Feb. 17 (Bloomberg) -- On a crisp winter’s day in 2010, Bill Foley was exploring a troubled winery for sale in Sonoma County, California, when he was taken aback by the sight of an enclosed horse-riding ring the size of an airplane hangar.
Foley, who made a fortune selling mortgage title insurance during the housing boom, also recalls seeing a California mission-style chapel and a regulation-sized football field and baseball diamond at the Chalk Hill Estate. These extravagant structures had nothing to do with making wine and helped saddle an estate valued at more than $100 million with excessive debt, Bloomberg Markets magazine reports in its March issue.
“My wife said, ‘There’s no way you can buy this,’” Foley recalls with a mischievous grin.
Foley, 66, did buy Chalk Hill in June 2010 for an undisclosed price well below its peak valuation. Now, it’s the flagship of his burgeoning viticultural business, which produces more than 1 million cases of wine a year and stretches from California to Washington state to New Zealand.
Foley is hunting for more distressed wineries along Napa Valley’s fabled Route 29 and in the pinot noir-laden vineyards of Oregon’s Willamette Valley.
“I’m not even close to being big enough,” says Foley in a mellow voice that bears the twang of his childhood home in the Texas Panhandle.
The wealthy have long come to California’s wine country to indulge in the pleasures of the grape. While many are content to lord over one luxury estate, Foley is gambling he can become a commercial force in a wine industry that is struggling with stagnant sales.
After jumping 37 percent from 2002 to 2007, sales of California-made wine have been flat at about $18 billion for four straight years as consumers drink less expensive brands in economic hard times, according to the Wine Institute, a San Francisco-based trade group.
Debt-laden producers have sold their operations at deep discounts. In April, Southbank, Australia-based Foster’s Group Ltd. spun off its wine division at a $2.5 billion valuation after spending $7 billion building it into a global player with Napa-based Beringer Vineyards and other brands.
In exploiting the shake-up, Foley has emerged as the most ambitious individual empire builder in the wine trade since the late Jess Jackson developed chardonnay powerhouse Kendall-Jackson Estate Wine Ltd. in the early 1980s, says Mario Zepponi, a principal at Zepponi & Co., a Santa Rosa, California-based mergers and acquisitions advisory firm.
Foley’s fortune tops $153 million, according to data compiled by Bloomberg. Since 2007, he has spent more than $200 million of his own money and credit on 12 wineries with more than 20 labels.
“Nobody really knew who this guy was, and then all of a sudden, he was making deals,” Zepponi says. “He’s been one or two steps ahead of everyone else.”
Foley’s properties range from Sebastiani Vineyards & Winery, a Sonoma-based producer of $25 reds and whites, to Merus, a Napa cult winery that sells its silky cabernet sauvignon for $135 a bottle. His holding company, Foley Family Wines, recorded $15 million in earnings before interest, taxes, depreciation and amortization on about $100 million of sales in 2011.
More buyers are now joining the hunt for undervalued wineries. In March 2011, Chilean producer Vina Concha & Toro SA paid $238 million, double Foley’s bid, for Sonoma County-based Fetzer Vineyards, which makes 2.2 million cases annually.
And French entrepreneur Jean-Charles Boisset has spent almost $40 million in the past three years to build his own California wine domain with the acquisitions of Raymond Vineyards in Napa and Buena Vista Winery in Sonoma. In 2010 and 2011, two dozen wineries changed hands in California in a record spate of acquisitions, Zepponi says.
In storming the wine business, Foley says his private-equity-style deal-making will tame an inefficient industry. From 1984 to 2007, he transformed a Phoenix storefront operation called Fidelity National Title Inc. into the No. 1 U.S. mortgage title insurer by acquiring more than 50 firms and absorbing their market share and customers.
Now, he wants to do the same in wine, a fragmented market teeming with more than 7,600 producers in the U.S. alone. In every winery deal, Foley has shunned short-term debt in favor of using 25- or 30-year loans and then capped his leverage at 30 percent of his invested capital.
He favors aggressive lowball bids. In 2010, he pursued a prestigious New Zealand pinot noir producer called Te Kairanga with a book value of $20 million. Foley got it for $8 million.
