Revisiting the Mondavi IPO Story

Our class discussion on The Robert Mondavi Company IPO last week provided some interesting perspectives on the challenges of a public offering for a wine company, particularly one that is family owned and controlled. Jack and Karl examined this a little further in Jack’s blog post, “Wine and investing” (Jan. 18). However, I found myself wondering whether we were missing any other important factors in discussing Mondavi’s rocky start as a public company.

As the HBS case mentioned, the stock was in a fairly constant decline following its June 10, 1993 IPO (priced at $13.50 per share). It eventually settled by mid-August in the $8-9 per share range. Why did this decline take two months? Many of the issues we discussed focused on the inherent issues of a wine company existing as a public company, which investors should have understood prior to the IPO. Other concepts that we discussed, such as a mis-priced IPO (too much “hype”), presumably would have led to a more immediate correction in the stock price, not one drawn out over 8-10 weeks. The limited public float, dual-class structure, and my lack of understanding of equity capital markets in the early 1990s (or today) make this a difficult stock to analyze, but I looked into a few things to see if we were missing any pieces to the story:

• Was the broader market also experiencing pressure in this time period? The S&P and NASDAQ indices were flat to up over this period, which suggests that there weren’t broader market pressures contributing to Mondavi’s decline. However, I was able to pull data for one of the other public wine companies that the case mentioned, The Chalone Wine Group. Its stock price was down around 20% over the period relative to Mondavi down about 35-40%. This suggests that there may have been news or investor sentiment issues affecting wine companies as a whole.
• Was there any major news about Mondavi in that period? Precipitous stock declines can sometimes be linked to company press releases or other media reports about a company. Mondavi did release earnings in this period. There also seemed to be some negative media coverage, including a New York Times article headlined “A Pestilence in the Vineyard Is a Plague on Mondavi Stock” and negatively concluding that “folks looking to make money from Robert Mondavi might instead try a direct investment: forget the stock; buy the wine” (10 Aug. 1993). However, it’s difficult to link the stock’s general decline to any specific announcements or events. In fact, over this time period (from IPO to mid-August 1993) there were 12 days in which the stock fell more than 4%.
• What were the analysts saying? Research analysts can provide perspectives on factors influencing a stock price. C.J. Lawrence, a subsidiary of Deutsche Bank, initiated coverage on Mondavi in September 1993. It described that “the most misunderstood factor of the IPO and subsequent market for Mondavi shares has been the infestation of phylloxera in the Napa Valley.” As the HBS case described, this issue had surfaced prior to the IPO. However, the C.J. Lawrence report described that the company was still in the middle of a multi-year plan to address the phylloxera infestation, the financial implications of which created a lot of uncertainty in the market. This analyst’s perspective was that despite the near-term financial pressures from replanting, there were actually some upsides including the ability to implement new viticulture techniques (new industry views on crop placement and leaf canopy training) and the opportunity to upgrade “the product mix by planting more valuable varietals” (consumer preferences were shifting toward reds, some of which were now known as better suited for Northern California).

Our informative class discussion and some more insight on the phylloxera issue provide helpful frameworks to understand the two-month stock price decline following Mondavi’s IPO, even if it’s difficult to pinpoint exactly what went wrong. It’s also interesting to note that if an investor had believed in the long-term value of Mondavi and its leadership in a growing industry, he or she would have realized a very attractive return over Mondavi’s life as a public company. An investment at $13.50 per share in June 1993 held until Constellation’s December 2004 purchase of the company would have resulted in a nearly 13% annualized return.

Sources: Capital IQ, Factiva, Thomson One (GSB library subscriptions); New York Times; C.J. Lawrence research report, “Robert Mondavi Corp.”, 30 Sept. 1993.