Constellation Brands to sell some international wine ops

Constellation Brands Inc, the world's No. 1 winemaker, will sell most of its operations in Australia, Britain and South Africa to focus on its most profitable brands and shore up its balance sheet.

Australia's Champ Private Equity, a private equity fund based in Sydney, will pay A$230 mn (USD 230 mn) for 80% of Constellation's businesses in the three countries.The deal, which sent Constellation shares up 1.7%, is the first in a flurry of expected mergers among wine and spirits makers, which are expected to follow the same path as their largely consolidated brewer peers.

Constellation said on Thursday that it will retain a 20% interest in the businesses, whose brands include Hardys in Australia, Fish Hoek in South Africa and Stowells in the United Kingdom. The company is retaining all its brands in New Zealand, South America and continental Europe.

Chief Executive Rob Sands said that despite a large-scale operation and quality wines, the businesses still faced challenging market conditions and were not consistent with the company's new strategy of improving margins by focusing on its more premium labels such as Robert Mondavi, Ravenswood and Clos du Bois.

"The divestiture of these operations comes as no surprise as management has indicated their focus on the most profitable, prominent core brands," said UBS analyst Kaumil Gajrawala. Constellation also owns Svedka vodka and sells Corona beer through a joint venture with Mexico's Grupo Modelo.

Many wine businesses have been struggling as a glut of grapes flooded the market and depressed prices. Swings in supply and demand have often plagued Australia, where a drought in recent years put a cap on an earlier glut.

Aside from the difficulty of growing grapes and the dependency on weather, the hundreds of brands on the market make it hard for wine makers to increase their profits by raising prices, a strategy often used by beer and spirits makers. A surge in the popularity of cocktails in recent years has also boosted sales of drinks like vodka and whiskey.

Mixing drinks

Rival Brown-Forman Corp said on Wednesday it may sell some of its California wines. Such a move could make Brown-Forman, the producer of Jack Daniel's whiskey, a more attractive target for a company like Diageo or Pernod Ricard.

Meanwhile Foster's Group Ltd, the second-biggest wine maker after Constellation, is separating its lucrative beer operations from its struggling wine business. That action is expected to attract bids for both units.

In the most recent quarter, Constellation reported an operating loss of USD 3 mn in the Australia and Europe wine segment. Higher taxes on alcoholic beverages and consolidation of distributors in Britain have also weighed on results in recent quarters.

The transaction with Champ, which values the entire business at A$290 mn, includes virtually all of Constellation's Australian, UK and South African brands, wineries, facilities and vineyards, as well as its 50% stake in UK wholesaler Matthew Clark.

Constellation expects the deal to close by the end of January and will use the proceeds to pay down debt. It expects the deal to be neutral to earnings for fiscal 2011 and neutral to slightly dilutive for fiscal 2012.

Constellation was advised by Rothschild, which is also advising Brown-Forman. Champ currently has investments in Manassen Foods, Healthcare Australia and Golding Contractors. Constellation shares were up 37 cents at $22.35 on the New York Stock Exchange. They touched a 52-week high of USD 22.42 on December 16.