COMMENT: Constellation Brands searches for a star

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US drinks group Constellation has said that it is looking for strategic acquisitions in spirits.
Constellation would certainly benefit from growing its business in the growing US premium spirits market. However, the available takeover opportunities may be limited: most brands that fit Constellation's portfolio are either family-owned or part of larger groups; and the company's relatively small financial scale might also be a problem.
US drinks company Constellation Brands has told the Financial Times newspaper that it has been looking at strategic acquisitions in the premium spirits market. It has identified possible targets worth between US$500m and US$2 billion.
Constellation derives most of its income from selling wines, spirits and imported beers in the US, while also marketing wines such as Hardy's and Paul Masson globally. US spirits sales have been buoyant for the last few years, in contrast to weak beer growth, leaving the company keen to shore up its relatively weak spirits portfolio. This goal also drove its failed bid for Allied Domecq earlier this year.
However, Constellation may encounter problems finding a suitable takeover candidate as few quoted independent spirits companies are left for sale. Some candidates, such as Bacardi, are controlled by families who appear reluctant to sell up; others, such as Fortune Brands, are conglomerates with many non-beverage businesses. Constellation can, however, point to its hostile acquisition of family-owned Robert Mondavi as an example of its experience in closing difficult deals.
Constellation's relative lack of size and scale could also be a problem. With a market capitalization of US$5.4 billion, the company is one-eighth the size of spirits market leader, Diageo, which is worth US$41 billion, and is one-third the size of runner-up Pernod Ricard, which is worth US$15 billion. Whereas a larger competitor on the scale of Fortune could easily absorb a few extra brands, a billion-dollar merger would involve serious integration challenges. And a billion-dollar cash deal, which might be needed to persuade family shareholders to sell up, would need to be financed by a heavy debt burden.
These problems are not insurmountable, and Constellation has a strong record in delivering growth and managing acquisitions so far. Even so, the chances that these plans will result in a major deal any time soon seem limited.

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