant.

The transaction allows Diageo, which has struggled during the recession, to raise cash and increase returns for shareholders.

“We know that to remain competitive in this environment we need to rethink our whole wine business to be more nimble and entrepreneurial,” said Zsoka McDonald, a company spokeswoman. “This is about ensuring the long-term strength of our North America wine business and the health of our core wine brands.”

Diageo's wine and spirits portfolios tend toward the high-end, and it has been hit hard as the alcohol business has proven to be less recession-proof than many thought. It owns such powerhouse brands as Johnnie Walker whiskey, Smirnoff vodka and Guinness stout.

Its wine sales fell 7 percent in 2009. The company announced in May it was restructuring U.S. wine operations, laying off about 14 percent of its workforce and would focus on core wine brands, including Beaulieu Vineyard, Sterling Vineyards, Chalone, Acacia, Rosenblum Cellars and Provenance.

The chief benefit for Diageo is that is can raise cash while paying reasonable leases on the properties, said Joe Ciatti, of Zepponi & Company of Santa Rosa.

“Diageo's saying ‘We've got these wine assets that really don't produce a lot of return for us, and it's better for us to sell those off,' ” Ciatti said.

He said he understood the leases would generate a 6 percent return for Realty Income Corp., a conservative return, he said.

Ciatti ran his own wine industry focused REIT, Vintage Wine Trust, from 2005 to 2008, when he was forced to liquidate it because the returns weren't what investors had hoped.

VinREIT in St. Helena is facing challenges, as well, with several of its properties facing foreclosure.

Nicholson, however, said this deal should work well for Realty Income Corp because it got great properties with a tenant that isn't going anywhere.

“This REIT is smart. They know what they are doing and got some blue-chip assets,” he said.

And wine consumers, whether visiting the Napa tasting rooms or buying the wines in supermarkets, won't notice a difference, Nicholson said.

“This is the same as the way Marriott doesn't own their hotels,” Nicholson said. Sphere: Related Content