Portfolio: CHAMP Private Equity and Accolade

When Australian wines were first introduced to the global market not everybody was keen. John Ratcliffe, CEO of Accolade, was an assistant buyer with UK liquor store chain Oddbins when - in 1984 - he tried to convince a leading figure in the local win industry that the antipodean tipple would be the next big thing.

"We tasted the samples I had brought from Australia, and I remember thinking that they tasted great. He simply said: ‘My dear boy, these wines won't work at all; Australian wines will never work in this market because there is too much fruit,'" recalls Ratcliffe.

Needless to say, the prediction was wrong. Australian vintages - dubbed "sunshine in a bottle" - not only caught on in the UK and Europe, but found global appeal, democratizing the entire wine market. It is claimed that the fruitier, more palatable variety took what was the preserve of a niche consumer base and turned it into something that can be enjoyed by all. For the next 18 years the world's thirst for Australian wine was unquenchable. Export volumes grew from 8.9 million liters in 1984 to over 416 million liters by 2002, according to the wine economics research center at the University of Adelaide.

In 2003, US wine firm Constellation Brands thought it would reap the benefits of this rising demand by buying Australia's largest wine producer BRL Hardy - an asset which later would form the core of its UK and Australian operations - for A$1.85 billion (then $1.11 billion). However, the growth would not last.

"There was always going to be a correction," says Ratcliffe. "Even in the most exciting categories there is a correction, and for Australian wine that started in the early 2000s, which was pretty much when Constellation purchased the Australian asset."

By the time Constellation decided to exit its Australian and European assets, the business was in dire straits. In the last quarterly report before the sale, it was announced that revenue dropped 12% year-on-year to $235 million during the first nine months of the 2011 financial year. CHAMP Private Equity entered the bidding after being introduced to Constellation though one of its local affiliates in Australia.

"From the initial introduction it took us nearly 18 months to make the deal happen and the deal went through a variety of different constructs," explains John Haddock, CEO of CHAMP. "They spoke with a few interested parties but I think ultimately they chose to work with CHAMP because they realized we had the knowledge and local capabilities to make this work, and because it gave them a chance to retain a 20% stake in the business."

The PE firm eventually bought 80% of the business for $290 million - a fraction of the price Constellation paid for BRL Hardy - and renamed it Accolade Wines. At the time, most of the company's production and exports came out of Australia, with a handful of operations in the US and South Africa, while there were significant sales into the UK and mainland Europe. In addition to the Hardys brand, the portfolio included: South Africa's Kumala, Fish Hoek and Flagstone; a UK portfolio that featured Echo Falls and Stowells; and Australia's Banrock Station.

For CHAMP there was an opportunity to ride the recovery in demand for Australian wine and expand the company's portfolio. The ultimate objective was to turn it into a leader in the new world wine category with a focus offering popular mid-market vintages plus a handful premium product offerings. But the first step was to Accolade to move beyond its troubled past.

Lingering legacies

"Whenever you break off a chunk of a company it is easy for the new business to try and reflect the old company and its culture," says Ratcliffe. "So we had a company that was operated very much in a North American sort of model; it was a very hierarchical, it was very meeting-driven, and it just didn't move quickly enough."

Ratcliffe, who founded UK consultancy WineConsult in 2010 after holding senior posts at Oddbins and Canadian distillery Seagram, was initially brought in by CHAMP as an advisor at the due diligence stage. One of his first tasks was to streamline the hierarchical decision-making process that was not only slowing down operations and but also getting in the way of new business opportunities.

One early example was when Accolade had a one-off opportunity to sell a large parcel of wine to a major UK supermarket and it took three months for a sample to reach the client. Ratcliffe put this early glacial pace of development down to a crisis of confidence: Constellation had consistently blamed its Australian and UK division for group-wide underperformance, and this had impacted the mindset of management.

"When people have been in the crash position long enough they become quite risk averse, so what I had to do was not only hold hands but also make decision-making easier and speed things up," says Ratcliffe.

The next priority was to build out the portfolio. This acquisition spree was fueled by extra capital in the form of a $234 million facility provided by GE Capital, which came across as the ideal partner; it had previously provided financing for a similar investment - United Malt Holdings (UMH) - which CHAMP formed in 2006 after acquiring, alongside Castle Harlan, four North American malt producers. Accolade, like UMH, was a cross-border investment in a low margin industry, needing an asset-backed solution.

"The team originally looked at doing a more customary leveraged finance, cash-flow style facility for Accolade, but given the quality of receivables and liquidity of inventory, we were able to look at it slightly differently. In this case the asset-backed loan (ABL) solution worked very well," explains Nick Bennett, executive director and head of leveraged and sponsor finance with GE Capital.

The benefit of the asset-backed facility, which was provided in November of 2011, was greater flexibility because it involved fewer covenants and was particularly suited to the cyclical nature of Accolade's business. For example, the Christmas peak periods would leave the business with a lot of receivables on its balance sheet towards the end of the year that would not get settled until January. With the ABL facility Accolade could unlock its balance sheet assets.

