 During an exclusive interview over dinner with Ravi Viswanathan of Singapore a few months ago where we had a long heart to heart chat, he stumped me with a revealing statement that the merger of Sula and Grover Zampa in which he and his PE fund have substantial investments, was a real financial possibility. There being no apparent reason for the two direct competitors to join hands I wasn’t going to accept his statement on its face value. I started talking to various stakeholders and stalwarts of the industry, wine experts and Private Equity investors on a one-to-one basis, including Rajeev Samant, Founder CEO of Sula and Kapil Grover-founder Director of Grover Vineyards and now a Director of the merged entity Grover Zampa Vineyards.
I was taken aback during my recent visit to Bangalore where I was asked at more than one occasion that the grapevine had it that the two would merge soon and the people wanted to know what may take was on the rumour.
Rajeev Samant had been equally stumped when I broached the subject over one of our occasional lunches a couple of months earlier. A suave businessman that he is, Rajeev has been financing his expansion to the current level of 650,000 cases a year sales through family money and private equity investors. He was quite dismissive and categorical that there was no such talk or even a possibility. The company was doing very well and there was no need for any merger or going public at the moment. He has been savvy enough to offer parcels of the company to private equity investors in small tranches with substantial jump in prices at each such transaction thus increasing the valuation and creating wealth for him and the other earlier shareholders. Rajeev also stressed that the investors were clear that he would remain in the driver’s seat with a free hand in running the operations.
Ravi Viswanathan who had invested earlier with Grover Zampa, invested through a group of investors that included his Singapore based wine and hospitality sector fund for India. This fund teamed up primarily with Reliance Capital and invested about 30%, according to industry sources (Samant always refrains from giving exact financial figures) and the company was valued at around Rs. 7.50 billion (750 crores) at the last count.
Kapil Grover, Director of Grover Zampa with a substantial holding in the merged company had similar thoughts and was dismissive about the idea and was not keen to discuss any further. Ravi Jain, another Director who has been a hard core spirits marketing man and financially quite savvy person from IIT Delhi (my alma mater too) saw this financial solution smart and didn’t see anything absurd in the preposition. In fact, he believes it would be good for the health of the wine industry as well.
One thing neither Rajeev nor Kapil is perhaps unwilling to accept or understand is that the merger as suggested by Viswanathan and possibility the other PE investors does not mean merging the two companies. They are expected to continue to work independently and promoting their existing brands. They may even compete at times because of their brands but they will continue to run independently-ostensibly under a common Board.
The idea behind the merger is primarily to unlock the capital and provide an exit route to the PE investors who have been gradually getting more powerful over the years in terms of voting strength. The single entity is expected to become an unmatchable force in the market with stronger distribution which is the fundamental for success in the wine and liquor business.
Pernod Ricard is an obvious example. Using their extremely large and effective distribution system spread pan India including all the Tier-2 as well as Tier-3 cities because of their liquor business, Jacobs Creek is the largest selling imported wines label in India. By the next financial year it is expected to become the biggest import(er) in India, crossing the sales in numbers of even Brindco, the largest exporter for the past decade.
According to Viswanathan, this step would give a near monopoly to the combine and will help improve the profitability, increase in growth as the market is expected to expand significantly in the coming years. Interestingly, wine is still clubbed with the spirits industry for the purpose of competition laws. It has a much larger share of the market (wine has less than 1% ), says Ravi Viswanathan who has been observing the Indian market for 2 decades. One factor making the merger feasible is that for the anti-trust (competition) laws to block such transactions, the share in the total alcoholic beverages is considered and wine even as a whole has a miniscule share of the total industry.
Barring Four Seasons and Fratelli who still have a few years before they can catch up with the big two, the other players are too small or insignificant in the big picture. Four Seasons has been taken over through USL by Diageo who were not successful in the wine business in India in their maiden attempt with their Nilaya Indian wines being a disaster. Fratelli might soon find it financially strained to expand further as fast as they have during the last 2-3 years, goes the reasoning-although Kapil Sekhri, one of the founder Directors, denies it and even claims they don’t aspire to compete with Sula. Nine Hills owned by Pernod Ricard does not seem to be as aggressive as marketing Jacobs Creek and seems to be happy with the sales of around 30-35,000 cases produced by its winery in Dindori.
