More cheap wine!
Constellation Brands, a leading international producer and marketer of beverage alcohol brands, has seen its shares drop sharply after it issued disappointing revenue and earnings projections.
Constellation Brands, by its own account the world’s major wine producing company by volume, is bracing itself for trouble selling its wines and beverages this year. The British market has been weak, suffering from an oversupply of Australian wines and pressure on prices. On the other side of the Atlantic, U.S. companies that distribute Constellation Brands’ products are consolidating and slashing inventory, flooding the market with cheap wines. This may be good for the consumers but bad for the investors. Constellation’s share price has dropped to USD 20 (end of March) from USD 29 (early December 2006).
Constellation’s wine division, which includes Californian winery Robert Mondavi and Australia’s Hardy Wine, is planning to reduce distributor inventory levels during the first half of the current fiscal year. According to media reports, U.S. distributors continue consolidating and getting larger, making their business processes more efficient and cutting down on costs.
Constellation Brands continues pushing to keep up with the consolidation in the industry by expanding its own growth. Last year it signed a joint-venture with the Mexican beverage giant Grupo Modelo to market Corona as of 2007. The company also completed its acquisition of the Canadian wine company Vincor for USD 1.3 billion. And on 6 February 2007, Constellation announced its agreement with Guillaume Cuvelier and Belgian-based Alcofinance S.A., the owners of Svedka Vodka, to acquire the brand and related business for USD 384 million. Svedka, founded in 1998, is the fifth largest imported vodka in the U.S. with eight percent market share in the imported vodka category according to Information Resources, Inc. (IRI) data.
Moreover, on 1 March 2007 Constellation announced a buyback of USD 500 million in common stock.
The same day, Moody’s Investors Service cut its debt rating on Constellation Brands deeper into junk territory, citing the company’s plans to buy back shares and fund the purchase with debt.
According to reports, Moody’s wrote: “Although the company has historically demonstrated an ability to quickly integrate acquisitions, repay debt and restore credit metrics, leverage improvement following the last acquisition has been delayed due to a restructuring plan announced in the fall and the swiftness of the subsequent acquisition and buyback plan.” Moody’s cut Constellation’s corporate family rating by one notch to "Ba3", three levels below investment grade, from "Ba2". The outlook is stable, indicating an additional ratings change is not anticipated over the next 12 to 18 months.
