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Constellation Brands Brews A Boost From Mexican Beer

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Anniversaries are often celebrated with toasts over raised drinks.

If any drink were in order whenConstellation Brands ( STZ ) recently marked its anniversary of a game-changing acquisition, it would be beer -- and a Mexican brand in particular.

A year ago this past weekend, Constellation Brands became full owner of Grupo Modelo's U.S. beer business in a $5.3 billion deal withAnheuser-Busch InBev ( BUD ).

Victor, N.Y.-based Constellation essentially got the remaining 50% stake in Crown Imports that it didn't already own.

The deal included full U.S. rights to import, market and sell Mexican beers under the Modelo umbrella, including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico.

The transaction, which included a brewery, doubled the size of Constellation, which also operates wine and spirits segments.

It strengthened Constellation's position as the largest importer of beer in the U.S. and the country's third largest beer brewer and seller after Anheuser-Busch and MillerCoors, a division ofMolson Coors Brewing ( TAP ).

Constellation "was a wine company before it imported beer, but they didn't own beer," said analyst Lauren Torres of HSBC Global Research. It "now owns a brand (Grupo Modelo) with great equity in beer."

Tops In Hops

Cheers go especially to Modelo Especial, Constellation's fastest-growing beer. Last year, U.S. shipments jumped 18%, reported Beer Marketer's Insights, making it the fastest-growing of the many beers that the beer-information provider tracks. Crown Imports' overall shipments were up nearly 6%.

That growth arrived despite declining sales of many other beers, including Bud Light, Budweiser, Coors Light, Miller Lite, Miller High Life and Busch. Overall U.S. beer shipments, excluding exports, slid 1.3% in 2013, said Beer Marketer's Insights, continuing a multiyear trend of declining volumes.

The economic downturn "hit mainstream beer drinkers harder than wine or spirits markets," said Eric Shepard, editor of Beer Marketer's Insights' newsletter.

But Modelo and Corona aren't expected to slow down anytime soon, Shepard says. Modelo spiked fairly quickly over the last 18 months, he says, largely because it's a hit with Latinos, a large and fast-growing demographic in the U.S.

But, he says, Constellation's beer portfolio is reaching plenty of non-Latinos, including Millennials (the generation born from the early 1980s to the early 2000s).

This year through April 20, volume sales of Modelo Especial surged 25%, Constellation said, citing data from Information Resources (IRI). Pacifico logged an 11% gain. Corona Extra and Corona Light were up 9% and 5%, respectively, and Negra Modelo 7%.

For Pacifico, a new national web and social-media marketing campaign -- the largest to date, called "Yellow Caps," a play on the beer's bright yellow bottle caps -- will roll out this summer. It will be supplemented by three TV ads on digital video, print ads in Southern California and spot TV ads in San Diego.

Corona is one of the biggest imported beers in the U.S. But the mature brand had lost some share to newer, lower-priced imports in the recession, Torres says.

But it has "incredible brand equity" and is back on the rise "a bit," she said, no doubt due in part to the success of the "Vacation in a Bottle" ad campaign.

"The Crown (beer) business is growing faster than their wine business," said Stifel Nicolaus analyst Mark Swartzberg. "We're happy to see (Constellation) becoming less reliant on the wine business."

Beer generates better cash flow and margins than wine, which is "a more capital-intensive business than beer," he said.

"Wine is a business that requires a lot more inventory and land than beer," Swartzberg said. It's also not as reliant on brand names, he says.

Torres says that a good portion of Constellation's wine business is being hurt by "competitive pricing" in the industry.

For the beer business, the company's outlook for fiscal 2015 calls for mid to high single-digit net sales growth and operating income growth in the low- to mid-20% range.

But for wine and spirits, it forecasts low- to mid-single-digit growth for both net sales and operating income.

Analysts expect full-year earnings to grow 26% to $4.09 a share.

A Year In Beer

Net sales in the company's fiscal year ending Feb. 28 jumped 74% to $4.9 billion, driven by $2 billion of incremental net sales related to the Crown beer business. Beer sales for the year rose 10%, while wine and spirits sales grew only 2%.

Profit for the year rose 48% to an adjusted $3.25 a share. Fourth-quarter earnings were up 72%, a third straight quarter of double-digit gains.

"I'm excited about the organic growth prospects for our beer business in fiscal 2015," said Constellation Brands CEO Robert Sands in the post-earnings conference call on April 9. He said that the firm expects sales and depletion trends to exceed U.S. beer industry and import levels once again.

Sands called last year's beer deal "our most transformational acquisition in the history of our company." (Management was unavailable to comment for this article, citing the "quiet period" ahead of the first-quarter earnings release on July 2.)

The acquisition also gave Constellation full ownership of a brewery in Nava, Mexico, which it's doubling in size. But management said in the last earnings report that the work would cost twice the original estimate, $900 million to $1.1 billion vs. $500 million to $600 million previously. The project is expected to be completed in 2016.

Swartzberg says that the added cost isn't as big an issue as it might seem. He figures that Constellation will benefit from at least $135 million in cost savings from brewery operations through mid-2016.

Roots In Wine Business

Founded in 1945, Constellation began to focus on branded wines in the early 1950s. Sands joined his family's upstate New York wine business in 1979, helping to expand it organically and via acquisitions.

The company shifted its focus to premium wines over the last decade. In 2004, for example, it acquired Robert Mondavi. A few years later, it sold off value brands Almaden and Inglenook.

But some other wine buys weren't as successful as Robert Mondavi. In fiscal 2008, Constellation wrote off $822 million in impaired assets from its Australia and U.K. wine businesses.

"They paid too much for their wine M&A's (mergers and acquisitions)," Swartzberg said.

Besides Robert Mondavi, Constellation's wine lineup comprises Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. Liquor brands include Svedka Vodka and Black Velvet Canadian Whisky.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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