Constellation sells wine brands to E. & J. Gallo for $1.7B
UPDATE: April 4, 2019: Constellation Brands sold about 30 brands from its wine and spirits portfolio to E. & J. Gallo Winery for $1.7 billion. The deal is expected to close by the end of the company's first quarter of fiscal 2020.
- E. & J. Gallo Winery is reportedly in talks with Constellation Brands to purchase some of its lower-end wine brands — including Clos du Bois, Mark West, Arbor Mist and Cooks — anonymous sources familiar with the sale told CNBC.
- The third-largest beer company in the United States had hoped to shed its bottom-of-the-barrel wines for $3 billion. However, sources familiar with the details of the negotiations said that the price tag is expected to be around $2 billion or less.
- Sales of non-premium wines, including the ones owned by Constellation, are down 9% compared with a year ago, according to an industry report by Silicon Valley Bank. However, Constellation's more premium wines — defined as those costing $11 or more a bottle — have been performing well, CNBC reported.
Today's alcohol space is fluid as studies have shown millennials don't have strong loyalty to brands and seek out new drinks and innovations. That has caused traditional adult beverages to be in tight competition with craft spirits, cannabis-infused items and alcohol-free drinks. Constellation Brands has been one of the major alcohol companies investing in emerging brands and new trends, shown by its $4 billion stake in Canopy Growth.
Constellation has been divesting some beverages in an effort to generate the cash flow to invest in new, experimental categories. Wine brands seem to keep finding themselves on the company’s chopping block, so Constellation's long-term strategy could be to trim all of its wine brands completely. Two years ago, wine made up 44.7% of Constellation's net sales. But by the beginning of 2018, wine accounted for only 38.6% of Constellation’s net sales of $7.6 billion. Part of this dramatic decrease can be accounted for by Constellation’s sale of its Canadian wine business in 2016 to Ontario Teachers Pension Plan for about $775 million.
It makes sense that Gallo was interested in Constellation's bottom-tier American wines. It is a maker of low- to mid-range wines, and despite the struggles that other companies have seen with cheap wine, the company saw growth last year. Although a privately held company, Forbes posted its revenue growth last year at 2.1% to $4.8 billion. Snapping up a bunch of brands that reportedly generate annual earnings of more than $260 million is a logical move for the California winemaker.
It is also not a surprising one. Gallo announced earlier this year that it would become the exclusive U.S. importer for Italian Gruppo Montenegro, whose brands include Amaro Montenegro, Select Aperitivo and Vecchia Romagna Brandy, showing current interest in acquisitions. And this deal allows Constellation to focus on its beer brands.
"Overall, we remain bullish on STZ’s overall beer positioning at the category's premium end and are glad to see confirmation of its wine sale, which removes a significant overhang on the stock, in our view," Bonnie Herzog, an analyst for Wells Fargo Securities, wrote in a note to analysts.
Since Constellation sold the brands for $1.7 billion, it could give the company a nice cushion with which it could invest in developing other CBD- and THC-infused beers — beverages that have recently shaken up the market with growth and show signs of overtaking more traditional beverages like beer and wine.