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Constellation Brands' rationale for selling its Australia and UK wine business has become clearer following the group's publication of third quarter profits.

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Constellation Wines Australia and Europe reported operating profits of just US$2.5m for the first nine months of the wine company's fiscal year. That's a 78% drop on the same period of the previous year, even though profits at the BRL Hardy-dominated division actually rose by 21% in the third quarter.

The figures shed extra light on why Constellation has agreed to sell its Australian and UK wine operations for a sliver of their former value. Champ Private Equity will pick up the pieces for AUD290m (US$290m), when Hardys alone cost Constellation $1.85bn in 2003.

Just prior to that deal, in March 2003, BRL Hardy reported full-year net profits of AUD84m. What a catastrophe Constellation has ended up walking into. That said, how many of us would have spotted the cliff's edge without hindsight's cruel torch?

At the time, let's not forget, Australian wine - just like the national cricket team - was going great guns in export markets. French vignerons were waving their arms in Gallic despair at the New World revolution and several observers reckoned that Hardys undersold itself in the Constellation deal.

Today, Australia is awash with unwanted wine and unloved cricketers - homegrown varieties, at least.

While Constellation has taken a sizeable hit, the group believes it can rise from the proverbial ashes as a finely-tuned, profitable unit. Its North American wine business was 200 times larger than Hardys in terms of operating profits in the first nine months of its current fiscal year. Wine sales in North America were triple those in the Europe and Australia business over the period. More generally, the outlook for wine consumption in the US remains brighter than in, say, the UK.

Hardys, in other words, has been effectively dropped as dead weight. There is still a lot of work ahead for the Robert Mondavi owner, however. Its operating profits from wine in North America slipped by 7% in the nine-month reporting period, to $507m, and sales only crept up by 1% in value. Investors duly gave the group a kicking on the stock market.

Wine is a tough place to be right now. Constellation still has to prove that it can persuade consumers to part with more cash in the wine aisles or find a way to get bottles into drinkers' hands more profitably. Neither will be easy, particularly as the recession hangover continues to linger.


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