• Sale will "dramatically improve" finances
  • Division not profitable enough
  • Shares fall on North America wine concerns
Constellation Brands says wine business sale will improve finances

Constellation Brands says wine business sale will improve finances

Constellation Brands has said that the sale of its Australian and UK wine operations will help it to become more profitable.

Constellation has agreed to sell "virtually all" of its wine operations in the UK, Australia and South Africa, including the Hardys brand, to Champ Private Equity for AUD290m (US$290m). The sale represents a huge slide in value for the BRL Hardy wine business in Australia, which Constellation bought in 2003 for AUD1.85bn.

Constellation's management today (6 January) defended the decision to sell. The Robert Mondavi producer's chief financial officer, Bob Ryder, told analysts that the sale would mean a "dramatic improvement" in the firm's finances.

"Although the business contributed to roughly a quarter of net sales, it contributed very little to profits," he said on a conference call following publication of Constellation's third quarter results. The group's Australia and Europe wine business saw sales fall by 12% during the three months to the end of November, which contributed to a 2% drop in the company's total net sales for the quarter.

Constellation's CEO, Rob Sands, reiterated that the sale is expected to close by the end of January. The group will retain a 20% stake in the Australia and Europe wine arm and Sands said that he believes new majority owner Champ is "committed to growing the business".

He argued that the deal would give Constellation greater flexibility on supply, because it will not be "tied by the bricks and mortars of our own operations". He said that the wine giant will have "the ability to move or switch appellations in certain brands where it is appropriate as we need to do".
Constellation said that its overriding rationale for the sale is to refocus resources on higher margin wines in its North America business.

The group's wine sales in North America rose by 1% in the third quarter and said that it is upbeat on the final three months of the year. "In the fourth quarter you should see pretty healthy sales and EBIT growth in the North American wine and spiirts category," it said.

Constellation Brands' share price fell by 6% on the New York Stock Exchange today, despite the company raising its full-year profits guidance. Net sales and operating profits both missed analysts' expectations. Analyst group Stifel Nicolaus said that the firm's underperformance "primarily reflected weaker-than-expected North America wine sales and higher-than-expected holiday-related [sales cost] increases".

Sands said that he remains upbeat on the North American wine sector. "We are experiencing continued momentum from our US distributor transition, with positive depletion trends recorded during the quarter," he said.