Long Idea: Vintage Wine Estates (VWE - $9.77). VWE came public through a merger with Bespoke Capital Acquisition ("Bespoke") on June 7, 2021. Bespoke was a SPAC that preceded the bubble (IPO was in August 2019) and was initially focused on finding a target in the emerging cannabis space. After its June listing, it traded as high as $13.48 per share before declining nearly 30% the past two months and closing this afternoon at $9.77. VWE is a consolidator of premium and luxury wine producers including brands such as Girard, Firesteed, and Kunde and should trade at $15 simply to be inline with its peer group and likely sees $18+ in a likely case scenario.
As a value investor, I have been searching for new opportunities in SPACs, but not in the ways one might typically read about. As is undoubtedly known by those on VIC, "blank. check" companies boomed in popularity last year, leading to yet another bubble in the backdrop of asset bubbles. Like any bubble, the market’s apparently insatiable appetite for SPAC paper allowed lower and lower quality sponsors to come to market in larger and larger deals. ln 2020, more than $80bn in gross proceeds was raised across almost 250 deals, almost 6x the amount raised in 2019. In 2021, that record haul was exceeded by March.
However, cracks in the sector emerged and the bubble started to deflate in February 2021. The CEO of Nikola Corp (NKLA), a zero-emissions truck company, was accused of fraud by a well-known short research firm. This month, he was formally charged with making false statements to investors. Clover Health Investments, which was taken public by a vehicle sponsored by the so-called "SPAC King", Chamath Palihapitiya, was found to have an undisclosed Department of Justice inquiry and declined precipitously. Fortress Investment's ATI Physical Therapy slashed earnings guidance in their earnings call debut and is trading ~60% below the IPO price. Since February 16th, the IPOX SPAC index has declined by 27%.
The ensuing carnage has created opportunities for investors willing to do the work. Such dislocations resemble other market inefficiencies that I seek to exploit such as spinoffs, restructurings and other special situations - where there is no established analyst coverage, limited financial disclosures, lower liquidity, and trading dynamics are dominated by technical factors rather than company fundamentals. In the SPAC space, there are both hairy situations (e.g. NKLA, Clover) and gems that have otherwise been discarded as investor enthusiasm in the space wanes.
I believe one of the gems is Vintage Wine Estates. While more recent SPACs have announced deals within weeks or months of their offering (raising eyebrows around the rigor of SPAC sponsors' diligence process), Bespoke looked for a deal for 17 months, then announced a pivot to the alcoholic beverage and consumer products sectors having been unsuccessful in finding a suitable target in the cannabis space. Ultimately, the sponsor evaluated 150 targets, signing 75 non-disclosure agreements. Their standard of diligence appears more consistent with a careful sponsor trying to find an attractive, undiscovered opportunity.
This pivot was well suited to the background of the team, which includes Paul Walsh as Executive Chairman. Mr. Walsh was the CEO of Diageo PLC from 2000-2013, overseeing a roll-up of the industry at the same time that Diageo developed brands like Johnnie Walker into industry icons. During his tenure, the total return on Diageo stock was almost 500% (assuming dividend reinvestment). VWE has the core components of what Diageo looked like at the time Mr. Walsh joined-operating in a highly fragmented market that is growing faster than the economy, with a significant portion of the valuation creation opportunity resulting from understanding how to accelerate the growth of smaller acquired brands, extend the reach of mature brands and harvest non-core brands.
The selling shareholders of the acquired winery business largely rolled their interests into VWE. There was one investor who exited via the transaction but even including this seller, 87% of the ownership of the target was rolled into the new equity of VWE and is locked up for 18 months. Effectively, this was a true IPO with a minimal amount of management or existing equity sponsors selling secondary shares.
VWE participates in the premium and luxury segments of the domestic wine market, which account for 79% and 20% of the Company's case volumes, respectively. Premium wines are priced $10 to $20 per bottle and luxury wines at over $20 per bottle. While the overall market in the U.S. grows at ~3%, these higher end segments have grown at over 6% annually for the last decade and are projected to grow at 7-8% from 2017-2022 (Euromonitor via JP Morgan initiation report on NAPA).
Observers have been concerned about the Millennial generation preferring spirits and hard seltzer to wine and beer. Similar with respect to home ownership, recent datapoints confirm that as age and income levels rise, Millennials look increasingly like prior generations. Millennials accounted for 20% of wine consumption in 2020 vs. 17% in 2018 (Silicon Valley Bank Annual Winery Conditions Survey). And wine is preferred (vs. liquor or beer) by 35% of consumers with annual incomes of greater than $100k, versus 27% of consumers with annual incomes of $40-l00k, and 23% of consumers with annual incomes of below $40k (Gallop Poll August 2019).
In addition, domestic wine consumption continues to meaningfully lag other developed countries with per capita consumption in the U.S. ranking 44th in the world. Consumers in countries like the U.K. and Germany consume two times per capita as much wine as consumers in the U.S. (https://www.nationmaster.com/nmx/ranking/wine-consumption-per-capita) (Italy and France are closer to 4x per capita consumption vs. the USA.)
At the current $9.77 per share, VWE is valued at ~16x trailing EBITDA and less than ~14x forward EBITDA. Wine and spirits peers trade at 21x forward EBITDA and higher growth food and beverage companies trade at 25x (calendarized for VWE’s fiscal year-end of June). The closest comparable, The Duckhorn Portfolio Inc. ("NAPA"), trades at 23.3x forward EBITDA. NAPA has a greater percentage of revenues from the luxury segment and higher brand concentration. However, if one looks at the projected organic growth of both companies, they are consistent (high-single-digit percentage) and trailing revenue and EBITDA growth are also quite consistent (~20% including acquisitions).
Importantly, VWE's channel mix is significantly differentiated, and we believe could warrant a premium multiple, with 30% exposure to direct-to-consumer (versus 21% for NAPA). Direct-to-consumer includes both tasting rooms and wine clubs (half of VWE's business) and e-commerce (the remaining half). This business grew at 11% last year, despite most tasting rooms being shuttered due to the pandemic. I expect this channel should re-bound dramatically as pandemic lockdowns are lifted. For example, for the key California market, restrictions in Sonoma County were lifted on June 15th.
VWE also develops, produces and bottles private label wines for retailers like Target, Costco and Amazon, which account for 29% of revenues. This business grew at 30% last year, as these retailers continue to push private label initiatives internally. NAPA doesn't have a comparable business to what VWE is doing in private label.
Were VWE to simply trade in-line with peers, the stock would be worth $15 per share (>50% upside to current share price). This is my base case, although it is also worth noting that VWE was built through strategic acquisitions. The management team has extensive experience evaluating, acquiring and integrating targets with 10 deals completed in the last 5 years. Management believes they can enhance their growth rate through accretive acquisitions and historically they have aggregated targets at 5- 6x EBITDA (including synergies and the value of subsequent asset divestitures versus 11-12x headline EBITDA multiples). Were one to give them credit for the forward accretion of this strategy, VWE stock would be worth ~$18 per share.