“I’m not doing anything I haven’t already done,” Foley says with a shrug. “You buy companies, collapse the back office, keep the front office and enhance the marketing and sales programs.”
Foley is betting that a combination of greater wine volume and improved branding will elevate his labels in a market flooded with them. After every acquisition, Foley pumps his new wines into his existing distribution channels to stores and restaurants.
He says he must add cases to get more clout with distributors, who choose which wines to showcase for retailers and which to shunt off to the back of the warehouse. So he’s hunting for farms in California’s Central Valley to produce more wine for his many labels and for brands already popular with consumers.
Foley is still kicking himself for letting a Central California producer called Four Vines Winery get snapped up by another suitor in 2010 for an undisclosed bid. Priced below $20 a bottle, the winery’s Naked Chardonnay and zesty zinfandels are a smash with budget-conscious buyers, and the winery produces about 100,000 cases annually.
“That’s the kind of thing I’m looking for, something that’s got some pull to it and distributor relationships,” Foley says. “I’ve got to find one like that.”
Foley became smitten with the vineyard life in the mid-1990s after moving to Santa Barbara and discovering the nearby Santa Ynez Valley, a savannah of oaks and ranchland nestled between coastal hills that’s ideal for growing the finicky pinot noir grape. In 1996, Foley bought a 30-acre (12-hectare) winery there and dubbed it Lincourt after his daughters, Lindsay and Courtney.
After every harvest, Foley visits with the vintners on many of his properties as they blend different batches of juice into a wine ready for aging. Camille Benitah, the Bordeaux-born winemaker at Merus, says Foley relishes being in the barrel room and exploring how to balance earthiness, acidity and fruit into an elegant cabernet sauvignon.
A Grand Improvisation
“He is very humble about it,” says Benitah, sampling a 2007 Merus with a nose of pipe tobacco and a long blackberry finish. “He lets us work, and he sees we are creating something special, something we won’t compromise, and he loves to see it happen.”
As a venture that blends agriculture and selling luxury goods, making wine has broken the hearts and bank accounts of many would-be vintners. Foley’s moves appear to be a grand improvisation rather than a carefully plotted campaign, says Vic Motto, chairman of Global Wine Partners LLC, a St. Helena, California-based investment bank.
Foley not only wants to be both a mass-market producer and the proprietor of fine wine boutiques; he even muses about opening a luxury hotel in the Napa Valley. Motto says Foley’s rapid accumulation of properties is unorthodox in a business where vintners favor building a wine group organically over many years.
‘No Master Plan’
“We’ve never seen anyone using his own capital to buy distressed assets and then try and put them together into a working unit,” says Motto, a 30-year Napa veteran. “He will have to do a lot of work to accomplish that.”
Seated at a round table in his Chalk Hill office and tapping a stack of business cards from wine industry contacts with his finger, Foley seems more amused than stressed by the challenges before him. Dressed in blue jeans and wearing his snowy hair long, he’s a cheerful man who pokes fun at himself.
When told that vintners in Napa wonder what his strategic objective is, he guffaws. “They give me too much credit!” he says with a high-pitched giggle. “There is no master plan.”
Underneath his avuncular exterior lies a steeliness borne of years of deals in the mortgage industry, says Thomas Hagerty, his friend and a managing director at Boston-based buyout firm Thomas H. Lee Partners LP. He says Foley is skilled at finding troubled companies, stripping out valuable assets and integrating them into his own group.
In 2010, Foley was eager to improve sales at Firestone Vineyard, a Santa Ynez producer of $20 reds and whites he bought three years earlier for $50 million. The problem was, its tasting room was located in Paso Robles, a viticultural area an hour’s drive north of Santa Ynez.
So Foley bought a Paso Robles-based producer called Eos Estate Winery out of bankruptcy and converted the Firestone tasting room into an Eos showcase, appealing to visitors who prefer locally produced wines. Sales at the tasting room quickly doubled, he says.
“Bill has a deep understanding of financial risk and operational risk, and it’s rare to see those two skills in one guy,” Hagerty says. “He does love wine, but he’s not a hobbyist. He’s in this to build a first-class business.”
