Constellation Brands stock fell as much as 7% on Wednesday (16 December) as news broke of a legal battle with joint venture partner Grupo Modelo. Michelle Russell looks at the early fallout.

Modelo filed a suit in New York earlier this week, seeking to recover marketing funds from Constellation that it alleges should have been put into the two firms' 50-50 Crown Imports venture. Crown sells Modelo's Corona beer in the US.

Modelo and Constellation set up Crown Imports, which also sells Tsingtao and Pacifico beers in the US, in January 2007. Crown's board comprises four directors from each company and the joint venture contract runs until the end of 2016.

News of the lawsuit clearly unnerved investors. Constellation shares were still off 87 cents, or 5.4%, at US$15.30 near midday Wednesday on the New York Stock Exchange.

The dispute has raised questions about the strength of Crown Imports.

Analyst group Stifel Nicolaus cut its rating on Constellation stock from buy to hold, despite expectations that Constellation will continue to cut its debt load and improve its cash flow and Modelo's insistence that it remains "fully committed" to Crown Imports.

"Suing one's business partner is generally a bad precedent for ongoing business relations," Stifel analyst Mark Swartzberg said.

"The suit may prove to be a nonevent or even a prelude to a positive for Constellation," Swartzberg added. "However, we recommend the sidelines because of the relationship's significance to Constellation and potentially sustained and low visibility on the dispute."

Constellation has insisted: "The funding at issue is not material to Constellation's overall financial position."

Modelo may be using the move to get out of the joint venture before the end of 2016, according to UBS analyst Kaumil Gajrawala.

Modelo recently reported a 4% fall in third quarter export volume sales, which include Crown. Export value sales grew by 8% on the year before, largely due to the depreciation of the Mexican peso currency against US$.

Separately, Modelo is also seeking arbitration proceedings against Anheuser-Busch InBev.

A-B had a 50% non-controlling stake in Modelo and the Mexican brewer has argued that this should not automatically pass to the new InBev-run conglomerate.

Modelo may have to either buy Constellation's 50% share in Crown or watch its brands decline further in the US, Credit Suisse analyst Carlos Laboy believes.

Laboy said Constellation may have leverage while Modelo grapples with arbitration against A-B InBev.

Laboy believes there may be pressure on Modelo to sell the entire company to A-B InBev, and the decline of its Corona brand in the US hurts the company's overall value.

It seems the dispute simply highlights the different paths the two companies are travelling on.
The Mexican brewer is clearly focusing on volume growth with a desire to increase its marketing spending, while Constellation's focus in 2009 has been to improve profits by cutting costs.