The Merger
“You’re well aware of the soil conditions and the rest, so I won’t bore you with the details. It’s remarkably similar to your land here at Redwood. Plus, since it’s right next door, it’s the optimal choice for expansion.”
He was right. If a farm were scattered in pieces all over the place, managing labor would be a nightmare, and the varying terroir of each vineyard would require different farming methods, complicating the winemaking process significantly.
“What’s the price?”
“5.8 million dollars.”
I immediately frowned.
“That’s not exactly cheap. I assume there’s quite a bit of wine stored in the winery, right? What about that?”
Ben furrowed his brow, looking a bit troubled.
“It’s standard practice to acquire the wine in the cellar when purchasing a winery. Inventory is usually recorded as an Inventory Asset on the books, and wine in tanks or barrels is treated as Work in Progress (WIP). Acquiring everything makes the accounting much simpler. However, that doesn’t mean every winery is acquired that way, as you’ve pointed out.”
“Exactly. When I acquired Ironwood Cellars, the volume wasn’t huge, so I took it all. But this time, it feels a bit overwhelming. I’ve heard Silveroak produces quite a lot.”
“Correct. In cases like this, we use an Asset Purchase Agreement (APA), where we only acquire the facilities, land, and equipment, excluding the inventory. That means excluding not just the bottled wine, but also the wine currently in tanks and barrels.”
“Hmm... that’s a bit...”
As I tilted my head, Ben offered a subtle smile.
“Right? The downside is that you can’t use the winery until the tanks are completely emptied. In such cases, we use a Hybrid structure, where bottled wine (ex-bottle) is excluded, but wine in barrels or fermenting wine (WIP) is included.”
“And if we do that?”
“That part requires negotiation, so it’s hard to give you a figure right now. Silveroak might want to take the barrels while leaving the tanks... there are various ways to handle it.”
“For my part, I want to acquire the winery for 6.5 million dollars. I’m fine with the original owner taking the barrels.”
“So, you’re willing to concede the barrels, but you want to secure the facilities, including the tanks?”
“That’s right.”
Oak barrels are expensive, but it was too risky to acquire them without knowing the state of the wine inside. Even if I did know, I didn’t have enough capital to take on all that extra stock.
“Hmm... that sounds good.”
Ben smiled with satisfaction.
I hadn’t been overly greedy, mentioning only what I needed without lowballing the price. Knowing the other party was in a tough spot, I could have squeezed them harder, but choosing not to was a sign of respect for a fellow farmer who had built up that vineyard.
“If they reject our proposal, I don’t want to force the contract, so please don’t pressure them too much.”
“Haha, you want to acquire it on good terms because they’re neighbors? Honestly, I don’t like doing business that way either. I prefer results where both sides are satisfied after the deal is done.”
“That’s a relief. Let’s proceed with that, then.”
“One thing I’d like to ask... how do you plan to handle the acquisition funds? The banks aren’t exactly keen on lending right now. Even if they do, the interest rates will be quite high.”
“I can cover up to 6.5 million dollars without a loan.”
Ben looked genuinely surprised at my words.
“Oh... I see. That’s a relief, hahahaha...”
It was understandable. To an outsider, it would be hard to imagine that this small, 15-acre winery had 6.5 million dollars in liquid assets.
He stood up, adjusted his suit, and extended his hand.
“It was an honor to meet you today.”
After Ben Lowell left, my father spoke up.
“So, all that money we’ve been saving is going to be used like this.”
“If I had tried to buy that farm under normal circumstances, I never would have been able to afford it with that amount.”
“Still, you paid a pretty penny, didn’t you? If the land alone is 5.8 million dollars, that’s nearly 200,000 dollars per acre.”
“That’s true. Honestly, I could have negotiated it down further, but since they’re neighbors, and it’s hard to buy the farm right next door at a price comparable to other farms...”
“You’re right about that. When you need to spend money, you have to spend it. If you try to pinch pennies at a time like this, you’ll lose something much bigger.”
Hearing my father praise me for doing a good job made me feel even better. Excited about the expansion, he called Mom to tell her to prepare some snacks. It looked like my parents would be having a drink tonight before bed.
When I entered the aging room, Warren asked with a curious glint in his eyes.
“What kind of properties did that lawyer bring?”
“He brought three farms: Spring Mountain, Oxbow, and the one next door, Silveroak.”
“I’ve heard of all of them. Must have been quite expensive?”
“The one I liked was Silveroak. They asked for 5.8 million just for the farm. I told him to negotiate up to 6.5 million including the winery equipment.”
“6.5 million? How big is it?”
“32 acres.”
“That’s not exactly a bargain, is it?”
“You’re right. But the land is excellent...”
Warren nodded and said in a subtle tone.
“Still, that’s a heavy burden. Do you actually have the money?”
“Why? Are you worried I don’t?”
I asked back with a laugh, and he took a sip of the blended wine before replying.
