Glenboden M & A Originations

Staged sale of spirits portfolio is the key to survival for Constellation Brands

Priority Rating priority rating 4
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Origination Status seller announcement of divestment intent, January 2009
Asset value –brand spirits portfolio of Constellation Brands (USA)
Buyer Sazerac Co. (USA), family –owned wine and spirits company
Seller Constellation Brands Inc. (USA), global no.1 wine producer by volume
Buyer Rationale acceptable valuation, scale, expansion of off –trade business
Seller Rationale reduced debt, fixed assets and portfolio size; focus on premium spirits brands
NBs the portfolio to be sold consists of 40 brands and 600 SKUs
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Recently Glenboden has described Constellation Brands’ longer –term survival prospects as withering away, because its weighty wine portfolio will increasingly come under pricing and margin pressures, causing the group’s capacity to service debt and generate investor returns to suffer. In fact we’ve coined the term ‘de-premiumisation’ through our repeated negative assessment of CB. This latest divestment is a case of too little, wrong place; it may improve the margin and growth profile of the group’s spirits business, but let’s not forget that spirits contribute only 10% of CB’s total revenues.

The mixed –bag portfolio of value –segment spirits brands that’s being sold constituted about half of CBs total spirits revenues of US$ 400 mln (in 2008). So, after this deal, the share of that segment in the group’s total sales will decline to only about 5%. True, the average price of the premium –segment spirits brands that the group’s retaining is roughly twice that of those it’s selling (10 mln cases vs. 5 mln in volume sales, with equal value sales); however the scale of this portfolio rationalization success story is not big enough to warrant management’s self –congratulatory language, we think.

CB’s real task is to reduce the number of SKUs in its huge portfolio of some 200 wine brands and, more critically, to protect and enhance their premium price positioning and margins. This is very difficult in the wine business, where brand equity is constantly being undermined.

We won’t repeat the reasons for this, only some key examples : in 2008 the two biggest premium wine producers in the world, Constellation Brands and Foster’s, both recognized impairment in the value of their wine brands to the tune of US$ 800 mln, thus causing big dents in their operating profits. This happened in the same year that CB boasted an increase in the premium –segment share in its wine sales to 85%.

Indeed, one might be unkind enough to say that CB has a track record of ‘value subtraction’ in the brands it manages. In addition to the above write –down, the group has taken a pre –tax loss on both this spirits brands divestment and the sale in 2008 of its Almaden and Inglenook wine brands.

Looking forward, the risk of more write –downs or transaction losses is heightened by the very high valuations paid by CB for its most recent large acquisitions : US$ 1,4 bln (about x2,5 Sales) for the Canadian premium wine leader Vincor in 2006; then US$ 900 mln (about x4 Sales) for the premium wine portfolio of Fortune Brands in 2008.

The key issue for CB, in survival terms, is debt servicing. Management claims that, through a combination of asset sales, higher average margins and efficiency gains, the group’s net debt will be reduced to x4,0 EBITDA in FY 2009. That’s very ambitious.

Net of the proceeds from this divestment, net debt is still likely to exceed US$ 4,0 bln. Assuming no more portfolio write –downs or major divestments, the group’s EBITDA would need to hit US$ 1 bln in 2009 for this ratio to be achieved; in the light of Q3 2009 results, that number doesn’t look likely to exceed US$ 600 mln for FY 2009.

Another option for CB, to raise cash and achieve its debt ratio target and survive in 2009, would be to divest its now stream –lined and fast –growing premium spirits portfolio.

That includes Svedka vodka, the no.4 imported vodka brand in the US with a sales CAGR of 50% in the period 2002 -7; also Black Velvet Canadian whisky and Paul Masson Grande Amber brandy, which are apparently both no.2 in their respective segments and growing in market share terms. It might be the case that these are genuine ‘scale brands’, to quote CB management; unlike all of those wine labels.

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THIS LEAD'S VALUATION
Size (€ mln) 260
Sector spirits
Asset Quality US value brand
Seller large plc
Buyer family
P/S 1,67
P/Ebitda n/a
Type enterprise value
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