Constellation Brands more vulnerable after buying premium wine portfolio from Fortune Brands
- November 12, 2007
||business unit acquisition agreement announced, to close by y/e 2007;
||wine brand portfolio, vineyards, manufacturing and salesforce of Fortune Brands (USA);
||Constellation Brands Inc. (USA), global no.1 wine producer by volume;
||Fortune Brands Inc. (USA), leading domestic consumer products group;
||to expand presence in super-premium wine segment in US;
||to focus on higher âreturns spiritsâ business;
||with cca. 250 brands in its portfolio, CBâs average sales per brand is only $ 20 mln.
In this deal, a public company has agreed to acquire an asset, from another public company, where the latterâs rationale is that the asset provides too low a rate of return. Itâs unlikely that Fortune Brands managed the portfolio badly, or any worse than CB could. Also, synergies are difficult to extract in the wine business, other than in sales, so no big justification there either. Maybe CB is just a company that likes to collect as many brands as possible ? Whatever the explanation, CB is arguably banking far too much on premium wine, making it vulnerable later to writeâdowns and other consequences.
Okay, so the portfolio is 75% Clos du Bois, the no.2 super âpremium wine brand in the US, as well as a number of other high âend brands, which CB might need in order to premiumise its overall portfolio further. However, with $ 214 mln in sales revenue, spread over 2,6 mln cases, this suggests CBâs buying an average retail price per bottle of only about $10 anyway. More fundamentally, we think that CBâs strategy of focusing on wine is inconsistent with maximizing shareholder value. Not only is wine a relatively capital âintensive and low âmargin business, compared to beer and spirits. Also, and more important in our view, it is one with lower repeat usage and frequency of usage, at the consumer level, than beer or spirits. So less revenue per brand and less brand equity.
On the valuation side, the x4 Sales looks very high, especially when the sales number includes excise duty. We donât know how much wine inventory is included in the price, but it wonât be of the scale of some family âowned French wine business, with its caves full of vintages. Earlier this year, CB also paid a very high Sales multiple for Svedka, a US vodka brand that was less than 10 yearsâ old and had a trailing year rate of growth that looked dangerously spiky. This time, CB is arguably making the same mistake, but for different reasons. To make things worse for CB, the two key fortified wine brands, Harveyâs sherry and Cockburnâs port, have been excluded from this sale. Fortune Brands has really âcherry âpickedâ by keeping them.
Fortune Brands has made a very shrewd divestment here. The timing is prudent, as there was still significant buyer interest in the portfolio, which might change when credit markets tighten further in 2008. Theyâre now able to focus on higher returns businesses and star âperforming brands. We wouldnât go so far as many analysts, however, who say that this deal was motivated by Fortuneâs desire to mobilize itself, strategically and financially, for the acquisition of Absolut vodka. No company in its right mind would divest an entire business unit, in order to prepare itself for a privatization tender which it may or may not win.