Sour Grapes Over Jewish Agency's Favored Carmel Winery Bidder?

Eyebrows are raised after the Jewish Agency, who had a member participate in a Kedma investor consortium, opt for Kedma despite Neopharm's offer of 5% more money.

Carmel Winery, the history-laden vintner founded in 1882 by Baron Edmond de Rothschild, was sold last week to a group of American, French and Israeli investors even though their bid was 5% less than the top offer.

Carmel’s shareholders, which include the Jewish Agency for Israel and the winegrowers who supply the grapes to the iconic winery, voted overwhelmingly in favor of a NIS 130 million bid from a consortium led by Kedma Capital, even though the pharmaceutical company Neopharm, which is owned by David Fuhrer, was offering NIS 6.5 million more.

Fuhrer had also offered the winegrowers who are to remain shareholders in Carmel a 5% bonus beyond what they were getting from Carmel for the grapes they sell it.

In addition to price, other factors in the selection of the successful bidder included the quality of the bid and the potential of the new owners to develop the business. The growers may have preferred Kedma’s offer because Neopharm conditioned its bid on Carmel’s wines being marketed through Promedico, Neopharm’s sales and distribution arm, rather than sticking with Carmel’s independent distribution network.

Not apparent

But the winegrowers’ preference for the Kedma group and the retention of Carmel’s current independent distribution network was not apparent in advance. When control of the Barkan Winery was acquired by Tempo Beverages, the Israeli bottler of Pepsi and brewer of Maccabee Beer, distribution was transferred to Tempo’s larger network. Barkan went from an operating loss of NIS 5.6 million on revenues of NIS 116 million in 2004, the last year under the old system, to an operating profit. In 2011, Barkan operating profit reached NIS 22.5 million on revenues of NIS 154 million.

But the role of the Jewish Agency in the decision to favor the Kedma bid has raised eyebrows in light of the fact that a member of the agency’s board of governors Pierre Besnainou, a French Jewish leader and owner of the French food retailer Fauchon is also a partner in the Kedma investor consortium. The Jewish Agency owns 12.5% of Carmel.

The investor group plans initially to buy a 35% stake in the Carmel Winery for NIS 45.5 million. The stake is owned by winegrowers who have agreed to divest their holding in the winery in return for bonds. The Kedma group could increase its stake to 47.5% if the Jewish Agency sells its stake at the same NIS 130 million valuation as the rest of the winery.

In addition to Besnainou, the winning consortium includes the Jesselson family of Israel, who previously had a stake in coffee and confectionaries maker Elite, now a part of the Strauss group, and the Schottenstein group of Columbus, Ohio, whose retail holdings include the U.S. supermarket chain Albertsons and the American Eagle Outfitters apparel chain. Other members of the Kedma group include Leo Noe, a former controlling owner of the real estate investment company British Israel Investments, and Remo Ben Shushan, who owns a 50% share of Marina, which grows and distributes mushrooms, sprouts and spices in Israel.

Last week’s approval of the Kedma group’s bid was the culmination of a six-month process. The Carmel Winery board approved the selection of the consortium led by Kedma Capital in mid-January. The deal was sealed after subsequent approval, by a 90% margin, by the winegrowers.

Roy David of Poalim Capital Markets, which arranged the bidding process, said the Carmel sale was triggered by the winegrower group’s need to raise NIS 25 million in cash to pay off the bonds due in May that were issued to growers who had earlier divested their stake in the winery.

Rising valuation

David said competition among bidders nearly doubled the winery’s valuation, which jumped from NIS 70 million to NIS 130 million. It also enabled the winegrowers who remain as shareholders in Carmel to improve their position through written agreements, such as Carmel’s commitment to buy their grapes. It also gives the winegrowers the right to bail out of the business at intervals of five, 10 and 15 years.

Kedma Capital’s Gilead Halevy, who will serve as chairman of the winery, said the new investor consortium has no intention of laying off staff, even as it takes steps to make operations more efficient. The winery’s operations in Zichron Yaakov will be expanded and the one in Rishon Letzion will be sold for its real estate. Indeed, without selling the Rishon Letzion property, the NIS 130 million valuation for Carmel would have been overpriced.

Halevy said Kedma would follow the strategy laid down by the late Carmel CEO Israel Ivzan, who died earlier this month. That strategy focuses on two engines of growth: exports and sales to hotels and restaurants.

Carmel’s exports have lagged because of the winery’s weak finances, which make it difficult for the winery to extend retailers credit. Exports account for just 6% of sales, or NIS 12 million, compared with 16% for Barkan, which is traded on the Tel Aviv Stock Exchange.

Halevy says Carmel will focus its export drive on markets in France, the United States and Britain. At hotels and restaurants, Carmel’s presence has been modest in recent years because its reputation and market position diminished over the 1990s and the early part of the last decade.

In addition to sales and profitability, another method of regaining Carmel’s image is through its two premium brands: Kayoumi, a winery in the Upper Galilee’s Ramat Dalton that was built to serve vineyards planted in 2004, and Yatir Winery, founded in 2000 and based in Tel Arad, in the northeastern Negev. Increasing the sales from those wineries would boost both Carmel’s overall profitability and local market shares.

courtesy
Eyal Toueg