Vintage Deal

Seagram's buys Coke's wine

Coca-Cola's latest annual report contains a two-page picture of a family simultaneously enjoying the company's products. They are drinking Coca-Cola, Tab and Sprite, pouring Minute Maid orange juice and sipping wine, while watching the Columbia Pictures movie Tootsie. If that scene is re-created next year, something will be missing: the wine. Last week Coca-Cola (1982 sales: $6.2 billion) announced plans to sell its wine business to distiller Joseph E. Seagram & Sons for more than $200 million in cash.

When Coca-Cola began selling wine in 1977, the industry expected its consumer-marketing savvy to propel its brands to the top. Beginning with the purchase of Taylor Wine in New York State, it created a division called the Wine Spectrum and then added the West Coast's Sterling Vineyards and Monterey Vineyard to its basket of wines. Coca-Cola shook up the industry with an advertising campaign boasting that its Taylor California Cellars was preferred to competing brands, which it identified by name. Sales grew smartly, up 17% last year.

But that was not enough for Coca-Cola Chairman Roberto C. Goizueta. Even though the Wine Spectrum had 6.3% of the market for domestic wines, it showed no signs of cutting into the lead of durable E. & J. Gallo Winery, which commands 27.7%. Privately held Gallo was reducing prices and boosting advertising to maintain its market share. Making matters worse for Coca-Cola, demand for wine was slack during all of last year and the first quarter of this year. While Coca-Cola earns a return of 10% to 15% on soft drinks and about 10% on Columbia Pictures, the return on its wine business was below 5%.

At the same time that Coca-Cola was thinking about getting out of wines, Seagram's (fiscal 1982 sales: $2.8 billion) was trying to figure out how to expand its wine business, which includes the Paul Masson brand. Its distilled liquor sales have been flat or falling, in part because Americans are drinking more wine. Former Bendix Executive Mary E. Cunningham, who joined the company in 1981 as a vice president of strategic planning, presented a report last year suggesting that Seagram's could reap larger profits in wine. The study mentioned three potential acquisitions, one of which was the Wine Spectrum. When Seagram's began hearing industry talk that the Wine Spectrum might be available, it approached Coca-Cola to express its interest. After the formal offer was made on Sept. 19, the deal was swiftly wrapped up at New York City's Regency Hotel. The acquisition of the Wine Spectrum instantly propels Seagram's into the No. 2 position in domestic wine, with 11.2% of the market.

Industry watchers generally approved the move. Said Kidder, Peabody Analyst Roy Burry: "Combined with its already substantial wine interests, the buy will give Seagram's the critical mass of volume needed to market and distribute wines effectively." Paying off Coca-Cola will not be difficult. Seagram's plans to pay the $200 million purchase price in part with $120 million in annual dividends from its 50.3 million shares of Du Pont stock; the distiller acquired most of its 21% stake in Du Pont, now worth $2.6 billion, as a result of the 1981 battle to take over Conoco.