Robert Mondavi Corporation's increasingly controversial plans to hive off its luxury wines operations from its core business have been thrown into doubt by Constellation Brands' takeover bid for the whole group. Chris Brook-Carter reports.

The heady cocktail of family politics, business and heritage that have come together to shape the future of Robert Mondavi Corporation always had the potential for the unexpected. But the news last week that Constellation Brands was going to give that cocktail an almighty shake by unveiling an attractive takeover bid still took many observers by surprise.

Certainly the Mondavi board looked to have been caught off guard. Their reaction so far has been to say they will consider the proposal, but contrary to Constellation's wishes they plan to carry on with the recapitalisation programme and with their plans to offload the company's high-end wine operations.

This rather ambiguous response has prompted at least one shareholder to believe the Mondavi board is failing to take the Constellation offer seriously. And, in a demonstration of how high emotions are running, a lawsuit was filed early last week in the Napa Superior Court on behalf of that shareholder, Connecticut-based Bamboo Partners, a technology company. It alleges that by failing to take give Constellation due consideration, the Mondavi directors "have not and are not exercising independent business judgement and have acted and are acting to the detriment" of shareholders.

However, as if to re-assert how sensitive and complex the situation is, there were reports late last week of at least one more lawsuit filed by another shareholder, Robert Lewis. According to local press reports, he alleges the Mondavi board of directors inappropriately structured the proposed divestiture of assets to favour the Mondavi family and Constellation Brands. This suit seeks to stop the acquisition by Constellation.

The only thing at the moment that seems certain is that the Mondavi board will face a tough time when the plan to split the company goes before shareholders for approval at the company's annual meeting November 30th, not least because the Constellation offer seems to make so much sense for both sides.

For Constellation's part, a successful play for Mondavi would mark an important moment in terms of scale alone, boosting Constellation's share of the US wine market to nearly 20%. It is the sort of scale few winemakers in the world can command in any market and will give the company real clout with distributors.

But it will also neatly top and tail Constellation's current wine offering, giving it well known brands across the price points as well as the prestige of owning some of the most famous labels in the New World.

At the low end, Constellation would gain Mondavi's Woodbridge label, which would significantly boost its credentials in the US$6 to US$8 bracket. Meanwhile, the super premium Robert Mondavi Winery brands would add high-end credibility to the company and complement the existing operations it is trying to build in that sector.

"Mondavi, with its great portfolio of wines, unmatched brand equity and storied tradition, adds breadth to Constellation's world-leading wine portfolio, and provides Constellation with additional growth opportunities," Constellation Brands chairman and CEO Richard Sands said in a statement on Tuesday.

In return, Constellation has made a generous offer for Mondavi's shares. The US$970m cash offer for Mondavi, which, including assumption of debt, sees the transaction worth US$1.3 billion, is a 37% premium over the closing price of Mondavi's Class A shares on the day of the offer. "It's a remarkable offer, a very good offer, and it's certainly financially attractive to the shareholders," one industry analyst was quoted saying.

The hard financial argument may be enough to swing a number of Mondavi shareholders. Certainly the board will have to go some way to see their recapitalisation and restructuring plan top Constellation's offer.

As reported last month, Mondavi executives plan to sell off the Robert Mondavi winery, its Napa vineyards and other luxury wine assets. The sale, it is expected will raise some US$400m, which will be ploughed into building the wines that sell for under $15 a bottle. The company said the restructuring would eventually create a business with a value of US$749m to US$929m. Constellation's offer easily reaches the top end of those estimates.
But many observers see the Constellation offer as a simpler and more logical solution to Mondavi's worries too. There have been concerns about splitting the Mondavi name and trademark since its board unveiled its plans and Constellation boss Richard Sands has seized upon this.

Constellation wants to keep the business intact, arguing the low-end and super premium wines complement each other. "Why would you take this wonderful relationship and split it in two?" Sands said. "It puts the two in conflict with each other. Someone's got to lose."

Constellation says it will focus on both ends of the business, and certainly Constellation's international reach would be a major boost for the Mondavi wines, particularly the Woodbridge brand.

But Sands is also keen to emphasise the importance to Constellation of the luxury labels. "(The Mondavi name) has actually lost some of its lustre," Sands was quoted saying last week. "But we can bring back the glory and lustre to the higher end of the business."

Sands has played the emotional card as well. The industry's antipathy towards plans by Mondavi's board to break up one of the most famous names in New World winemaking should not be underestimated. Mondavi is an icon in the region and though many may be uncomfortable with the thought of a New York-based group coming in and buying this pillar of the California winescape, it is certainly preferable to the disintegration of the group.

Not only that, but Sands has said he may reverse the recent redundancies that have occurred due to downsizing and hopes to maintain the family's involvement in the business.

But, while the arguments appear compelling, the motives and thoughts of the Mondavi board remain a mystery to all but themselves at present. The Mondavi board will only say that it is considering the bid along with other opportunities to maximize shareholder value. And it is proceeding with its recapitalisation plan despite calls from Constellation that it will diminish the company's value.

Of course, Mondavi could be playing a waiting game, hopeful of other bids that would drive the asking price higher or convincing Constellation to sweeten its current offer. But the truth is that it is not even clear if the Constellation bid will be put before shareholders at all.