Foley graduated from the U.S. Military Academy in West Point, New York, in 1967 with an engineering degree and then switched from the Army to the Air Force, serving four years and earning the rank of captain. He went on to receive a Master of Business Administration at Seattle University and a law degree from the University of Washington.
After moving to Phoenix and working as a real-estate lawyer, he took control of Fidelity National Title in 1984 through a leveraged buyout. The company, which protects mortgage lenders from losses in the event a home seller lacks clear title to a property, had $6 million in annual sales and was then the No. 92 title insurer in the U.S.
By March 2000, Foley had renamed the company Fidelity National Financial Inc. and had made it the No. 1 mortgage title insurer after acquiring archrival Chicago Title Corp. for $1.1 billion.
The following year, Foley launched a subsidiary called Fidelity National Information Services Inc. that sold data-management software to mortgage companies. He catapulted the venture into a market leader in 2003 with the $1 billion purchase of the financial services arm of Alltel Corp., which serviced almost half of the home loans in the U.S.
In 2006, he spun it off in an offering that created $7.6 billion in market capitalization. The total value of Foley’s stakes in both his companies soared to $454 million in 2007.
As subprime mortgages started defaulting en masse, Foley stepped down as chief executive officer of Fidelity National Financial in May 2007. He gave up day-to-day management just as the firm’s fortunes were undermined by the housing crash: Net income at the company slid to $130 million in 2007 from a peak of $964 million in 2005, and in 2008 the company lost $179 million. Foley, who remains chairman, says that after 23 years in title insurance, he wanted to spend more time playing golf and tending to his vineyards.
Rather than ease into semiretirement, Foley had to overcome distribution problems at his fledgling wine business. Two years after setting up Lincourt in 1996, Foley bought a 460-acre Thoroughbred ranch nearby and planted it with pinot noir and chardonnay grapes. He dubbed it Foley Estates. He says both wineries, in which he’d invested $18 million, were headed for disaster as unsold inventory piled up.
Elegant and Complex
“I wanted to learn how you make wine, and I’d sunk all this money into it,” Foley says. “And I’m like, ‘God, I have to do something. I’ve got 20,000 cases of wine from last year, and this year I’m going to have another 25,000, and I’m selling 2,000?’ It was hilarious.”
Determined to make inroads with distributors, Foley bought Firestone Vineyard, which produced 140,000 cases a year in Santa Ynez Valley. The next year, he acquired Sebastiani, a 109-year-old winery that epitomizes California’s Italian winemaking roots and cranks out 250,000 cases a year.
In early 2010, Foley cast his eye on Chalk Hill. Cobbled together from 13 parcels over 38 years by San Francisco plaintiff lawyer Fred Furth, it emerged as a premier label that delivered elegant and complex wines for about $50 and up.
By the time Foley arrived, its high-alcohol reds and whites had lost suppleness and cachet and were no longer selling like those of Frog’s Leap, Cakebread Cellars and other peers, says Kerrin Laz, wine director at Dean & DeLuca Inc., a chain of gourmet grocery emporiums based in New York.
“All those wines still maintained relevance,” she says. “Chalk Hill did not.”
During harvest in early fall, Foley saw how difficult his new career could be when unseasonal rains drenched Sonoma just as the grapes were reaching peak ripeness. The moisture caused a countywide outbreak of botrytis, a gray fungus that spoils grapes, and Chalk Hill lost about half of its chardonnay crop. The development raises concerns about the 2011 vintage’s volume.
“If you run out of product and lose shelf space, somebody else will get that slot,” says Mark Lingenfelder, Chalk Hill’s vineyard manager.
Foley takes the news in stride as he visits with guests of the estate on an October afternoon. He says the Chalk Hill brand possesses prestige to build on, and thanks to his deals, he’s finally getting his labels onto the shelves of mass-market retailers such as BevMo Inc., a 114-store chain in California and Arizona.
Apples and Nectarines
A glass of Chalk Hill’s 2009 chardonnay is placed in front of Foley. The scent of apples and nectarines wafts from the wine. One of his guests compliments the estate’s Olympic-sized equestrian ring and asks whether Foley rides horses. He shakes his head and says he’s a cyclist.
“I was thinking of going this afternoon,” Foley says, swirling his wine. “But now I’m going to drink this chardonnay.”