CWGLV - Crimson Wine (LUK Spinoff)

[racemize]

LUK Spinoff announced:

 

http://finance.yahoo.com/news/leucadia-national-corporation-declares-spin-210500459.html

 

On the distribution date, which is expected to be February 25, 2013, Leucadia shareholders of record as of 5 p.m. EST on February 11, 2013, the record date for the distribution, will receive one share of Crimson common stock for every 10 Leucadia common shares they hold, with cash in lieu of fractional shares to be distributed thereafter.

[racemize]

From Kitacular:

 

Stahleyp,

 

This guy put some decent information down the other day: http://boards.fool.com/crimson-will-be-spun-off-to-leucadias-original-30500499.aspx

 

I reproduce the full post below.

 

If you forced me to guess why they doing this spinoff rather than keeping it in Leucadia, I would say that is less likely related to what Handler wants and more likely related to what either or both of Cumming and Steinberg want.  Make it a pet project and get it on the cheap after the spin-off "crash" in price.  Who knows though? 

******

 

Crimson will be spun off to Leucadia's original shareholders upon successful merger.. and who would want to hold on to these except for Cummings and Steinberg??

 

Well, maybe me. I expect the usual post-spinoff sell-off. If it's selling for around book value, I could be induced to take a nibble. A sip?

 

Cummings and Steinberg had stated that they bought the vineyards more as a real estate-inflation hedge than for its wine yields.

 

I think you're referring to comments in the 2009 and 2010 annual reports, where C&S do talk about the value of land as a hedge, the difficulty of making vineyards consistently profitable, and the need for volume in order to drive profits. I'm not sure this means the wineries are "mostly" an inflation hedge. Did they say this somewhere else?

 

[From 2009 AR]

 

Even in good times, it is difficult to make estate wineries profitable. The entire industry suffers from a lack of discipline. The sheer number of brands combined with owners willing to sell out last year’s vintage at (or below) cost are a constant anchor on price. Estate wineries have

high fixed costs and require large marketing dollars, making volume the key profit driver.

 

Having started one estate winery from scratch we have seen that planting quality vineyards increases land value and may provide an inflation hedge. Durable annual cash flows may be difficult to achieve, thus the ultimate judgment on our investment will have to wait until it is eventually sold.

 

[From 2010 AR]

We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer

number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver. We need more volume to make our goal of consistent, yearly cash flows a reality.---

 

I think it's worth noting that despite the pessimistic tone of these remarks, Cummings and Steinberg continued to invest in the wine business in the effort to crank up the volume. Seghesio wasn't a National Beef -sized acquisition, but it wasn't nothing, either. I know they're sometimes slow to cut their losses, but I start from the assumption there is SOME value here: it's not a bottomless money pit.

 

A few weeks ago, I took a stab at coming up with a valuation somewhere between book value and the multiple awarded to Constellation Brands--primitive, I know, but it's a starting point.

 

In the merger prospectus, Crimson is assigned a book value of $197 M. Much of that consists of tangible productive assets, in the form of land and physical plant (vineyards). Divided by 245M (pre-merger) LUK shares, that works out to about $8/share in book value per Crimson share. [Note: this assumes no debt. Obviously, if the spun-off entity has debt, you'd reduce book value accordingly -- and you'd want to make sure they have enough revenues to meet their obligations!].

 

If the volume strategy works out, Crimson should eventually deserve some multiple to book. Constellation (STX) sells for 2.4 times book, Diageo (which does beer and spirits and has consistently high returns on equity and wonderful cash flows) for 8 times (!) book. If we apply a reasonably generous multiple of 1.5x book to Crimson's pro-forma book value, we get around $300M (again, divided by 245M pre-merger LUK shares, multiplied by 10 = $12.24 / Crimson share). That's not a price I'd pay out of the gate, but seems like a fair price for Crimson if it manages to produce enough volume to be consistently profitable.

