The Losh Cause - Constellation-Vincor

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For anyone out there who was still in any doubt what sort of corporate animal Constellation Brands has become, recent events have provided the answer. Its acquisition of Vincor International was so fast that it was over almost before it had begun, resembling nothing so much as a shark devouring a lone guppy.

Six months ago, the 'Jaws' of the drinks world had a good long sniff around its prey, tabling a series of bids that were all rejected by the Vincor board. And that, we thought, was that. Constellation would go away for a year, have a think and content itself with digesting the not insignificant purchase of Mondavi only 12 months earlier.

Some chance. The Great White simply took a longer run-up, opened its mighty jaws and steamed back in with an offer 10% higher than its previous one. No board is ever going to turn down a bid that is 13 times its company's projected turnover for the year unless it wants to face a rebellion from its shareholders.

Constellation says that the 13x increment is going rate for such deals, but that is only the case if you use their own Mondavi deal as a benchmark, a company for which they were widely reckoned to have paid over the odds as well. Not long ago, eight times turnover was reckoned a reasonable deal. Constellation has altered the business logic of the wine world.

Officially, Vincor's shareholders still have to agree the deal, but since their shares are currently worth 50% more than they were when Constellation first came a-calling in September, it's hard to see any of them being in a rebellious mood.

More astonishing is the fact that Constellation is able to muster the funds to bankroll two such huge deals in less than 18 months. Mondavi was US$1.6bn and Vincor, the eighth biggest wine company in the world, according to some estimates, was US$1.3bn. When two such sizeable fish can be swallowed without a hint of indigestion, it sends a shiver down the spine of even big wine companies. When Jawstellation is on the prowl, no-one is safe.

From Constellation's point of view, there were two big drivers for the deal: the enhanced access to the Canadian market, and the acquisition of Kumala.

According to figures from the Canadian Vintners Association, Canada's wine market is around 35m cases, and has been growing steadily for over a decade. Owning Canada's biggest wine firm will allow Constellation to tap into this growth and make the most of a state-run retailer that can otherwise be hard to crack.

The other big Canada question is whether Constellation will be allowed to keep the licence for the 165 Wine Rack stores that Vincor owns in Ontario. Vincor was granted the licence because it was a Canadian company selling local wines to a local population. But this preferential treatment may be reviewed now that the company is part of an American conglomerate.

Less open to question is the purchase of Kumala, which remains arguably the sexiest big brand not already owned by a multinational and undoubtedly a major driver behind the deal.

For starters, it sits well within its new owner's portfolio. Constellation might be massively strong in Australia and California, but, with the exception of Shamwari, the rather sickly-looking joint venture with Omnia Wines, it has had no presence in South Africa and has had to watch the country's growth from the sidelines.

It clearly hasn't escaped their notice that much of that growth has been driven by the country's only genuine brand: Kumala. The golden gecko's current power isn't in question. It will clear over 2.5m cases in the UK's off-trade alone this year, and has grown 50% in the last two years.

Much of the attraction, however, comes not from what the brand is doing in Europe but from the more mouth-watering thought of what Constellation may be able to do with Kumala in the States. Stepping up the volume from South Africa is not a problem, and there are real expectations that it could be the Cape's version of Yellow Tail if it's properly handled.

The price tag might be Alice in Wonderland, and naturalists might shudder at the image, but the shark swallowing the gecko makes sense.

Sectors: Wine

Companies: Constellation Brands

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