There are no scale alcohol beverages businesses for sale, according to Constellation Brands CEO Rob Sands

There are no scale alcohol beverages businesses for sale, according to Constellation Brands CEO Rob Sands

Earlier this year, the rumour mill went into overdrive when a CNBC report suggested Constellation Brands had made a move to acquire Brown-Forman. At first, Brown-Forman declined to comment, only to break its silence a few days later, when the company stated categorically that it "is not for sale".

Whether Constellation did make a move or whether someone was merely seen running the rule over hypothetical targets, analysts were curious to know more about Constellation's M&A plans. In the notes that followed the Constellation's Q1-2018 results conference call, talk turned away from Brown-Forman and towards "tuck-ins" and "bolt-ons" - M&A speak for smaller-scale purchases.

"Without naming Brown-Forman, CEO Rob Sands said no scale alcohol beverages businesses are for sale, parroting Brown-Forman's 'we're not for sale' of 24 May," writes Stifel analyst Mark Swartzberg. "This could be part of the negotiation dance, but we doubt it is."

Swartzberg highlights Sands' reiteration on the call of Constellation's preference for tuck-ins as "evidence no scale deals are in sight". 

The Stifel analyst believes this is likely to still be the case 12 months from now.

What about beyond the next year? Indeed, Wells Fargo analyst Bonnie Herzog points out that Constellation has a "cash windfall lurking around the corner". She says the firm has been "aggressively investing in its beer production while also de-levering" over the last couple years. Just last October, the firm agreed to purchase the Obregon Brewery from Anheuser-Busch InBev subsidiary Grupo Modelo, in a deal worth US$600m.

In the short term, these factors have limited the cash available for share buybacks and M&A, according to Herzog. "Beginning next year," she writes, "Constellation's coffers should begin to rapidly refill as it completes its beer expansion investments and it takes on new debt to maintain its target 3.5x leverage.

"We estimate by FY-2021 Constellation will have over $5bn in excess annual cash flow (after dividends) to be used for either accelerated share repurchases or through M&A." And, by FY-2021, Herzog believes that cash flow will have grown to between $8bn and 10bn.

"Given commentary ... that Constellation is likely only targeting small-scale, bolt-on brand acquisitions, versus major deals, we think the likelihood increases that Constellation simply returns excess cash to shareholders in addition to potentially increasing investments in marketing, promos, distributor margins, and other top-line growth supporting initiatives," Herzog concludes.

And, with both the beer and spirits craft segments burgeoning, Constellation should have no trouble finding a bolt-on brand. 

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