 

Deciding on an appropriate multiple to earnings is trickier. We know Crimson's revenues but not much else. Hypothetically, if the market values Crimson at book value ($200M), it would need $20M in earnings to support a P/E of 10. Constellation has about a 15% profit margin. With similar margins, Crimson would need $134M in revenue to achieve $20M in earnings. However, Crimson's margins for direct-to-consumer sales are higher than for retail (see below, 2008).

 

I've struggled to come up with a back-of-envelope price for the vineyards. The land owned by Crimson as of the 2011 annual report is as follows:

 

NAPA VALLEY, CA -188 acres

WILLAMETTE VELLEY, WA- 120 acres

EDNA VALLEY, CA- 97 acres

ALEXANDER VALLEY, CA – 231 acres

RUSSIAN RIVER VALLEY, CA – 68 acres

HORSE HEAVEN HILLS, WA – 611 acres (87 acres producing)

 

Land for wine grape cultivation varies dramatically in price according to location, productivity, the age of the vines, and other factors. Land for vineyards in the Napa Valley can be twice as much as the Willamette valley ($150,000 /acre vs. $80,000/acre). However, the following might give a rough idea what Crimson's most important asset would fetch in the market:

 

Napa land $28.2 M (150K/acre)

Willamette land $ 9.6 M (80K /acre)

Edna Valley $1.9M (20K/acre)

Alexander Valley land $18.5M (80K / acre)

Russian River Valley land $6.1M (90K /acre)

Horse Heaven Land $ 7.8M (87 acres at 30K/acre and 524 acres at $10K/acre : initial purchase in 2005 was $3.3M)

-

total $72M

 

So for a very rough estimate of the land alone, without structures and other improvements, we can use $72M. This represents 37% of the pro-forma book value of Crimson ($197M) in the merger prospectus.

 

 

While I'm sure you've read all the information in the annual reports, it might be helpful to have selected excerpts in one place, so I've done some cut-and-pasting below:

 

 

Selected CRIMSON WINE GROUP extracts from Leucadia National annual reports, 2006-2011

 

2006

Weird file permissions keep me from copying and pasting from the discussion of wine operations in the 2006 annual report, but it starts on p. 13. Here are some notes:

 

-$70 M investment

-2006 sales of 81,000 9L cases, revenues of $19.5M

-2005 sales of 76900 9L cases, revenues of $17.8M

-Pine Ridge inventories were too high; focused on replanting and adjusting mix of varietals

-

-low 2004 harvest yields will mean lower 2007 sales.

-potential of direct-to-consumer sales

-Washington State purchase: $3.3M

 

 

From 2007 Annual Report:

 

 

Leucadia owns two wineries, Pine Ridge Winery in Napa Valley, California and Archery Summit in the Willamette Valley of Oregon. Pine Ridge was acquired in 1991 and Archery Summit was launched in 1993 on land that was previously a dairy farm. Our investment in these wineries has grown to $70 million, principally to fund the acquisition of land for vineyard development and to increase production capacity and storage facilities at both of the wineries. Pine Ridge controls 229 acres of vineyards in Napa Valley, California and Archery Summit 116 acres of vineyards in the Willamette Valley of Oregon. These vineyards are located in some of the most highly regarded appellations9 of the Napa and Willamette Valleys. In 2007, due to the vagaries of the weather and grape yields, these two wineries sold only 68,000 9-liter equivalent cases of wine generating revenues of $18.5 million versus 81,000 9-liter equivalent cases of wine generating revenues of $19.5 million during 2006.

 

In 2005 and 2006, we acquired an aggregate of 611 acres of land in the Horse Heaven Hills of Washington’s Columbia Valley, of which approximately 85 acres are currently undergoing vineyard development. The Columbia Valley is an up and coming wine region with many good wines being served to glowing reviews. We are hoping to produce several products at various price points and have the potential to develop quite a substantial business. It can take up to four or five years for a

new vineyard property to reach full production and up to three years after an initial grape harvest before the wine can be sold. Double Canyon Vineyard, the current name for this new property, celebrated its first crush this fall. We look forward to tasting the results this coming fall and winter.

