The world's leading premium wine and spirits distributor,
Constellation Brands Inc.
(
STZ
), took a step forward in completing its pre-announced acquisition
of Crown Imports by finishing the sale of additional Senior Notes.
These notes are slated to mature in March 2023.
The company had issued $650 million of Senior Notes with a
coupon rate of 4.625%, of which it received $641 million in net
proceeds after deducting all the expenses related to the issuance.
It intends to use all the net proceeds, along with available cash
and existing revolver credit facility and term loan, to finance the
acquisition.
At the end of first-quarter of 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 $850 million remaining under its revolving credit
facility.
We believe that the financial condition of the company is not
strong enough and so it has opted to finance the acquisition in
this way. It is anticipated that the acquisition will increase
Constellation Brands' debt-to-EBITDA ratio to mid-four times.
However, in next 12 months, the company is expecting to generate
strong free cash flow, which will bring its leverage ratio to its
targeted range of three to four times.
Apart from this, Constellation Brands has successfully modified
its 2012 credit agreement. The amended agreement will facilitate
the company a $575 million delayed draw term loan, which it intends
to use for completing the acquisition.
In June 2012 the company, in order to enhance its presence in
the U.S. beer market, entered into an agreement with
Anheuser-Busch InBev
(
BUD
) to acquire the remaining 50% stake of Crown Imports.
The proposed acquisition is expected to complete by December 30,
2012. If for any reason, Constellation Brands fails to close the
acquisition by this date, it will redeem the senior notes at par
value along with the accrued interest.
Constellation Brands has a 50-50 joint venture with Grupo Modelo
S.A.B. de C.V. (Modelo) in Crown Imports. Previously, AB InBev
completed its proposed acquisition of Modelo.
Per the agreement, Constellation Brands will pay $1.85 billion
to complete the 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.
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 completion of
the deal, Constellation Brands will become the largest
multi-category supplier of beer, spirits and wine and on a volume
basis, the 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 that the
acquisition will be significantly accretive to its earnings per
share and free cash flow.
The company reiterated its fiscal 2013 adjusted earnings per
share guidance in the band of $1.93 to $2.03 per share. Though the
guidance excludes any impact from the acquisition, we expect the
transaction to contribute positively to the fiscal 2013 earnings
performance. The current Zacks Estimate of $1.99 per share is
approximately at the midoint of the company's guidance.
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 Constellation Brands'
growth opportunities while strengthening its market position.
Additionally, in an effort to generate strong margins,
Constellation Brands is focusing on higher priced segment across
all key categories. The company also recently acquired a California
based wine company - Mark West - which is anticipated to enhance
its presence in the wine market.
However, the company faces intense competition from other
well-established players in the industry, including
Beam Inc.
(
BEAM
) and
Diageo plc
(
DEO
). Moreover, Constellation Brands encounters competition from local
and regional players in the respective countries, which may dent
the company's future operating performance.
We currently have a Zacks #2 Rank implying a short-term Buy
rating. However, our long-term recommendation on the stock remains
'Neutral'.
BEAM INC (BEAM): Free Stock Analysis Report
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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