Wine may take years to mature, but things are happening awfully quickly over at Chalone Wine Group (Nasdaq: CHLN). Shares of the Napa, Calif., company rose more than 17% yesterday following the announcement that it received an acquisition proposal (from a still-secret acquirer) substantially richer than the one it agreed to with near-half-owner Domaines Barons de Rothschild (Lafite), or DBR, early last month.
Merger agreements like the one DBR and Chalone signed typically include a provision that allows either party to walk away under certain circumstances -- such as, in the case of the acquiree, a better offer within a given time period -- for a fee. That's the case here: DBR now has until Friday to make its own deal sweeter than the new one or risk Chalone signing a deal with the new folks. If that happens, DBR would get $2,475,000 for its trouble.
There's a chance of this happening with any deal, which is why the business of merger arbitrage exists: Investors know there's always a chance that an announced deal won't come off, and savvy investors will try to play those odds. You can tell how confident they are by the degree to which the shares of the acquiree approach the offer price in the time leading up to the closing date -- in a highly likely merger, the acquiree's share price will typically move close to, but just under, the offer price. Less certain mergers have a wider gap. If a better offer is expected, the acquiree's shares may even move above the current offer price.
Wine deals, it seems, can't be pulled off without some kind of hitch these days. Robert Mondavi (Nasdaq: MOND), for example, was all set for a major reorganization before Constellation Brands (NYSE: STZ), which had planned to exchange assets for a stake in the DBR/Chalone venture, stepped in.
And Golden State Vintners was the subject of a heated merger battle earlier this year. In short, there appears to be an awful lot of people willing to put big money on their ability to make even more of it in the wine business in the coming years. We don't know the identity of Chalone's new suitor yet, and we probably won't unless the deal either goes through or gets ugly.
It seems probable that SFI, a major Chalone stockholder controlled by the Hojel wine family -- which at one time was looking for options other than a deal with DBR and was for some time unhappy with DBR's offered prices -- is involved. As many as five other companies besides DBR were seriously considering buying Chalone, and SFI was especially involved in one deal involving two companies working together. (The background of the merger section of a recent Chalone filing has more on this.)
Whatever the case, we should know the next step by the end of the week, at which point, of course, Chalone investors may simply be invited on yet another wild ride. If nothing else, they've got plenty to drink along the way, not to mention the affirmation of knowing there's substantial outside interest in the clubby company they're part-owners of. Given that management was discussing deals that included Chalone shares below market value earlier this year, that must be a good feeling indeed.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story.
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