 

At December 31, 2007, our investment in the Washington property was $5.9 million. The ultra premium and luxury segments of the wine industry are intensely competitive. Our wines compete with small and large producers in the U.S. as well as with imported wines. Supply and

quality depends upon the weather and size of the grape harvest. The demand for our wine rises and falls with general economic conditions and is largely affected by the ratings given the wines in industry and consumer publications. Wines are rated on a 1 to 100 numerical scale for each vintage and type of wine. The scores provided by The Wine Spectator and by Robert Parker can, and do, make or break a particular vintage and winery.

 

In the summer of 2007, two senior and experienced wine executives joined us to manage the winery businesses. Erle Martin has 20 years of experience in ultra-luxury wine brands. In 1996, he began his tenure at

Niebaum-Coppola Estate Winery, and until joining us, was President of Francis Coppola Winery. Erle is President and CEO of the newly minted Crimson Wine Group which includes both of our wineries and Double Canyon Vineyard. Patrick DeLong also joined as Chief Financial Officer. From 1999 to 2004, he was with Robert Mondavi Corporation, and in 2004 until joining us, was CFO of Icon Estates, part of Constellation Brands, Inc. These two will be a great team.

 

Stacy Clark is the winemaker at Pine Ridge. This year we celebrate her 25th year at Pine Ridge and her 20th year as the winemaker. She is the soul of Pine Ridge! Anna Matzinger has been the winemaker at Archery Summit since 2002. Leigh Bartholomew, the viticulturalist,10 has been at Archery Summit since 2000. These two are the angel brigade that has

managed to make Archery Summit a Pinot Noir recognized the world over. Recently, one of us hiked up to the top of a hill in Positano, Italy and at an osteria found a bottle of Archery Summit on the wine list to enjoy with pasta primavera.

 

 

From 2008 Annual Report:

 

Wineries

The wineries have been re-christened the Crimson Wine Group. Crimson Wine Group is composed of Pine Ridge Winery in Napa Valley, California; Archery Summit in the Willamette Valley of Oregon and our latest addition, Chamisal Vineyards, the historic name of an 82 acre vineyard that was the first vineyard planted in the Edna Valley of California.

 

We control approximately 223 acres of vineyards in Napa Valley, California, 120 acres of vineyards in the Willamette Valley of Oregon and 82 acres of vineyards in the Edna Valley of California, substantially all of which are owned and producing grapes. We believe these vineyards are located in some of the most highly regarded appellations and areas of the Napa, Willamette and Edna Valleys. At December 31, 2008, the Company’s combined net investment in these wineries was $90.8 million. The wineries sold approximately 90,000 9-liter equivalent cases of wine generating revenues of $20.9 million during 2008. Our development of an additional winery and vineyards on 611 acres of land in the Horse Heaven Hills of Washington’s Columbia Valley has been put on hold.

 

The fourth quarter brought to the luxury wine business the same carnage it brought to virtually all sectors of the economy; the consumer pull back was pronounced and dramatic. It is said that people drink in good and bad times, and perhaps that is true, but the consumer has already

traded-down to lower priced brands and products. We are looking for opportunities to compete in the new market reality and are exploring the launch of new brands which will resonate in a value driven market place. We expect to have at least one new entrant in the market in 2009. One bright spot in our wine business has been direct selling at our wineries and through our Wine Clubs. We have 13,800 members of our Wine Clubs who receive several shipments throughout the year. The Wine Clubs and direct sales from the wineries have been growing each year for several years and now account for 49% of total revenues at much better margins. We expect this trend to continue as we concentrate even more on these distribution channels.

 

After 25 years at Pine Ridge, Stacy Clark our talented winemaker has moved on to new challenges. With sadness we report that Gary Andrus, Pine Ridge’s founder, passed away earlier this year. We are very grateful to both for their contributions to Pine Ridge’s success.

