Constellation sells another chunk of itself to reduce debt
- December 27, 2010
||seller announcement, December 2010
||Constellation Wines Australia & Europe (CWAE), Australia and UK wines operation
||CHAMP Private Equity (Australia)
||Constellation Brands Inc. (USA), international premium wines producer
||attractive valuation, turnaround opportunity
||debt reduction through asset sales, losses
||CB is to retain 20% of the shares of CWAE under a retention provision
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.
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.
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.
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.
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.