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In The Spotlight - A Win-Win for Vina Concha y Toro and Brown-Forman?

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Vina Concha y Toro's deal this week to acquire Brown-Forman's Fetzer Vineyards for US$238m has been welcomed by many observers as a good move for both companies. Here, just-drinks brings you the market reaction.

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Vina Concha y Toro's share price rose by another 5% yesterday (2 March) after initially spiking after the deal was announced, helping to claw back lost ground since the start of the year.

Investors, then, seem to agree with the Chilean producer's CEO, Eduardo Gilisasti. "We believe that this transaction opens additional growth opportunities globally, as well as in the American market, with its main brands Fetzer and Bonterra," Gilisasti said.

It's a big foray for Concha y Toro - the biggest acquisition by the company to date, to be exact. Fetzer sells 2.2m cases annually, making it one of the top ten wine brands by volume in the US, and the acquisition also includes organic wine brand Bonterra, as well as 429 hectares of California vineyard. The total business has annual sales of $150m.

Aside from the potential benefits of new brands and a large production base in one of the world's most promising wine markets, the deal could also help Concha y Toro by "diversifying the currencies it operates in," according to investment bank Banchile Inversiones, which was quoted in the Wall Street Journal.

As for Brown-Forman, it joins the growing list of large drinks companies exiting the world wine sector. It is only two months since Constellation Brands announced the sale of the bulk of its overseas wine assets to CHAMP Private Equity. Remy Cointreau looks set to follow the trend by selling its Champagne business within the next few weeks.

Several analysts praised Brown-Forman for offloading Fetzer, which has much lower profitability than the group's spirits business, and for getting a decent price.

Morningstar analyst Philip Gorham said: "At around 1.5 times sales, we think Brown-Forman has realised a reasonable price for the assets, and we applaud the firm's decision to exit a category that underperforms the rest of its portfolio as measured by returns on invested capital."

Brown-Forman has forecast that the deal should increase its earnings per share by between $0.2 and $0.3 in 2011. It will also have more resources to plough into its spirits brands, such as Jack Daniel's and Finlandia.

That said, the group's share price has struggled for momentum over the past week, down by around 0.2%, and the Fetzer deal has done little to lift investors' mood. Gorham, though, said that this probably reflects the general view that Brown-Forman is slightly overvalued on the New York Stock Exchange.

A happy ending all round, then? It looks that way.


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