 

From 2009 Annual Report:

 

At December 31, 2009, our net investment in Crimson and the Columbia Valley property was $94.8 million. In 2009, the wineries sold approximately 92,000 9-liter equivalent cases of wine generating revenues of $19.8 million. The economic upheaval did not spare the high-end wine market in 2009. In the wine salesmens’ vocabulary, “Value” replaced “Luxury”. Droves of consumers and corporate business travelers abandoned restaurants. Even those who did not, often traded their bottle of fine wine for a bottle of Diet Coke® and two straws. While total wine industry sales actually grew, the growth was solely at the lower end of the price range – wine sales above $25 per bottle slowed dramatically.

 

Selling our wine into this headwind required unprecedented marketing and discounting. We have responded by launching a new line of wines fashioned for the realities of the market – ForeFront by Pine Ridge. The ForeFront collection includes Cabernet, Pinot Noir and Sauvignon Blanc, all of which “over-deliver on quality at their price”(translates to “luxury on a budget”). Not only great value, but also very tasty. Even in good times, it is difficult to make estate wineries profitable. The entire industry suffers from a lack of discipline. The sheer number of brands combined with owners willing to sell out last year’s vintage at (or below) cost are a constant anchor on price. Estate wineries have

high fixed costs and require large marketing dollars, making volume the key profit driver.

 

We have a great management team led by Erle Martin and Patrick DeLong who have streamlined our operations while improving our wines. We now need more volume. Having started one estate winery from scratch we have seen that planting quality vineyards increases land value and may provide an inflation hedge. Durable annual cash flows may be difficult to achieve, thus the ultimate judgment on our investment will have to wait until it is eventually sold.

 

From 2010 Annual Report:

 

During 2010, the wineries sold just over 111,000 9-liter equivalent cases of wine generating revenues of $22.7 million. Crimson Wine Group started seeing some improvement in the luxury wine segment in 2010. However, value is still the catchword and most industry growth is concentrated in wines priced under $20/bottle. Heavy marketing costs (largely payments to distributors) and deep discounting delayed meaningful profits for another year. ForeFront, the line of wines Pine Ridge introduced in 2009, has been successful. 21,500 cases of our total 111,000 cases sold wore the ForeFront label. Our promise from last year’s letter, “Not only great value, but also very tasty,” was validated.

 

We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer

number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver. We need more volume to make our goal of consistent, yearly cash flows a reality.

 

 

From 2011 Annual Report:

 

 

Wineries

The Company’s winery operations are managed under the umbrella name, Crimson Wine Group (“Crimson”). Crimson is engaged in the production and sale of premium, ultra premium and luxury wines (i.e., wines that retail for $10 to $14, $14 to $25 and over $25 per 750ml bottle, respectively). Crimson is headquartered in Napa, California and owns four wineries: Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards and Seghesio Family Vineyards. Pine Ridge was acquired in 1991 and has been conducting operations since 1978, the Company started Archery Summit in 1993, Chamisal Vineyards was acquired during 2008 and has been conducting operations since 1973, and Seghesio Family Vineyards was acquired in 2011 and has been conducting operations since 1895. Crimson controls approximately 188 acres of vineyards in the Napa Valley, California, 120 acres of vineyards in the Willamette Valley, Oregon, 97 acres of vineyards in the Edna Valley, California, 231 acres in the Alexander Valley, California and 68 acres in the Russian River Valley, California, substantially all of which are owned and producing grapes. Additionally, in 2005 and 2006, the Company acquired an aggregate of 611 acres of land in the Horse Heaven Hills of Washington’s Columbia Valley, of which approximately 87 acres have been developed into producing vineyards. At December 31, 2011, the net book value of the Company’s aggregate investment in Crimson was $177,096,000. During 2011, Crimson sold approximately 212,000 9-liter equivalent cases of wine generating revenues of $36,864,000. Crimson’s wines are primarily sold to distributors, who then sell to retailers and restaurants.

