Stars Align for Winemaker Constellation

By MIKE ESTERL

One big winner in Belgian brewer Anheuser-Busch InBev NV's $20 billion planned takeover of Mexico's Grupo Modelo SAB: Constellation Brands Inc., a wine company from upstate New York.

In a surprise development, the maker of Robert Mondavi and Clos du Bois wines is poised to control U.S. imports of popular Modelo beers, including Corona Extra, for at least the next decade. AB InBev, the world's largest brewer by volume, agreed to sell those rights to Constellation for $1.85 billion in a side deal meant to allay antitrust concerns over the Modelo purchase.

The twin transactions announced Friday highlight how AB InBev finds itself boxed in by its size in the U.S., where the brewer commands nearly 50% of the market by volume. In other parts of the world, the maker of Budweiser, Stella Artois and Beck's can add to its roughly 20% global market share.

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The deals promise to transform winemaker Constellation Brands.

The deals marked a transformative moment for Constellation, whose annual revenue would double by acquiring the 50% it doesn't currently own in Crown Imports LLC. The Modelo-Constellation joint venture had $2.5 billion in sales last year and is the No. 3 beer supplier in the U.S. with an estimated 6% of the market. Corona is the leading U.S. imported beer, and Crown's Modelo Especial is No. 3.

Control of Crown could open the door for Constellation to add to its portfolio of beers through acquisitions or partnerships with other brewers. Such moves would narrow the gap with MillerCoors LLC, a joint venture between the U.K.'s SABMiller PLC and Denver-based Molson Coors Brewing Co. MillerCoors is the No. 2 U.S. player with nearly 30% of the market. The Crown purchase also could heighten pressure on Dutch brewer Heineken Holding NV, the fourth-largest U.S. supplier, with roughly 4% of the market.

Constellation's shares soared $5.30, or 24%, to close at $27.06 Friday on the New York Stock Exchange after the Crown deal was announced. The company's stock had been underperforming the broader market in recent months amid concern Modelo wouldn't renew the 10-year Crown joint venture, which was set to expire at the end of 2016. Mexico's biggest brewer sued Constellation in 2009 over marketing and promotional expenses before settling out of court.

"We don't have this cloud of what happens in 2016 hanging over us,'' said Rob Sands, Constellation's chief executive.

Under the deal, the Victor, N.Y., company and its Crown subsidiary would control distribution, marketing and pricing for all Modelo brands in the U.S. AB InBev would have an option every 10 years to buy the U.S. rights at 13 times operating profit, subject to regulatory approval. Crown had $431 million in operating profit last year.

Constellation's shares had climbed 13% last Monday following news that AB InBev was close to acquiring the 50% in Modelo it didn't already own. Investors believed AB InBev also would try to buy Constellation's stake in Crown, potentially for as much as $3.5 billion.

Investors preferred the way the deal turned out for Constellation because it would diversify the wine company just as the U.S. beer industry is growing after three straight years of declines.Tim Ramey, an analyst with D.A. Davidson, praised it as "a home run.'' Stifel Nicolaus raised its recommendation on Constellation's shares to "buy'' from "hold,'' saying the company had secured a "crown jewel.''

U.S. beer shipments rose 2.2% in the first four months of this year from a year earlier, according to the Beer Institute, an industry group. But Crown's volume increased 7.2% in the last three months, including a 28% jump for Modelo Especial, according to Bernstein Research. AB InBev's volume was flat.

Crown President Bill Hackett said he hopes to more than double the company's U.S. market share to 20% in dollar terms by 2020. Friday's deal would allow Crown to buy or distribute other beers not from Mexico, reducing its reliance on Modelo. "We will absolutely be having conversations about brands that would be a good fit for our organization,'' he said.

Any beer acquisitions by Constellation could take time. The company said it remained committed to its wine business and said Friday it would pay $160 million to acquire Mark West, a popular Californian Pinot Noir. Constellation, which already owns dozens of brands, including Ravenswood and Estancia, is vying with closely held E. & J. Gallo Winery and others for top status in the heavily fragmented wine industry.

The deals for Crown and Mark West also would push Constellation's debt to about 4.5 times operating profit, limiting the company's near-term options. Still, credit-ratings services said they expected Constellation would bring that figure down to the company's long-term target of three to four in the next 12 to 18 months, helped by increased cash flow from Crown.

Constellation said it hopes to close the Crown acquisition in the first quarter.

Constellation Brands Inc.

Headquarters: Victor, N.Y.; employees: 4,400

Fiscal 2012* profit: $445 million; sales: $2.65 billion

Wines: Robert Mondavi, Clos du Bois, Blackstone, Inniskillin, Franciscan Estate, Ruffino, Estancia

Spirits: Svedka vodka, Black Velvet whiskey, Paul Masson brandy

Beers**: Corona Extra, Corona Light, Modelo Especial, Negra Modelo, Pacifico, Victoria

A version of this article appeared July 2, 2012, on page B3 in the U.S. edition of The Wall Street Journal, with the headline: Stars Align for Constellation in Deal.