But there's another way to invest in wine: buy shares in a producer. In the UK, there are two tiny companies to choose between, and - as a bumper harvest approaches - both are currently looking for new investors. Our retail and beverages writer Julia Bradshaw and I spent a late summer's day in Kent this month visiting the vineyards and discussing the fundraisings. We took a video camera with us to document this fascinating excursion into the world of micro-cap investing. Julia's webcast will be published on the site shortly.
Chapel Down is one of the two largest winemakers in the country (the other being Nyetimber). Its equity is listed on ISDX, an exchange run by ICAP (IAP), but - oddly - it is raising money through Seedrs, a crowd-funding platform for small companies. That it is the first UK-listed company to use this channel is testimony to the sophistication of its marketing operation. Chief executive Frazer Thompson, who used to be global brand director at Heineken (Ne: HEIA), makes little distinction between investors and customers. In fact, he deliberately blurs the distinction by giving shareholders a 33 per cent discount on the company's wines. What he wants above all is "pilgrims" to spread the Chapel gospel.
At the time of writing, Seedrs had already gathered almost all of the £4m sought by Chapel Down. The money will go towards various projects: the planting of recently leased land, the expansion and improvement of the production facilities, even the construction of a brewery to cement the company's recent diversification into beer.
The shares are not obviously cheap. For the current fundraising, which offers investors 30 per cent tax relief under the Enterprise Investment Scheme, they are being priced at 28p, giving the company a market capitalisation of £24m. It made pre-tax profit of just £68,000 last year, suggesting a triple-digit earnings multiple. Yet the 2013 financial year reflected very poor harvests in 2011 and 2012, which kept wine volumes low. Last year was much sunnier, leading to a record crop, and this year is expected to be even more bountiful, so earnings should rebound dramatically.
A more useful valuation tool is the company's balance sheet, which at the year-end showed tangible net assets of £10.7m. That included £3.2m of maturing wine stocks held at cost; applying a typical 40 per cent gross margin would add an extra £2m to shareholders' equity. It also included vineyards held at £16,000 per acre, compared with £32,000 for the most recent local transaction - not to mention about £300,000 per acre across the Channel in Champagne. Conservative property revaluations could add another £3m to net assets.
That still prices the shares at a 50 per cent premium to tangible assets. With his background in branding, however, Mr Thompson is adamant that the bulk of the company's true value is intangible. He cites research that intangible assets account for 50-80 per cent of the value of typical drinks businesses. This is credible, particularly at the premium end. At the latest count, intangibles accounted for 116 per cent of net assets at Diageo (DGE) and 103 per cent at SABMiller (SAB).
The other winery looking to raise capital is Aim-traded Gusbourne (GUS). Based near Ashford, just a few miles from Chapel Down, Gusbourne has none of its peer's flashy visitor facilities, operating instead out of a giant shed. It is also many years behind Chapel Down in terms of business maturity, with no expectation of cash profits before 2018. What it does offer is a premium brand (the company's benchmark bubbly sells for £28, compared with under £20 for Chapel Down's), backed by an impressive haul of awards and a commitment to the finer points of viticulture, including a very costly four-year production process. Revealingly, chief executive Ben Walgate was trained at Plumpton Agricultural College, not business school.
At an offer price of 77p, compared with net tangible assets of 40p, Gusbourne's shares are clearly a riskier proposition than Chapel Down's. However, the key risk - that the company runs out of working capital while it waits for its stocks to mature - is mitigated by the backing of Lord Ashcroft, who owns 64 per cent of the shares. "Lord Ashcroft enjoys Gusbourne very much," stresses Mr Walgate. For personal as much as for economic reasons, Gusbourne might not be allowed to go bust.