 

Consolidation at the distributor and retail level has increased which has added competitive pressure to increase marketing and sales spending and constrain pricing. As permitted under federal and local regulations, Crimson has also been placing increasing emphasis on direct sales to consumers, which they are able to do through the internet, wine clubs and at the wineries’ tasting rooms. During 2011, direct sales to consumers represented 15% of case sales and 39% of wine revenues. Seghesio Family Vineyards has historically sold approximately 19% of its production to international markets, which Crimson expects to continue and expand with the export of products from its other wineries.

 

Changes to the business, from 2011 Annual Report:

 

Crimson Wine Group

In our 2009 letter, we stated “…we have streamlined our operations…now we need more volume.” And again last year, “We need more volume to make our goal of consistent, yearly cash flows a reality.” We are happy to report that on May 31, 2011, we put our money where our mouths were with the acquisition of Seghesio Family Vineyards. Seghesio was established by Edoardo Seghesio in 1895 as California Bonded Winery #56 and was one of a few out of 3,000 wineries to survive Prohibition. During the following century Edoardo and his descendants collected 299 prime Zinfandel growing acres in the Alexander and Russian River Valleys of Sonoma County, California.

 

On several fronts, the addition of Seghesio is a game changer. With annual sales of over 100,000 9-liter equivalent cases, Seghesio increases the annual volume of our Crimson Wine Group by nearly 70%. This additional volume provides Crimson with the scale and market power to improve margins and bring cash to the bottom line. Seghesio’s leading category Zinfandels perfectly complement Crimson’s Pine Ridge, Archery Summit and Chamisal portfolios, offering customers a one-stop shop for premium American wines. In seven of the last 11 years, Seghesio has produced one of the Wine Spectator’s top 100 wines, including Seghesio’s 2009 Home Ranch which was ranked #12 this year (95 points) and – sorry – is already sold out. The best way to ensure access to the 2010 vintages is to quickly join Seghesio’s wine club at www.seghesio.com. Don’t wait, do it now!

...

While we are certainly excited about our latest addition, Crimson’s other wineries continue to grow. In 2011, Crimson sold 212,000 cases, including some from Seghesio for part of the year. Highlights from the other wineries include:

 

• Pine Ridge Vineyards (188 acres) in Napa Valley, California - While luxury-priced wines continue to sail into the headwind of a difficult economy, two non-estate brands produced by Pine Ridge are thriving. Demand continues to exceed our ability to produce Pine Ridge Chenin Blanc Viognier. Despite producing 26,000 more cases in 2011 than in 2010, we didn’t have enough! The ForeFront brand was launched in 2009 as wines that “over deliver on quality at their price.” ForeFront sales continued to grow in 2011.

 

• Archery Summit (120 acres) in Willamette Valley, Oregon - A bevy of 90+ scores from Wine Spectator and Wine Advocate were awarded to our 2009 vintages, including 93s for our Red Hills, Looney, Arcus and Estate vineyard wines. Most of these tasty wines are only available to members of the Archery Summit wine club.

 

• Chamisal Vineyards (97 acres) in Edna Valley, California - Since acquiring Chamisal in 2008, 1,000 new customers have joined the wine club. Boosted by critical praise, Chamisal’s Stainless Chardonnay is experiencing significant growth. Despite these positive prospects, we experienced a significant setback in our Washington vineyards. Mother Nature reminded us again of the risks involved in this business. In 2005, we purchased 611 acres in the Horse Heaven Hills of Washington’s Columbia Valley. We chose this location because it is known to produce magnificent wine and importantly, our neighbors had not experienced a freeze event since 1973. In 2007, we planted 87 acres of vineyards that were thriving until November 24, 2010, when temperatures dipped to -7°F for ninety minutes. While we held out hope the vines could be saved, the prudent thing proved to be to prune them to ground and to essentially start over. We are told that the 2012 crop will be back to roughly 75% of a full crop … unless there is another freeze.

[racemize]

Is there no Spinoff SEC filing for this?  All I can find is that press release?

