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Constellation No Prisoner to Hard Assets

May 2016
by Paul Franson

Victor, N.Y.—It’s been a busy few months for Constellation Brands. The world’s largest wine company by volume released strong earnings, announced that it had bought the hot Prisoner wine portfolio and disclosed that it was considering spinning off much of its Canadian wine holdings in a public offering.

For its 2016 fiscal year ending Feb. 29, Constellation reported sales of $6.55 billion ($7.22 billion before excise taxes), up 9% including gains from Meiomi wine and Ballast Point beer, both of which it acquired during the past year.

The numbers tell how much the company depends on beer, however: Beer sales were up 14% to $3.62 billion, and beer profits were up 21% to $1.78 billion (49% gross profit) on beer volume up 11.3%, while its U.S. wine and spirits volume was up 2.4%

Wine sales were up 3% to $2.59 billion, and spirits sales were up 6% to $334 million.

Wine and spirits profits are consolidated and amount to $1.24 billion or 42% (up 5%).

Beer accounts for 55% of Constellation’s sales, wine 40% and spirits 5%.

Its beer brands include imports Corona, Modelo and Pacifico, plus Ballast Point, the hot domestic craft beer.

Constellation’s “focus” wine brands are Black Box, Clos du Bois, Estancia, Franciscan Estate, Inniskillin, Kim Crawford, Mark West, Meiomi, Mount Veeder, Robert Mondavi, Ruffino, Saved, Simi, The Dreaming Tree and Wild Horse.

Constellation is projecting net sales growth in the mid-single-digit range and mid- to high single-digit growth in operating income for wine and spirits, including incremental benefits from Meiomi, which the company acquired for $315 million last year, and The Prisoner, which it is buying for approximately $285 million.

The Prisoner portfolio
Constellation is buying The Prisoner Wine Co.’s portfolio of brands from Huneeus Vintners. They include The Prisoner, Saldo, Cuttings, Blindfold and Thorn.

“This acquisition aligns with our portfolio premiumization strategy, enables us to capitalize on U.S. market trends that favor high-end wine brands and strengthens our position in the dynamic and margin enhancing super-luxury wine category,” said Rob Sands, president and chief executive officer of Constellation Brands.

As with its purchase of Meiomi, it received no hard assets except inventory. Neither deal includes vineyards or wineries.

The Prisoner red wine blend was launched in 2003 by Dave Phinney of Orin Swift Winery as a blend of Zinfandel, Cabernet Sauvignon, Syrah, Petite Sirah and Charbono as a modern interpretation of the classic Italian-American field blend. It includes a number of varieties that are out of favor or can’t command high sales or prices on their own.

The Prisoner is the top super luxury (over $20) red blend in the U.S. market, growing 28% in retail sales last year. It retails for $35.

Saldo is the No. 2 super luxury Zinfandel, with recent annual sales growth of more than 40%, while Blindfold is the No. 1 super luxury white blend.

In 2010 the founders, who had built The Prisoner to 85,000 cases, sold it to Huneeus Vintners for $40 million. It’s now producing 170,000 cases annually.

General manager and winemaker Jen Beloz and her production team will move production to nearby Franciscan Estate winery. Notably, Agustin Huneeus sold Franciscan to Constellation in 1999.

His son, Agustin Francisco Huneeus, ran Franciscan Estates until December 2004, when he left to manage Huneeus Vintners and Quintessa with his father.

The proposed Canadian IPO would reportedly include Jackson-Triggs, Canada’s largest brand, but perhaps not Inniskillin ice wine, a focus brand for Constellation.

Constellation owns six of the top 25 Canadian brands, a legacy from its acquisition of Vincor International in 2007 for nearly $1.1 billion.

Sands said, “In fiscal 2016, our business in Canada delivered excellent overall financial results, outperformed the industry and gained market share, and we believe its full value is not being recognized. An IPO will create better visibility to this dynamic part of the business. A final decision regarding whether to pursue a potential initial public offering is expected to be made later this calendar year.”

A different strategy for private companies
Constellation’s acquisition and sale strategy contrasts strongly with those of family-owned companies like E. & J. Gallo Winery, Jackson Family Wines and even Bronco’s Franzia family.

As a public company, Constellation seeks to minimize hard assets like real estate to improve return on assets, since real estate gains don’t benefit them until the land is sold. This makes it more attractive to investors who seek constantly increasing quarterly earnings.

Families, however, tend to take a long-term view, accumulating land for the future.

Gallo and Jackson have been on a spree of buying land (and even wineries). Gallo bought substantial acreage in Pope Valley in the Napa Valley AVA as well as in California’s Lake and Solano counties and properties in Washington state, all areas that produce high-quality grapes and yet are greatly undervalued compared to prime sites in Napa and Sonoma counties in California.

Gallo also bought The Ranch custom-crush winery in Napa Valley (once owned by the Trinchero family to produce Sutter Home wine). The Trincheros have built a huge, state-of-the-art winery in Lodi, and the large Courtside custom winery in San Miguel, Calif., near Paso Robles, among others.

The Jackson family has bought significant vineyard property in Oregon, where Jackson Family Wines is now reportedly the state’s largest vineyard owner.

The Franzia family owns more than 40,000 acres of vineyards in California, too.

Constellation’s acquisition of brands mirrors alcoholic beverage giant Diageo’s recent sales of most of its wine brands to Australia’s publicly held Treasury Wine Estates.

Treasury acquired the Beaulieu, Sterling, Acacia, Provenance, Rosenblum and Blossom Hill brands for $550 million in October 2015, but the company didn’t acquire any hard assets.

Publicly held Diageo had already sold its valuable land in a leaseback deal to remove assets from its balance sheet , and Treasury assumed those leases.

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