"We had a good experience with GE Capital with the asset-backed loan facility provided for our prior UMH investment - that also had some agricultural features to it - so we knew the financing product would work well," say's CHAMP's Haddock. "GE is a good provider of this type of financing product, and we secured a multi-geography, multi-currency, asset-backed loan in US, New Zealand, and Australian dollars, and UK pounds."

The financing soon facilitated Accolade's first acquisition in January of 2012; the purchase of a majority stake in Chinese wine distribution business Shanghai CWC Wine Trading. Accolade already had distribution deals with the target company, and it would serve as a platform for expansion into the fast-growing China market.

Five months after that came a deeper incursion into the US market with the purchase of Californian brands Geyser Peak, Atlas Peak and XYZin, from Ascentia Wine Estates. Under the terms of the deal, Accolade agreed to lease Geyser Peak's winery and vineyard instead of buying them outright.

"We buy brands, we are not great believers in buying vineyards," explains Ratcliffe. "We sell the vineyards on and enter into long-term contracts; that gives us more flexibility, and of course it is better for our cash-flow."

A brand apart

While looking to expand into new markets, Accolade was also building up its existing brand equity on a global basis. In the early days of the investment the existing management was intent on new product development. Ratcliffe felt that this was to the detriment of existing brands - in particular Hardys - which could have benefited from more focus.

"Hardys was sitting there, an amazing brand, and they weren't putting much emphasis on it," he says. "So we changed all of that at the beginning of 2013, by deciding Hardys would be absolutely central to what we do."

This resolve was in turn backed up by an investment of $18 million in the Hardys brand over the next 18 months. From there, the company upgraded the packaging and websites across several brands, as well as securing a sponsorship deal to make Hardys the official wine of both the Australian and English cricket teams.

Meanwhile, Accolade continued to expand its portfolio, acquiring a number of wine brands from its New Zealand counterpart Mud House Wine Group. These included the flagship Mud House brand as well as the Waipara, Dusky Sounds, Haymaker and Skyleaf marques.

The aim is to make Accolade a one-stop shop for new world wines. "The downside of the wine industry being too fragmented is that with fragmentation comes complexity, and every multiple retailer the world over hates complexity because it adds cost," says Ratcliffe. "So if there is one trend globally at the moment, it is to take out cost and complexity; they want a range of products but they want one invoice, and we are able to do that."

On the other hand, as a result of expanding its wine portfolio and global footprint, Accolade has been obliged to invest heavily in its supply chain, which - according to the company - is currently responsible for shifting approximately 34 million cases of wine a year globally. One example of this is Accolade Park, a huge warehouse and distribution facility in the UK. Following an investment $20 million, the facility has opened a third production line, increasing output by 40%. Accolade Park, from which bottles of wine are shipped throughout the UK in large container bladders - has been instrumental in cost savings.

"One thing Constellation did brilliantly was that it saw the trend for offshore packing," says Ratcliffe. "Why would you import your glass from China and then fill it with wine from New Zealand and transport is all the way to the UK in glass?"

The company also has an outsourced bottling arrangement with Treasury Wine Estates whereby Accolade does the bottling for both companies in Europe, and Treasury provides the same services in Australia.

These changes in the brand portfolio and back-end infrastructure were matched by changes at the top of the management pile. For two years Accolade had been led by CEO Troy Christensen, who took up the role after serving just over four years as president of Constellation Australia and Europe. However, by March of 2013 he had left the business, and Accolade was in need of a new head. The choice was obvious - but it would be another six months before Ratcliffe could be convinced to leave his consultancy work to take the job.

"The more time we spent with the business the greater the opportunity he thought it had, and he was the logical candidate as he knew the business well," says Haddock. "So we coaxed him back into executive life to take over as CEO of this business."

Shortly after Ratcliffe's appointment, the company raised $300 million in a second round of financing from GE Capital. This funding was intended to consolidate and re-size the initial ABL facility, taking advantage of the earnings growth, and return capital to investors.

"We have returned 100% of our capital and we are still less than 2x geared," says Haddock. "Three years in it was an appropriate time to reset the capital structure, return some capital, and continue to allow the business to grow."

Meanwhile the acquisitions continue. Last month Accolade bolstered its core Australian portfolio with the purchase of Grant Burge Wines, an asset which includes the Grant Burge brand, Burge & Rathbone Fine Wine Merchants and the Krondorf Winery. It is unlikely to stop there, with Ratcliffe hinting there will be other investments in the coming months, as the company looks to fill the gaps in its new world wine portfolio; Haddock shares the same sentiment.

"One area in world where we have a more limited presence - and might look to do another acquisition - is South America, especially Chile or Argentina," he says.

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• Topics
• Australasia
• Consumer
• Buyouts
• Portfolio management
• Restructuring
• Expansion
• Buyout
• CHAMP Private Equity
• Consumer
• buyout
• Australia