[stahleyp]

thanks race! I'm gonna check this out!  :)

[thomcapital]

Is there no Spinoff SEC filing for this?  All I can find is that press release?

 

The 10-12b is here: http://www.sec.gov/Archives/edgar/data/1562151/000093041312006541/c71848_ex99-1.htm

[motownsf]

Can't see this being particularly compelling.  Bad economics in the wine business and more areas are starting to produce it.

 

Furthermore, I know for Napa, it is very difficult to redevelop property (lot splits), so your upside is sort of capped and you are counting on another rich guy to buy the property for more in the end (which does happen, but the market is volatile).

 

We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver.

[rjstc]

Can't see this being particularly compelling.  Bad economics in the wine business and more areas are starting to produce it.

 

Furthermore, I know for Napa, it is very difficult to redevelop property (lot splits), so your upside is sort of capped and you are counting on another rich guy to buy the property for more in the end (which does happen, but the market is volatile).

 

We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver.

 

You're right about the making your money hopefully when you sell to the next guy who comes along. Kind of like boats, airplanes, and big rvs. The best days are the day you buy and the day you sell. In between you pretty much throw money at it.

  Seghesio is pretty good if you like zins. I've supported it before.

 

 

[Olmsted]

If I had to guess, based purely on qualitative factors, I would say we don't see gross mispricing when this thing starts trading.  I think LUK's shareholder base is probably a bit more value-oriented than the average company's, and will give more than a passing thought to the spinoff before deciding whether to hold or dump.  That said, I'll still be watching for something grossly under book value.

[racemize]

If I had to guess, based purely on qualitative factors, I would say we don't see gross mispricing when this thing starts trading.  I think LUK's shareholder base is probably a bit more value-oriented than the average company's, and will give more than a passing thought to the spinoff before deciding whether to hold or dump.  That said, I'll still be watching for something grossly under book value.

 

I agree.  However, this will be trading OTC, so maybe that will offset the value crowd? 

 

I've looked through the SEC filing once, and it appears that they will be pretty profitable, now that they won't buy new wineries, the LUK debt has been taken off, and they've got to a volume that they like.  I'll definitely be watching the price.

 

Has anyone looked at the 5% rule re takeovers?  They have a 2021 date (or something near there) for the provisions, but I didn't spend enough time to figure out exactly what they meant.  I'm planning on coming back to this and looking again this weekend.

[oddballstocks]

Thanks for posting about this, for some reason I've found my portfolio filled with wine related companies in the past few years. 

 

I own Treasury Wine Estates which was a winery spin-off from Fosters.  The dynamics for TWE are a little different than this, they're a global wine holding company with a diverse set of brands rather than a few vineyards in Napa.

 

I'll echo sentiment above that buying vineyards below book or replacement cost is probably a good entry point.  With TWE Fosters spent $8b building up the portfolio, then wrote the entire thing down.  After the spin investors could buy $8b worth of brands for around $2.5b.  Maybe Fosters overpaid (very likely) but did they overpay by 3x? TWE will also benefit if the Australian dollar starts to decline at some point.

 

Here's a good presentation on the industry from TWE's website: http://www.tweglobal.com/wp-content/uploads/2012/11/AnalystWorkshop_Final.pdf

 

Note that there are over 1 million producers! The industry is very cyclical as well.

[racemize]

Thanks oddball!  Have you looked over this one to have much of an opinion?  Given that it is unlisted and you have already been dealing with wine companies, I'd love to hear what you think. 

 

Maybe an oddballstocks post will pop up on my RSS?  ;)

[scorpioncapital]

Every way I look at this, this puppy appears to be coming out highly priced on a per acre basis.

 

They have 500 acres of producing vineyards. Roughly 180 in Napa, 250 in Sonoma, and the remainder here and there.

 

At the book value of $187 million, that's $375,000 per acre. That is a high price per acre. In fact, sale prices per acre for Napa are up to 200,000 (and that's the best of the best) and about 60,000 to 100,000 in Sonoma. However I saw an article saying prices go up 100% to 200% every decade since 1950.

