Butterfly Equity, guided by its mantra of turning caterpillars into butterflies, spent nearly $2 billion to see just how high a certain duck could soar – or something to that effect.

The Beverly Hills private equity firm, which specializes in middle market food and beverage investing across the whole supply chain, bought The Duckhorn Portfolio, a collection of premium and luxury wine brands, in a deal that closed just before the new year.

Looking to continue efforts that have led to Duckhorn’s success as well as spearhead a number of growth initiatives, Butterfly hired Robert Hanson as the new chief executive of Duckhorn.

Hanson, who most recently served as head of Constellation Brands’ wine and spirits business, pointed to Duckhorn’s ability to thrive despite the wine industry at large being in turmoil in recent years.

“What attracts us so much about this portfolio is its proven ability to compete in the right segment of the market,” Hanson said. “…While wine in general has been a bit dislocated recently, the (market for) $15 and above bottles … has grown about 7% over the last 12 years, and this portfolio has contributed to about 30% of that total growth.”

This take-private transaction – valued at $1.95 billion or $11.10 per share – is on the larger end of Butterfly’s typical deals, Adam Waglay, co-founder and co-chief executive of the company, said, adding that the lower end of Butterfly’s deals was in the $100 million to $200 million range.

Butterfly spans the entire food chain supply and describes itself as “seed-to-fork,” meaning it invests in companies focused on agriculture, distribution, ingredients and packaging in addition to food and beverage brands and restaurants. 

“Because we’re vertically integrated and systemic investors in food, we understand upstream, midstream and downstream food … (which) creates value across that whole supply chain,” Waglay said.

Anthony Aaron – director of the USC SEC and Financial Reporting Institute who worked in financial analysis for decades across various industries including wineries – spoke to the benefits of private equity firms with specific niches.

By familiarizing themselves with the particular issues faced by their focus industry, Aaron said firms “can understand investee challenges and needs and respond quickly and decisively with resources such as filling management personnel needs, capital infusion, etc.”

When determining which companies Butterfly takes under its wing, Waglay said it’s a “methodical process,” digging into a target sector, a lucrative sub-sector within that and then finding the best asset in that market.

Waglay sees the firm as a “transformational and operations focused” quasi-strategic providing more than just monetary value to its portfolio companies. And Duckhorn will be no exception.

Innovation, distribution and sales targets

Duckhorn comprises four core brands – Duckhorn Vineyards, Kosta Browne, Decoy and Sonoma-Cutrer – and seven smaller brands or “little ducks,” as Hanson put it.

A big push for Duckhorn’s growth strategy will be getting these ducks in a row as Hanson said a number of them have high, unrealized growth potential.

“(We’ll be) putting a priority on a number of little ducks in the portfolio that are really distinctive in terms of the quality of the wines they produce, geographies they’re from and the price segments that they compete in,” Hanson said.

Hanson would like to see more of Duckhorn’s brands growing at the same pace as the Decoy brand, which has put consumer behavior at the forefront of its offerings through its lower alcohol content “Featherweight” collection and seasonal wine offerings in addition to its staple bottles.

“This portfolio has leaned into meeting the consumer on their field and on their terms,” Hanson said.… “People are drinking higher quality wines at lower quantities and that plays strictly into the premiumization trend of this portfolio.”

In addition to innovating brand offerings, another growth avenue for Duckhorn is distribution. Recently, Duckhorn renegotiated its contracts in the U.S. with new distributors, primarily Republic National Distributing Company and Breakthru Beverage Group in a move that “secured well above market rate growth commitments from their distributors,” Hanson said.

Once Butterfly accelerates Duckhorn’s organic growth, Hanson sees it as a platform for mergers and acquisitions.

Another part of championing organic growth is through enhancing the portfolio’s direct-to-consumer and international sales which account for 12% and 6% of sales, respectively.

“For a portfolio of this quality, those should be significantly higher,” Hanson said.

Increased direct-to-consumer sales can be a game-changer and “are often viewed as the most profitable aspect of the wine business,” Aaron said. 

This is because these sales allow brands to avoid the costs associated with the United States’ three-tier alcohol distribution system – producer, wholesaler, retailer – Aaron said.

Thus, Butterfly is confident that these initiatives in addition to a refined capital allocation strategy will prove successful. Duckhorn is able to pivot away from the capital-intensive nature of the wine industry because 90% of its grapes are third party sourced.

“It’s an asset light, high return on invested capital focused business,” Hanson said. “You have a beautiful portfolio competing in the right segments of the market, plenty of organic growth potential, as well as extensions into critical channels in distribution and great innovation plays.”

From public to private

As a part of this acquisition, Butterfly took Duckhorn private in December after it had been trading on the stock exchange since March 2021. In the two years leading up to the announcement of the Butterfly deal on Oct. 7, Duckhorn’s stock had been slowly but steadily declining before reaching an all-time low close price of $5.40 on Oct. 3, eventually jumping to $10.95 at closing on the day the transaction was announced.

Hanson believes the company is best poised for success in the private market.

“It really was a dislocated public company,” Hanson said. “It was frankly a size that was probably too small for material public investors to be dramatically focused on.”

While Aaron said he refrains from placing limits on who can succeed in capital markets, he acknowledged that for an alcoholic beverage company like Duckhorn, securing large institutional investors could be a challenge given the competitive landscape of big players.

Being private can also free up some capital, with companies saving on annual SEC registration fees, accounting fees and stock exchange listing fees, Aaron pointed out. Plus, it could potentially minimize the extra labor costs of producing public press releases and quarterly reports.

In being beholden to public shareholders’ expectations and the demands of quarterly earnings reports, public companies may not always have the chance to explore longer-term strategies, Hanson said.

Aaron echoed this point, noting that the strict time schedule a public company must adhere to can be “restrictive” at times and create friction based on expectations.

“Public companies often provide guidance on quarterly and annual performance to analysts and to the investing public,” Aaron said. “If that guidance together with analysts’ expectations are not met, many companies believe that their stock prices suffer – perhaps disproportionately – because of the short-term nature of the guidance.”

That said, while being private can allow for longer-term thinking, it also lends itself to quicker action in that there is less regulatory oversight and outside pressures.

“There’s frankly a superpower that I think exists, both within the portfolio as well as within Butterfly, which is agility to take advantage of opportunities and to work at the pace of the market and meet the consumer/customer on their playing field,” Hanson said. “And that isn’t at all distracted by being a public company where you can be forced into having a shorter-term framework of mindset.”