Seeking to case its dependence on bank credit lines, the Robert Mondavi Winery plans to go public and turn over the proceeds from the stock sale to its lender, Bank of America.
In a preliminary prospectus, Mondavi - one of the country's leading producers of premium wines --said its existing credit line with B of A would be replaced with a smaller facility from the bank on more favorable terms.
The offering, though, comes at a perilous time for the capital-intensive wine industry, particularly for wineries in California's famed Napa Valley, where Mondavi is located.
Bug Invasion Threatens Vines
Phylloxera, a bug that feeds on the roots of grapevines, has invaded the valley, including 745 acres of Mondavi vineyards.
If the Mondavi offering falters, it could spell trouble for other privately owned wineries, for which the availability of capital has always been a concern. "I think everybody connected to the wine industry is watching this," said a banker of the Mondavi offering.
Standard & Poor's Corp. analyst Robert Natale, who follows new equity offerings, said the strength of the Mondavi name will probably carry the deal.
A 'Flip' recommendation
But he does not think initial investors should hold the stock for long.
"We recommend flipping it," Mr. Natale said. In the initial prospectus, dated May 12, Mondavi said 2.7 million common shares would be sold by the company, and another million shares would be offered by selling shareholders, at an estimated price of between $13 and $16 a share.
Assuming the stock is sold at the midpoint of that range, net proceeds would amount to about $35 million, Mondavi said in the prospectus.
Mondavi would use the proceeds to repay a big chunk of its outstanding bank debt, which totaled $55.3 million at March 31.
After the payment, the old line would be replaced with a new $45 million credit line.
Higher Taxes Could Pinch Profits
In addition to the phylloxera infestation, which could spread beyond Napa Valley, the wine industry is plagued by a host of other problems, including a threat of yet higher federal excise taxes, which could erode earnings in the highly competitive premium wine business.
Despite these problems, bankers at B of A said they aren't cutting back on providing credit to the industry.
"We understand the risks and feel we can evaluate which is the well-managed winery," said Alan Clifton, a B of A regional vice president in Santa Rosa.