 

However, on a cash flow basis it looks a bit better. Cash flow seems to be about $8 million, let's say 10 million annualized. I've seen estimates of roughly $10-12,000 per acre net so that is about in line.

 

I guess the book price can be justified if cash flows are optimized. What does it mean however if there is a divergence between price per acre selling prices and cash flow? Is 18x free cash flow in line for US vineyards?

 

[Olmsted]

Trading when-issued: CRSWV

[plato1976]

Hi, Guys:

 

Can you see CRSWV in your account ?

It's trading now but I don't see my CRSWV from LUK

, and no idea when they will show up :(

 

/plato1976

 

Trading when-issued: CRSWV

[fareastwarriors]

It might take a few days for your broker to reflect it.

[Hielko]

Odd are that you have to wait till it's actually issued

[Olmsted]

Yeah, if it's still trading when-issued that means it has not been distributed yet.

 

Any further thoughts on this one?  I did a 5-minute look through the registration statement.  Looks like it's priced about book value.  PE of 35, P/FCF (though I didn't try to break out maintenance capex) around 19.  Trading at a similar valuation to Treasury Wine Estates.

[oddballstocks]

I did look at this, looked long and hard and reached out to someone I know in the wine industry as well.  I'm not going to post his comments here, but the industry knowledge turned me away on this one.

 

Yes at a stats level this is trading like TWE but TWE has a much different standing.  There are over 1000 wineries in the world, but the top five in the US and top five in the world dominate production selling most of the volume.  TWE is in the top five worldwide, they have a nice portfolio of brands.

 

That's the difference from a TWE and Crimson, Crimson's brands are worthless outside of Seghesio.  This doesn't mean that the brands don't sell, but in the industry brands are considered to have resale value.  Seghesio has resale value, the others have none, so while the wine does produce sales they could not resell the brands to anyone else.

 

The CEO here is excellent which is a plus, but the valuation is high in my view.  They don't have a good history of profitability what's even more concerning is as wine demand was at all time highs in the US the company was losing money.  The wine industry is extremely cyclical, the largest players do well because they have brand power and economies of scale and the firepower to last through the trough.

 

I'd encourage anyone who's interested in this to read about the wine industry's cyclicality.  There's a great chart out there (no clue where the link is sorry) showing the marginal cost and resale potential for different classes of wine.  So for premium wines the cost to produce and sell is always lower than the resale value.  Moderate wines come close at the bottom, economy wines are the worst.  At the bottom of the wine cycle grapes and production cost more than what a cheap bottle sells for.  This is what clears the market from the startups and ones without a niche.  The big players crowd out this space at the bottom of the market in an effort to gain market share, once the minors are cleared out prices slowly start to rise again and the majors turn profits.  They have lower costs and can withstand a downturn.

 

The problem is most wineries are small operations.  The small ones that do well have niches, some sell small batches of wine at high prices.  They're not competing in the general game.  The middle market, groups like Crimson are all over the map and I think this is their problem.  They don't have premium brands and they're competing in a crowded market place, so when the cycle turns they are in trouble.

 

With that said there is a price I'd consider buying, but it's much lower than where they're at now.

 

As for the value per acre, I'm not sure that's a good metric.  My source said their vineyards are in non-ideal locations, and given a choice buyers would choose better placed vineyards, so knock down the price you're expecting on that acreage.

 

Hope this is helpful.

[jay21]

I did look at this, looked long and hard and reached out to someone I know in the wine industry as well.  I'm not going to post his comments here, but the industry knowledge turned me away on this one.

 

Yes at a stats level this is trading like TWE but TWE has a much different standing.  There are over 1000 wineries in the world, but the top five in the US and top five in the world dominate production selling most of the volume.  TWE is in the top five worldwide, they have a nice portfolio of brands.

 

That's the difference from a TWE and Crimson, Crimson's brands are worthless outside of Seghesio.  This doesn't mean that the brands don't sell, but in the industry brands are considered to have resale value.  Seghesio has resale value, the others have none, so while the wine does produce sales they could not resell the brands to anyone else.

