Did Canandaigua Buy a Leaky Bottle?

Last month's acquisition of Simi Winery is beginning to look more like a tin cup than a golden goblet.
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Canandaigua Brands (CBRNA) thought it knew what it was getting when it inked an agreement to buy Simi Winery from Moet Hennessy Louis Vuitton (LVMHY) . But it seems the silver chalice has turned into a tin cup, at least according to some of the people close to the transaction.

The picture the company paints of Simi is that of a needy brand that had been carried as a kind of oenological charity case by distributors who wanted access to the more profitable Moet Hennessy brands. Drinks and Diversions wrote

last month about Canandaigua's acquisition of the Sonoma County premium winery for $56 million.

"I'd say they were pretty upset when they started talking to our distributors," says a source at Simi familiar with the transaction. "They

Canandaigua weren't prepared for the relatively high level of promotional allowances being demanded by distributors."

Last week, D&D wrote about the

issue of depletion and promotional allowances, which are a widespread, legal way for wineries to discount the wholesale price of their goods without appearing to knock down the price.

Simi's depletion allowances apparently were a surprise to Canandaigua, because the brand was distributed by the New York import and distribution company

Schieffelin & Somerset

(itself 73%-owned by Moet Hennessy), which has a reputation of never offering price supports.

"Schieffelin & Somerset is the master distributor for us," acknowledged the Simi executive. "but in some areas there are other distributors under them. Most of these folks also distributed Moet and Dom

Perignon Champagnes as well as Johnnie Walker and other spirits brands, all of which had such huge margins that they could afford to carry Simi without allowances." Johnnie Walker is owned by

Diageo

(DEO) - Get Report

but distributed in North America through an agreement with Moet Hennessy.

"But," the Simi source continued, "with the sale to Canandaigua, those distributors no longer have big margin brands to help prop up Simi, so they're telling Canandaigua that they need promo allowances in order to keep on selling it."

D&D talked to several Simi distributors who say that they need $18 to $25 per case allowances in order to profitably continue to sell Simi under its new Canandaigua ownership. That would represent a 14% to 19% discount off the stated wholesale case price of about $130.

If that's so, then the premium winery just might be worth less than the $56 million that Canandaigua agreed to as recently as two months ago. Canandaigua would not comment on any specifics, nor say whether it would be offering promotional allowances to help its indigent new acquisition.

"The only thing that I can say is that we are conducting our customary detailed audit as we do with all acquisitions," said Kristen Jenks, Canandaigua's head of investor relations. "It's premature to say what, if any, adjustments

in the acquisition price may be necessary."

Canandaigua issued a news release stating that it had completed the acquisition of Simi and Franciscan Vineyards on June 4th, but company officials said both of these acquisitions were subject to continuing due diligence.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in any securities mentioned in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.