Constellation Brands Revises Terms With Gallo, Cuts Deal Value

Constellation Brands, Inc. (NYSE:STZ) recently agreed to revise the terms of its original deal pertaining to divestiture of its certain wine and spirits business to E. & J. Gallo Winery. The Federal Trade Commission’s (FTC) competitive concerns related to the Sparkling Wine, Brandy, Dessert Wine, and Concentrate categories prompted the revision of the deal. The transaction, subjected to the FTC’s approval, is now likely to conclude by fiscal 2020 end.

Delving Deeper

In April this year, Constellation Brands had agreed to divest nearly 30 low-end brands from its wine & spirits portfolio, priced at or below $11 per bottle, to E. & J. Gallo Winery. The contract also included the divestiture of related facilities in California, New York and Washington. Notably, the deal, which is being superseded by the revised agreement, was valued at $1.7 billion. However, the revised adjusted deal value is worth about $1.1 billion, of which, $250 million is an earnout on the divested brand performance in a two-year period after closure of the deal.

Owing to the revised terms of the transaction, brands like Cook’s California Champagne, J. Roget American Champagne and Paul Masson Grande Amber Brandy are now excluded from the deal, resulting in the latest transaction price. On a combined-basis, these three brands generate sales of roughly five million cases annually.

Driven by the ongoing transformation strategy for its wine and spirits business, Constellation Brands is expected to pursue additional opportunities to sell the brands and Concentrate business, which are excluded from the original agreement. Management expects to divest the excluded brands by fiscal 2020.

In a separate deal, the Corona brewer entered into an agreement with E. & J. Gallo to divest its New Zealand-based Nobilo Wine brand and related assets worth $130 million. This transaction, which is likely to conclude in the first half of fiscal 2021, is subjective to the FTC’s and New Zealand’s regulatory approvals. Over the past 12 months (ending Aug 31, 2019), the Nobilo brand generated volume of roughly 550,000 cases, delivering net sales of $40 million and CAM (gross profit less marketing) of $19 million.

In second-quarter fiscal 2019, Constellation Brands agreed to divest Black Velvet Canadian Whisky to Heaven Hill in a deal worth $266 million. For fiscal 2020, net sales for the wine and spirits business are estimated to decline 15-20%, with operating income likely to fall nearly 25%.

Persistent softness in Constellation Brands’ wine and spirits business induced this Zacks Rank #4 (Sell) stock to decrease 11.5% compared with the industry’s 8.8% decline in the past three months.

Outcome

All the aforesaid actions clearly demonstrate Constellation Brands’ commitment to revive performance of its wine & spirits business. Sale of these low-end brands will help it concentrate on more lucrative premium wine & spirits brands, which should enhance returns and shareholder value. The company expects to use proceeds from the transaction to reduce debt.

Constellation Brands’ remaining wine and spirits portfolio include the Robert Mondavi brand family; The Prisoner Wine Company brand family; Kim Crawford; Ruffino; Meiomi; and SVEDKA Vodka. The portfolio also houses a range of high-end brands, namely, SIMI, Schrader Cellars, and Mount Veeder Winery wine brands; High West Whiskey and Casa Noble Tequila; and wine innovations like Cooper & Thief, 7 Moons and Crafters Union.

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