In a strategic move to enhance its presence in the U.S. beer
market,
Constellation Brands Inc
. (
STZ
) has entered into an agreement with
Anheuser-Busch InBev
(
BUD
) to acquire the remaining 50% stake of Crown Imports.
Constellation Brands has a 50-50 joint venture with Grupo Modelo
S.A.B. de C.V. (Modelo) in Crown Imports. Previously, AB InBev has
completed its proposed acquisition of Modelo.
Per the agreement, Constellation Brands will pay $1.85 billion
to complete Crown Import acquisition and will hold the right of
distribution, marketing and pricing of Modelo brands in the U.S. AB
InBev will be responsible for maintaining the supply and quality of
products along with innovations.
At the end of first-quarter fiscal 2013, Constellation Brands
had $69.1 million of cash and cash equivalents. Moreover, the
company generated $96.4 million and $76.8 million of cash from
operations and free cash flow, respectively. Furthermore, the
company has remaining $850 million under its revolving credit
facility.
We believe the financial condition of the company is not solid
enough and so it will require bridge financing to complete the
transaction or may also opt for permanent financing including
revolving credit facilities, term loan and senior notes if market
conditions remain favorable.
It is anticipated that the acquisition will increase
Constellation Brands' debt-to-EBITDA ratio to mid-four times.
However, in next 12 months, Constellation Brands is expecting to
generate strong free cash flow which will bring leverage ratio at
its targeted range of three to four times.
Moreover, the company notifies that it is going to suspend its
ongoing $1.0 billion share repurchase program. Currently,
Constellation Brands' has nearly $700 million remaining under its
share repurchase authorization.
Crown Imports is the largest beer importer in the U.S. and
markets Modelo brands, such as Corona Extra, Corona Light, Modelo
Especial, Pacifico, Negra Modelo and Victoria. After the completion
of the deal, Constellation Brands will become the largest
multi-category supplier of beer, spirits and wine and on a volume
basis third-largest total beverage alcohol company in the U.S.
During fiscal 2012 Constellation Brands earned $215 million of
equity earnings from Crown Imports which was 50% of the total
earnings. Therefore, Constellation Brands believes acquisition will
be significantly accretive to its earnings per share and free cash
flow.
The company reiterates its fiscal 2013 adjusted earnings per
share guidance in the band of $1.93 to $2.03 per share. The
guidance excludes any impact of acquisition, however, we expect the
transaction will have a positive contribution to the fiscal 2013
earnings performance. The current Zacks Estimate of $1.99 per share
is approximately at the midway of the company's guidance range.
Our Recommendation
Constellation Brands is the largest wine company in the world
and commands a dominant position in the premium wine segment in the
U.S. The company is also a leading producer of wines in Canada and
New Zealand. This provides a competitive edge to the company and
bolsters its well-established position in the market.
Moreover, continued focus on brand building and promotion along
with strategic acquisitions will accelerate its growth
opportunities while strengthening its market position. Moreover, in
an effort to generate strong margins, Constellation Brands is also
focusing on higher priced segment across all key categories.
Moreover, the company recently acquired a California based wine
company Mark West, which we believe will enhance its presence in
Wine market.
However, the company faces intense competition from other
well-established players in the industry, including
Beam Inc.
(
BEAM
),
Brown-Forman Corporation
(
BF.B
) and
Diageo plc
(
DEO
). Moreover, Constellation Brands also encounters competition from
local and regional players in the respective countries.
Consequently, this may dent the company's future operating
performance.
We currently have a Zacks #3 Rank (short-term Hold rating) on
the stock. Our long-term recommendation on the stock remains
Neutral.
BEAM INC (BEAM): Free Stock Analysis Report
BROWN FORMAN B (BF.B): Free Stock Analysis
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ANHEUSER-BU ADR (BUD): Free Stock Analysis
Report
DIAGEO PLC-ADR (DEO): Free Stock Analysis
Report
CONSTELLATN BRD (STZ): Free Stock Analysis
Report
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