Constellation Brands Expands Further, Buys Mexican Brewery

In line with its strategy of expanding operations aimed at achieving business growth, Constellation Brands Inc. (NYSE:STZ) recently agreed to buy the Obregon Brewery from Grupo Modelo, a subsidiary of Anheuser-Busch InBev SA/NV (NYSE:BUD) . Valued at $600 million, the news of the buyout did not significantly impact the company’s stock price.

The Obregon Brewery, situated on Mexico’s west coast in the state of Sonora, is expected to generate nearly four million hectoliters of production capacity on deal closure. The acquisition will enable Constellation Brands to capture immediate functional brewery capacity that will help serve its high-end Mexican beer portfolio, alongside providing it with the flexibility for future innovation strategies. The brewery will mainly serve Constellation’s largest beer markets in western U.S.

In this regard, Constellation Brands submitted a proposal to the U.S Department of Justice (DOJ) earlier this week. Additionally, the acquisition is subject to approvals from the U.S. DOJ and Mexican regulators, along with the satisfaction of other customary closing conditions.

Apart from expanding its Mexican beer portfolio, the world’s largest wine company will assume complete control of the Obregon brewery with this deal, relieving itself from the existing supply agreement inked with Grupo Modelo in 2013. Per the agreement, Constellation Brands obtained the U.S. distribution rights for a portfolio of Grupo Modelo’s Corona brand, as well as several Mexican beer brands. AB InBev had facilitated this agreement in order to obtain regulatory approvals for acquiring Grupo Modelo.

Earlier, the company announced plans to build a new brewery at Mexicali in Mexico and further expand the capacity of its Nava brewery to support the future growth of its Mexican beer business. The Obregon brewery buyout is likely to support ongoing improvement at the Nava brewery and the buildout of the Mexicali brewery, while keeping the company’s targeted long-term investments in Mexico intact. Therefore, the company has shifted some of its spending outlays from the Mexicali brewery to the Obregon brewery. This is likely to result in an increase in the company’s free cash flow estimate for fiscal 2017 to $575–$675 million.

At the Mexicali brewery, the company plans to initially expand production capacity by 10 million hectoliters with the provision to later expand its capacity to 20 million hectoliters. The buildout of 10 million hectoliters at Mexicali is expected to be carried out in a phased manner with the first five million hectoliters of expanded capacity likely to be operational by Dec 2019, while the remaining will be planned in line with future growth targets.

Following the Obregon acquisition, the company has trimmed its Capex for Mexicali Brewery Build to approximately $1.4 billion, including $125 million for fiscal 2016 and $225–$275 million for fiscal 2017. Earlier, the company had planned to spend about $1.5 billion for the 10 million hectoliters expansion.

At the Nava brewery, the company intends to expand capacity to 27.5 million hectoliters from the existing 25 million hectoliters. Expected to be completed by early calendar year 2018, the project calls for total capital spends of about $2.5 billion, including about $650 million for fiscal 2016 and $550–$600 million for fiscal 2017.

We believe that the Obregon brewery acquisition will help Constellation Brands to grab various growth opportunities in the U.S. beer market, alongside providing cushion to its expansion and innovation plans.

Zacks Rank

Currently, Constellation Brands has a Zacks Rank #2 (Buy). Other favorably ranked stocks in the beverages-alcohol industry include Craft Brew Alliance Inc. (NASDAQ:BREW) and Molson Coors Brewing Company (NYSE:TAP) , also carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Craft Brew Alliance, with a long-term earnings growth rate of 25%, has surged nearly 80.4% year to date.

Molson Coors, with a long-term earnings growth rate of 6%, has jumped nearly 18.6% in the past 12 months.

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