Constellation Brands looking more vulnerable after sale of 'de-premiumised' wine brands
- January 23, 2008
||business unit divestment agreement announced, January 2008
||Almaden and Inglenook wine brands, Paul Masson winery (USA)
||The Wine Group (USA), no.3 domestic wine player
||Constellation Brands Inc. (USA), global no.1 wine producer by volume
||total cash consideration of $ 134 mln, represents net P/S of 1,0 (2008F)
||to broaden portfolio of economy wines
||to divest non âpremium wine businesses in US
||deal comes two months after CB paid x4 Sales for Fortune Brandsâ wine portfolio
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 âpremium wine portfolio for only x1 Sales shortly afterwards (to The Wine Group). Of course itâs not quite that simple. However, we believe this deal confirms Glenbodenâs generally negative assessment of CBâs 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 doesnât.
The portfolio that CB earlier acquired from Fortune Brands is dominated by the Clos du Bois brand, hailed as the no.2 super âpremium 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 âde âpremiumise or dieâ. 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 âpredatorâ that will constantly be âde âpremiumisingâ 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 ?