True Worth

With the recent sale of Lanson and questions hanging over the ownership of Taittinger, Malcolm Davis considers how to put a price on such luxury brands

The Champagne business, most recently featured in enthusiastic terms in db’s Champagne Report last month, would seem to be one area where generating decent cash flow and margins hardly troubles the sleep of the owners and producers in this most prestigious of markets. Certainly LVMH, with its stable of top brands, is in a regular position to announce good results (although, notably, its margins on Champagne run well below those on Cognac). But what of the others?

Marne et Champagne Diffusion, whose key brand is Lanson, was forced to go to its banks for help in 2004, reportedly because of problems in paying its grape suppliers. Caisse d’Epargne received a 44% stake in exchange for €38 million and extended a line of credit of €410m. One year later the loss was €10m and debts were at €420m. Consequently the business was put up for sale and, in January, smaller rival producer Champagne Boizel Chanoine completed the acquisition. Boizel was the only bidder left, backed by Crédit Agricole and SNCB, and the price paid undisclosed – possibly to spare the vendor’s blushes.

By the time of this issue going to press, the future ownership of Taittinger may also be clear. Last year Starwood, a US group with extensive hotel holdings, took over Société du Louvre, a luxury goods conglomerate owned in part by Taittinger family interests and including such properties as the Hôtel de Crillon, Baccarat and, of course, Taittinger Champagne.
Extracting the value placed on Taittinger in this deal is not easy, but suggested estimates place the expected asking price at between â‚¬500m and €600m, or six times annual turnover. In this case there would also seem to be only one potential buyer, the Taittinger family, which (one assumes) has a good idea of the present and potential value of the business.

But why are there so few bidders for such prestigious brands? In the case of Taittinger, placing a valuation on the business is aided by clear guides to the value of its fixed assets – primarily vineyards, property/plant and stock in bottle and vat – plus a track record of sales and profitability against overheads, as well as a knowledge of the price of contracts agreed with growers supplying grapes or juice. Perhaps, then, there is the extra factor of Taittinger family confidence in carrying the brand forward, and a tolerance of the timescales needed to reach certain key objectives.

Lanson poses a different set of problems in its valuation as a brand. Possessing no vineyards of its own, its fixed assets consist of maturing bottle stock and the quality of its grower contracts which have to be renewed regularly in a highly competitive environment. As a major brand in many markets, it enjoys continuing demand. But in a cutthroat marketplace where promotion and pricing are fierce, it would be easy to lose vendor interest and market share.

As a further complication, Champagne’s appellation laws are much more demanding than rules imposed in other wine regions. Minimum ageing requirements mean producers carry somewhere between 24 and 36 months’ worth of stock in their cellars at any time. Add to this the need to pay progressively over the course of each year for grapes purchased at every harvest, and the vital importance of good cash flow becomes all too obvious.

New models
Given these scenarios, in particular the Lanson one, it seems likely that a brand valuation (as distinct from the business in which it resides at any one time) would prove difficult for most standard financial models. New, proven models are now being used for arriving at an understanding of true brand value.

The relief from royalty methodology, for example, which explores the drivers of value, is based on commercial reality and combines robust financial analysis with in-depth brand and market analysis. With this appreciation of
brand value, vendors could communicate more effectively its true worth, which would be reflected in the price. If this was the case, perhaps we could look forward to vendors being able to attract a wider field of interested bidders, rather than just one. db  April 2006

Malcolm Davis is a director at Intangible Business, the brand valuation, strategy and development consultancy.