Analysis: Constellation takes industry by surprise with Punch move
The decision by Constellation to sell half of its UK distribution company Matthew Clark to Punch Taverns and form a joint venture with the pub retailer has left many in the industry scratching their heads. Chris Losh searches for the rationale behind the deal.
The decision by Constellation to sell half its stake in the on-trade supplier Matthew Clark to Punch Taverns for GBP85m (US$168m), and form a 50/50 joint venture with the pub giant caught the industry by surprise. No one, it's safe to say, saw this one coming.
On the face of it, the deal seems a logical move, offering synergies both for the wine behemoth and the pub retailer, two large companies aggressively seeking to expand further.
Punch's chief executive Giles Thorley is naturally convinced of the deal's merits. "This is an innovative joint venture between the UK's leading pub operator and a leading global producer and marketer of branded alcohol, with all the benefits of scale and reach you would expect," he says.
Leaving aside how Robert Mondavi, for one, might feel about being described as a "producer of branded alcohol" it has to be said that this deal only makes sense if it results in greater sales for Matthew Clark. And on that question, only time will tell.
The deal, for instance, did not include any guaranteed switch-over of all of Punch's pubs to the Matthew Clark portfolio. Moreover, there is an interesting difference in the way the two sides interpret this.
Constellation talks confidently about "progressively becoming the preferred supplier of choice to the remaining tenanted Punch Taverns pubs". However, a spokesperson for Punch was much more circumspect. "Punch's licensees obviously already have distribution arrangements in place, and those will remain," she said. "It's not that they'll have to use Matthew Clark."
Moreover, the ties between Constellation and Matthew Clark could create problems for the distribution company in its relationship with existing customers. It is hard to imagine rival pub chains not reacting when every case of wine bought by their tenants effectively lines the pockets of the opposition.
There is also the possibility that Punch licensees may be lukewarm about the deal. They may not like the idea that their landlords know every single purchase that they make, from beer to Beaujolais. As turnovers rise, so do the rents, which is one of the reasons licensees have tended to shop around with myriad suppliers.
While the nightmare scenario of becoming a 'one stop shop' is unlikely to happen, this deal still creates arguably as many doubts as it does benefits.
Constellation, for instance, might be happy to trouser the GBP85m, and represent the move as consistent with a withdrawal from non-core businesses. But the mass on-trade was always a highly important sector for its wines, and signing away sole control of that area sends very mixed messages. As one industry insider put it, "You don't pay GBP85m and not want to have a say in the way that business is run."
For Matthew Clark, there is the potential advantage of gaining access to better prices for beer and spirits through Punch, as well as (in theory) preferential access to over 9,000 pubs. But it is also going to find itself subject to some pretty fierce price negotiating from a very powerful new partner.
The two partners are at opposite ends of the business and while they have some shared aims, chiefly selling lots of wine, in the area of pricing their objectives are fundamentally opposed. One will naturally seek the highest price possible, while the other pushes for the lowest. So there is always going to be a certain tension inherent in the relationship.
Punch, for instance, has already proved itself a tough negotiator in the beer world, and might well see the Matthew Clark deal as a good way of sourcing wine at a discount - possibly by going further up the supply chain and using its links with Constellation to source directly from the producers. That would hardly be advantageous for Matthew Clark.
From Punch's point of view, access to cheaper wine will be an advantage, but it is going to take a very long time to gain a return from the investment. And a move into distribution, an area the company knows little about, is a major diversification, and goes against the current trend among similar companies to focus on core businesses.
This is not, in other words, a deal without a rationale, but the business logic is far from compelling, and, if nothing else it begs the question "why now?"
Either Giles Thorley has a grand vision that no one else can see yet or Constellation is under pressure to sell. Indeed, one industry source suggested that the deal was driven from the US, while the UK arm of the company was not in favour.
As one seasoned industry operator put it: "The whole thing feels like a fire sale. I'm surprised Punch paid that much money, but from Constellation's point of view it would have made more sense to have raised some private equity backing. Matthew Clark controls one third of the UK on-trade. If you're a venture capitalist, that ought to be of interest."
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