Constellation Brands Inc
. (
STZ
) has recently completed the acquisition of Mark West wine brand
from California-based Purple Wine Company, LLC. Constellation
Brands paid a total sum of $160 million to complete the
acquisition. This strategic move expanded its hard beverage
portfolio.
Per the agreement, the acquisition will include some grape
supply contracts and wine inventories from three California labels,
i.e. a California pinot noir, a Russian River reserve pinot noir
and a Santa Lucia reserve pinot noir.
Being the best-selling and fastest growing brand in the U.S.,
Mark West holds leadership in $10 - $12 price category, registering
a growth of 35% in volume in the last 12 weeks. At present,
approximately 600,000 cases of Mark West pinot noir are being sold
annually in U.S. We believe this acquisition will strengthen
Constellation Brands' pinot noir brand portfolio.
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. Although the company is silent about the
source of fund, we expect that the company has utilized a portion
of its credit facility to complete the acquisition.
We believe that the company's strategic initiative of expanding
footholds in the U.S wine industry along with focus on brand
building and promotion will enhance 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. The company in a drive to enhance its presence in the
U.S. beer market has entered into an agreement with
Anheuser-Busch InBev
(
BUD
) to acquire the remaining 50% stake of Crown Imports.
Constellation Brands believes that the acquisition will be
significantly accretive to its earnings per share and free cash
flow.
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.
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 #2 Rank (short-term Buy 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
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DIAGEO PLC-ADR (DEO): Free Stock Analysis
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CONSTELLATN BRD (STZ): Free Stock Analysis
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