Glenboden M & A Originations

Constellation Brands more vulnerable after buying premium wine portfolio from Fortune Brands

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Origination Status business unit acquisition agreement announced, to close by y/e 2007;
Asset wine brand portfolio, vineyards, manufacturing and salesforce of Fortune Brands (USA);
Buyer Constellation Brands Inc. (USA), global no.1 wine producer by volume;
Seller Fortune Brands Inc. (USA), leading domestic consumer products group;
Buyer Rationale to expand presence in super-premium wine segment in US;
Seller Rationale to focus on higher –returns spirits’ business;
NBs with cca. 250 brands in its portfolio, CB’s average sales per brand is only $ 20 mln.
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In this deal, a public company has agreed to acquire an asset, from another public company, where the latter’s rationale is that the asset provides too low a rate of return. It’s 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 write–downs and other consequences.

Okay, so the portfolio is 75% Clos du Bois, the no.2 super –premium wine brand in the US, as well as a number of other high –end 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 CB’s buying an average retail price per bottle of only about $10 anyway. More fundamentally, we think that CB’s strategy of focusing on wine is inconsistent with maximizing shareholder value. Not only is wine a relatively capital –intensive and low –margin 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 don’t know how much wine inventory is included in the price, but it won’t be of the scale of some family –owned 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 years’ 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, Harvey’s sherry and Cockburn’s port, have been excluded from this sale. Fortune Brands has really ‘cherry –picked’ 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. They’re now able to focus on higher returns businesses and star –performing brands. We wouldn’t go so far as many analysts, however, who say that this deal was motivated by Fortune’s 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.

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THIS LEAD'S VALUATION
Size (€ mln) 630
Sector wine
Asset Quality US premium branded
Seller large plc
Buyer large plc
P/S 4,1
P/Ebitda n/a
Type total consideration
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