Glenboden M & A Originations

Constellation sells another chunk of itself to reduce debt

Priority Rating priority rating 5
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Origination Status seller announcement, December 2010
Asset Constellation Wines Australia & Europe (CWAE), Australia and UK wines operation
Buyer CHAMP Private Equity (Australia)
Seller Constellation Brands Inc. (USA), international premium wines producer
Buyer Rationale attractive valuation, turnaround opportunity
Seller Rationale debt reduction through asset sales, losses
NBs CB is to retain 20% of the shares of CWAE under a retention provision
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Constellation Brands has sold another asset, its Australian and UK wine business constituting 30% of total sales, cheaply in order to reduce its huge debts (see valuation). We ask whether the group's poor M&A history is to blame for its financial woes.

Shrinking business and high debt ...Particularly since 2008, CB has suffered from negative top -line growth, low EBITDA, and a very high net debt ratio (see chart).

Both cause and effect of this situation has been the group's policy of maximising free cashflow, largely through asset sales, in order to pay down its mostly long-term debts.

This task is made much more difficult, however, by the perennial restructuring costs (employee, contractual etc) and asset impairments (goodwill, inventory etc) that CB has had to charge to its operating profit.

... restructuring charges and asset impairments ...To put things into perspective, the EBITDA booked by CB in FY2010 (see chart) is net of such 'one off' costs, without which the number would have been about 50% higher; net debt could have looked almost respectable without them.

To be fair, the one-offs were much lower in 2010 than in the previous two years. What's more, they were largely down to 'initiatives' taken by CB in its troubled Australian and UK businesses, both of which it's now shedding.

But one has to ask the question whether the group's very active M&A strategy, since 2007, is significantly to blame for this state of affairs, and how much more trouble there's in store for the portfolio.

... poor M&A history ...Illustrative of CB's questionable M&A history is its acquisition of the entrepreneur -founded and very young Svedka vodka, in 2007. Although it has continued to grow volumes strongly (60% in 2010), it's still quite small (about 3 mln cases).

The price tag for Svedka, about US$ 385 mln, is said to have been very high in multiples terms. From CB's financial reports we can observe that, in assets terms, 90% of the consideration was for goodwill and trademarks.

Other dubious M&A moves by the group include buying, for x4 Sales, Fortune Brands' premium US wines portfolio in 2008, where Fortune stated its rationale was to exit a low returns business.

... turned the corner or imbalanced portfolio ?Hopefully, CB will soon have worked its 'global initiative' one-off charges out of the system, so as to represent a streamlined portfolio of premium brands delivering strong financials.

But question marks remain; branded wine is historically a fragmented business, in which it's harder to achieve sustained premiumisation that in spirits.

Meanwhile, the share of spirits next to wine, in CB's net sales in FY 2010, fell by nearly 50% over 2009, to reach less than 10% of the group's total revenues.

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THIS LEAD'S VALUATION
Size (€ mln) 220
Sector wine
Asset Quality Australia & UK branded
Seller large plc
Buyer private equity
P/S 0,3
P/Ebitda n/a
Type total consideration 100%
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