Glenboden M & A Originations

Constellation Brands looking more vulnerable after sale of 'de-premiumised' wine brands

Priority Rating priority rating 4
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Origination Status business unit divestment agreement announced, January 2008
Asset Almaden and Inglenook wine brands, Paul Masson winery (USA)
Buyer The Wine Group (USA), no.3 domestic wine player
Seller Constellation Brands Inc. (USA), global no.1 wine producer by volume
Financial Terms total cash consideration of $ 134 mln, represents net P/S of 1,0 (2008F)
Buyer Rationale to broaden portfolio of economy wines
Seller Rationale to divest non –premium wine businesses in US
NBs deal comes two months after CB paid x4 Sales for Fortune Brands’ wine portfolio
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On the face of it, Constellation Brands bought a premium or super-premium wine portfolio for x4 Sales one day (from Forune Brands), then sold a non –premium wine portfolio for only x1 Sales shortly afterwards (to The Wine Group). Of course it’s not quite that simple. However, we believe this deal confirms Glenboden’s generally negative assessment of CB’s M&A activity. It also raises the question of whether premium wine warrants valuation premia to the extent demonstrated by juxtaposing these two transactions; we think it doesn’t.

The portfolio that CB earlier acquired from Fortune Brands is dominated by the Clos du Bois brand, hailed as the no.2 super –premium wine brand in the US. That portfolio had an estimated average retail price per bottle of about $10. In contrast the brands now being sold by CB, Almaden and Inglenook, retail at only $3 per bottle. Crudely, this price ratio of 3,5 : 1 is reflected in the valuation difference, so the valuation gap is easy to justify, on the basis that operating cost differences between the two segments are probably not very big. But how sustainable is this degree of premiumisation ?

We think it is not because, in contrast to beer and spirits, wine is a very fragmented and artisanal business, with low repeat and frequency of usage so limited opportunity for building brand equity. Premium brands are therefore susceptible to ‘de –premiumise or die’. This is not the type of business for a public company like CB, dedicated to high returns on capital.

Case in point - the buyer in this deal, The Wine Group, is no.3 in volume in the US market and is famed for its low overheads model, its boxed wines and its screw top wines. Precisely the type of ‘predator’ that will constantly be ‘de –premiumising’ the market going forward.

One last point; this transaction is to result in a pre-tax loss of approximately $ 27 mln, for CB. Does this mean that when CB bought these brands they had a more premium positioning than now ? If so then will the same thing happen to Clos du Bois etc in future ?

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THIS LEAD'S VALUATION
Size (€ mln) 95
Sector wine
Asset Quality US branded
Seller large plc
Buyer private corporate
P/S 1,0
P/Ebitda n/a
Type total consideration
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