E&J Gallo is expanding its Sonoma County portfolio, buying Asti winery, one of the largest wine producers in the U.S. from Treasury Wine Estates.

 

The deal, which includes the brand Souverain, comes just months after Gallo acquired J Vineyards and Winery in March, and is indicative of the very different business plans for two of the world’s biggest wine companies.

 

For Australia’s Treasury Wine Estates, the sale is a maneuver within in the group’s North American retrenchment plan, as the group has been having difficulty marketing its various branded wines at multiple price points, and after a deal to be bought by a partnership of private equity firms fell through last year. Ultimately, Treasury is aiming to optimize its supply chain and narrow its focus to its more premium brands of wine.

 

Under the terms of the agreement, Gallo will purchase the 535 acre Alexander Valley Asti winery property, which includes 275 acres planted with vines. The deal also includes the Souverain brand, which had sales of 80,000 cases last year – far below its sales of 220,000 cases in 2004. Treasury will also establish a long-term lease with Gallo to continue to obtain grapes from the vineyard which has been supplying the group with fruit to produce its premium, luxury wines.

 

Founded in 1881, the Asti operation is the sixth largest winery in the U.S. The operation crushes 35,000 tons of grapes per year, and has a permit to produce up to 2.5 million cases of wine. Prior to the acquisition, Gallo already had the capacity to produce 4.9 million cases per year at its facility in Healdsburg – the largest of its kind in the U.S. The property is also granted a county permit to hold up to six events per year for up to 1,000 people, and up to 30 events per year for up to 500 people, which could prove to be a valuable asset.

 

The financial terms of the deal were not released, however, planted vineyards in the Alexander Valley average between $80,000 and $95,000 per acre, meaning the vineyard could easily have cost $25 million. And although Treasury has not commented on price, the group has stated that it will be posting a loss of $7.5 million on the divestiture of the asset in its year-end earnings.