 

The CEO here is excellent which is a plus, but the valuation is high in my view.  They don't have a good history of profitability what's even more concerning is as wine demand was at all time highs in the US the company was losing money.  The wine industry is extremely cyclical, the largest players do well because they have brand power and economies of scale and the firepower to last through the trough.

 

I'd encourage anyone who's interested in this to read about the wine industry's cyclicality.  There's a great chart out there (no clue where the link is sorry) showing the marginal cost and resale potential for different classes of wine.  So for premium wines the cost to produce and sell is always lower than the resale value.  Moderate wines come close at the bottom, economy wines are the worst.  At the bottom of the wine cycle grapes and production cost more than what a cheap bottle sells for.  This is what clears the market from the startups and ones without a niche.  The big players crowd out this space at the bottom of the market in an effort to gain market share, once the minors are cleared out prices slowly start to rise again and the majors turn profits.  They have lower costs and can withstand a downturn.

 

The problem is most wineries are small operations.  The small ones that do well have niches, some sell small batches of wine at high prices.  They're not competing in the general game.  The middle market, groups like Crimson are all over the map and I think this is their problem.  They don't have premium brands and they're competing in a crowded market place, so when the cycle turns they are in trouble.

 

With that said there is a price I'd consider buying, but it's much lower than where they're at now.

 

As for the value per acre, I'm not sure that's a good metric.  My source said their vineyards are in non-ideal locations, and given a choice buyers would choose better placed vineyards, so knock down the price you're expecting on that acreage.

 

Hope this is helpful.

 

Great post.  The wine industry is way worse than the liquor and beer industry.  Very fragmented and few successful brands (most of which compete at the premium level).  Very few players can get scale and decent margins to go with.  This would have to be extremely cheap to get my interest.  Or they would have to start allocating money away from the wine industry.  I'd rather buy a fairly priced DEO or RI than a slightly cheap wine company.

[jay21]

http://www.marketfolly.com/2013/03/crimson-wine-group-cwgl-bull-case-on.html

[scorpioncapital]

Are there any Canadian shareholders of Leucadia who received Crimson shares in the spinoff and need to make the 86.1 election to have the shares treated as a tax-free spinoff (instead of immediately paying tax as income if it is considered a dividend)? I tried to contact LUK but got no answer. The spinoff meets all Canadian requirements except one - the foreign corporation must send a package of information to CRA. I'm worried LUK may think Canada too peripheral to care to furnish this info so in which case we'd have to pay tax immediately. Any ideas?

[Grenville]

Press for Chamisal Stainless Chardonnay in the WSJ Weekend Edition.

 

"Rediscover Chardonnay"

http://online.wsj.com/article/SB10001424127887324000704578391052156604968.html

[Mephistopheles]

Does anyone know what the cost basis would be for CWGL if I sell? From the prospectus it says:

 

"Your aggregate basis in your Leucadia common shares and our Common Stock that you receive in the distribution (including any fractional share interest in our Common Stock for which cash is received) will equal the aggregate basis in the common shares of Leucadia held by you immediately before the distribution, allocated between your common shares of Leucadia and our Common Stock in proportion to the relative fair market value of each on the distribution date."

 

So I would have to divide the cost of my Leucadia purchase proportionally between the two based on the collective share price on the date it started trading? If I just go to yahoo finance and find the closing share price of each on that day, is that reliable enough?

[Gopinath]

It looks like the cost basis is based on the cost basis of your LUK stake. Scottrade calculates the cost for me  as ($6.4) on average varying from $5.7 to $7.2. I hope this helps!

[Mephistopheles]

It looks like the cost basis is based on the cost basis of your LUK stake. Scottrade calculates the cost for me  as ($6.4) on average varying from $5.7 to $7.2. I hope this helps!

 

Thank you! My broker did that too, I just didn't know if it was reliable or not. I guess it is, great!