Analysis - Fortune strengthens Constellation's hand in wine market
Constellation's US$885m purchase of Fortune Brands' wine portfolio further adds to the acquisitive US company's impressive line-up. Chris Losh believes the deal makes perfect sense for Constellation, and for Fortune Brands could be part of the company's preparation to enter the auction for Absolut vodka.
It says a lot about inflation in the wine world when a deal of close to US$1bn attracts little more than the odd raised eyebrow.
Less than a decade ago, the US$885m that Constellation is paying Fortune Brands for its wine portfolio would have been a huge enough purchase to merit holding the front page. But in 2007, it's ten seconds on the network news, a few columns in the trade press, and the odd 'News in Brief' in the nationals.
However, by any criteria this is a big acquisition. Constellation is buying five wineries and 1,500 acres of Californian vineyards, representing a production of 2.6m cases of wine, bringing in $216m last year.
So why has the acquisition failed to attract more attention? Partly, it has to be said, it's because the wine industry is getting used to big fish swallowing smaller ones. Indeed, Constellation has been the hungriest predator in the pond, having wolfed down BRL Hardy for $1.1bn (2003), Mondavi for $1.3bn (2004) and Vincor last year for $1.1bn.
Yet even with all these purchases, that make it indisputably the biggest operator in the wine industry, the company is responsible for only around 5% of the global market and 20% of the US. The hysteria that greeted some of the earlier deals has simply run out of energy as the wine trade has realised that it is unlikely that every estate in Burgundy is going to end up being run from Fairport, NY.
This is perhaps just as well as Rob Sands, Constellation's CEO, isn't finished yet.
"As opportunities arise, we'll continue to attempt to take advantage of them as long as they meet our financial discipline and generate what we term as true growth," he told an analyst briefing in the US.
But, apart from simple deal fatigue, there's another very good reason why the Fortune purchase hasn't attracted much attention, and that is the fact that the deal makes sense.
A price tag of $885m is hardly peanuts, but no-one has suggested, as they did with Mondavi, that Constellation has overpaid, particularly since, with an estimated $350m worth of vineyards tied up in the purchase, there is the option to ease the cost with a sell and lease back arrangement.
Then there's the fact that the wineries are, according to Fortune, all in double-digit growth. None of them is as global in reach as Hardy's, Kumala or Mondavi, but they are all considerable businesses, while Clos du Bois, for sure, has real potential.
Sands hit the nail on the head when he said: "This portfolio … furthers our strategy of expanding our presence in the growing high-end segments of the wine market."
These 'high-end segments' (above $10) have been outperforming the general wine market not just in the US, but across Europe, too, and, having found good growth there with Mondavi, Constellation clearly scents an opportunity to tap into a market sweet spot.
As a company spokesman said of the deal that now gives them 20% of the US market, "While the volume is relatively small, the strategic value of the brands, due to their current and future growth potential, is significant."
Clos du Bois, at some 2m cases, is the obvious power brand, and while it has a positive reputation in the industry, it's not unreasonable to expect that it will be worked harder promotionally than it has been. But the other, smaller wineries are far from make-weights in the deal, with one seasoned observer suggesting that "Geyser Peak might well be the hot button for Constellation for a super-premium brand".
In fact, as a largely common-sense purchase for Constellation, arguably the most intriguing element of the deal is where it leaves Fortune Brands.
The company's explanation that it is selling its wineries "to concentrate on spirits" is fine as far as it goes, but it doesn't explain why Fortune wants to hold on to Cockburns and Harveys. Neither Port nor Sherry are categories that are exactly setting the heather alight at the moment, and it seems likely that they were offered for sale and refused.
In fact, given that the wine brands were a) making money and b) in growth, Fortune's sale is most easily seen as the final positioning manoeuvre prior to a bid for Absolut vodka when Vin & Sprit finally puts the world's number five spirit brand up for sale.
Fortune certainly won't be the only bidder, but as the brand's US distributor and a partner with V&S in Maxxium, it does have a head start over the competition in terms of good will and ease of transfer.
But while Fortune is the most logical and certainly the least disruptive purchaser, there have always been question marks over whether it has deep enough pockets for a brand that, with annual sales of $1.5bn a year, won't be cheap.
And in situations like that, every $885m helps…
Constellation's US$885m purchase of Fortune Brands' wine portfolio further adds to the acquisitive US company's impressive line-up. Chris Losh believes the deal makes perfect sense for Constellation, ...
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