“I was just thinking I could lend you some if you were short.”
“No, thank you. I have exactly 6.5 million.”
Warren looked just as surprised as Ben had been.
“You’ve saved up that much? Without a loan?”
“You’ve seen our warehouse, Warren. We have almost no inventory.”
“True... there are almost no wineries with a warehouse as empty as this one. I was quite surprised when I first saw it. What will you do if you acquire it? You must have a plan, Master?”
“I don’t have a grand plan yet... I’ll have to check the soil and the state of the vines first. If the vines are healthy but the soil is the problem, I’ll supplement it with biochar and mycorrhizae. If the vines themselves are the problem...”
“You’re thinking of tearing it all out?”
“That thought has crossed my mind. It’s a waste, but... creating a terroir similar to the existing Silveroak farm would provide some uniformity.”
“Whoa, then you’ll have to spend money on investments for the next five years. Can you handle that?”
“We can sell other wines in the meantime.”
He shook his head in admiration.
“Sometimes you seem to have no greed at all, and other times, when you think deeply, your ambition is incredible. Resetting an entire field is common for premium lines, but it’s hard to do at that scale.”
Entering the 2000s, a reset boom occurred in the large winery areas of Napa Valley, where entire fields were torn up and replanted. There were several reasons for this, one being that once grapevines reach 20 to 30 years of age, their quality begins to decline. Some claim that Old Vine produces better quality, but that is based on Mediterranean and European standards.
Another reason was the discovery of a fatal flaw: the AXR1 rootstock, widely planted in Napa during the 1970s and 80s, had no resistance to the grapevine pest Phylloxera. Since the problem persisted into the 2000s, a replanting boom occurred among high-end wineries to completely eradicate the rootstock issue.
“Silveroak will be 50 acres in total. I’d love to do the same for Redwood, but that feels like too much greed...”
“That would be excessive.”
“Exactly. That’s why I’m going to decide after checking the condition.”
“Incredible... to talk so easily about giving up the chance to make and sell thousands of cases of wine immediately for the next five years...”
“I haven’t decided yet, you know.”
However, Warren’s eyes were full of anticipation, like a child the day before a field trip. He had only seen the results of the soil I had newly created at the Silveroak site from the outside. Perhaps because he would now be able to witness the soil creation process with his own two eyes, he clearly wanted me to flip the entire Silveroak property.
“6.5 million dollars?”
“6.5 million dollars?”
The two reacted differently to Ben Lowell’s proposal. Tom clenched his fists, looking as if he had been saved, but Elowen Pike’s face turned bleak.
“It’s true that we’ve offered a better price per acre compared to other farms.”
This time, Ben didn’t say much, his expression calm. He knew that forcing a positive spin wouldn’t make them accept it any better. He also knew that the more he praised the buyer, the less they would trust him.
“It’s a good opportunity. The average price in Napa Valley wasn’t much different from this anyway.”
At Tom’s words, Elowen nodded.
“I know that, but... do we really have to give it up like this?”
At that moment, Ben spoke.
“I don’t think I’ve told you everything yet.”
The two faces stiffened instantly. Elowen had a look that said, ‘I knew it,’ and Tom frowned as he asked.
“Is there more?”
“The condition they want is that they won’t take on the inventory. They are only acquiring the wine currently in the tanks; they are not acquiring the barrels or the bottled wine.”
At those words, Tom’s face actually brightened.
“It sounds like the buyer doesn’t have much cash?”
“It seems so... given the significant amount of inventory, it appears to be a burden.”
Tom grabbed Elowen’s arm and said hopefully.
“It’s an opportunity! If we just sell off all the inventory, we can get a decent farm in Sonoma, even if it’s not Napa Valley.”
“Do you think so?”
“If the buyer had acquired the wine, we would only get a portion of the revenue, but if we sell it ourselves, we get all the profit. I think it’s a good opportunity. Besides, considering Elaina’s reputation, everything could be cleared out by the first half of next year. If that happens...”
“Yeah, if that happens, we could get a suitable farm in Sonoma.”
It wasn’t an impossible scenario. The quality of the wine they had made wasn’t terrible, and Elaina still had enough name recognition to occasionally appear on broadcasts.
Even if they had to dump it on home shopping channels to clear it out, they figured they would take a loss but still walk away with a substantial amount of capital.
“What if we just don’t sell?”
Tom looked at Elowen, who was hesitating again, with a pitiful expression.
“We don’t have operating funds. If the subprime crisis causes a liquidity crunch for distributors until the middle of next year...”
It wasn’t as if Elowen didn’t know that. He had hoped they might be able to hold out, but the cold, rational Tom didn’t give him any room. As a partner and investor, Tom knew this was a very good offer and wasn’t about to attempt a gamble.
“Phew... I have no choice. I’ll accept the condition of handing over the facilities for 6.5 million dollars.”
“You’ve made a wise choice.”