But first another merger
Another aspect that might have sparked off the rumours in Bangalore is the reported ongoing talks between Viswanathan and Alpine Industries in Karnataka. It’s an open secret that Alpine has the biggest land bank and a state-of-the art winery that could change the landscape of wines-at least in Karnataka where Grover has the leadership position but no land holding to talk of. It is also a known fact that Alpine winery is stalling because of funds shortage and some family issues that have bogged down the business. Wines tasted have been found to be of excellent quality, however. Although one can only speculate at this juncture, there is a remote possibility that this winery with a huge potential in terms of quality and quantity might be tempted to fall under the common umbrella-even though it would be on the radar of many other private equity investors as well.
An international viewpoint
I discussed the scenario with Robert Joseph- an English wine expert, author, critic and now also a wine producer with an extensive knowledge and vision of the global industry including India. He has visited India and several wineries many times since the 90s and is in frequent touch with the producers and other stakeholders. He isn’t appalled by the idea and finds it quite practical. ‘Look at LVMH-they had Moet Chandon and Dom Pérignon originally but also acquired Krug, Ruinart and Veuve Clicquot Champagne houses. Big corporations like Constellation Brands. Australian Vintage and Treasury Wine Estates are only a few of the similar examples where the parent company owns several competing wineries but finds synergy in the operating results,’ he says.
Robert clarifies however, that the strength of the combine would come from the distribution channels. Most wine companies fail to exploit the market because of their weak distribution systems. It is expensive to expand the channels especially since every State in India requires an excise licensed distributor, an onerous task for small wine producers. Already Pernod Ricard has shown successful results due to deep distribution reach. Whether Sula Grover Zampa combine will help them increase the reach is a moot question.
If Alpine were also to be a part of the combo-an unlikely scenario, it would have no distribution to talk of. But the presence of over 1200 acres of contiguous land and a state-of –the art winery with few equals in India could be a big asset, especially for and around the Karnataka market and exports.
Valuation is one issue that would also come into play. Not everyone agrees with the valuation. A senior person in a PE investment company which was keen to invest in Sula’s latest infusion confirmed to delWine on the condition of anonymity that his company felt the valuation was unrealistically high and their company had decided to stay out of the negotiations. This view was further endorsed by two of the industry watchers.
There are also doubts raised by some Private Equity investors and wealth managers whether the value of the joint enterprise would increase substantially through the merger though they all agree that this step will provide a greater liquidity and would in general be good for the future of the Indian wine industry. The first and the only wine venture that went public earlier, is already under the weather; the erstwhile leading producer and a pioneer, Indage Vintners is facing bankruptcy.
'Rajeev and his family reportedly own 35% share -including a number of shares in different names. But many small shareholders not related to the family own a small quantity. He has thus control on roughly 45% of shares; Belgians (Verlinvest) have 23%. Reliance Capital and Visvires of Viswanathan together own 30%. Undoubtedly the PE investors would like to have an easy exit policy, be it in Sula or GroverZ. If the management of the two companies were kept independent and yet synergies were a possibility, such an eventuality could become a reality with the financials of both companies independently showing improved results.
These are my personal observations and hence in the shape of a Blog (normally they would be in the ‘Global Perspective’ section of the Indian Wine Academy website). But it is a matter of record that when Grover Zampa parlays were being held, delWine was perhaps the first to report that a merger was on cards-even though some people even within the two companies had denied it and some people scoffed at our report.
The merger of Sula and Grover Zampa is not imminent-it is not even on the cards. But it’s certainly on the canvas!
Subhash Arora
Related earlier articles:
Sula Enterprise Valued at $100 million
Sula Stake Sale shows Industry has Bright Future |