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Constellation Acquires Fortune Brands Wine Arm for $885 Million

World's largest wine company picks up 5 wineries, 1,500 acres of vineyards and several big California brands, including Clos du Bois

Eric Arnold and Tim Fish

Posted: Monday, November 12, 2007

Constellation Brands, the world's largest wine company, has made its third major acquisition in about as many years. After buying Robert Mondavi for $1.3 billion at the end of 2004 and Canadian wine company Vincor for about the same amount in early 2006, Fairport, N.Y.-based Constellation announced today that it is buying Fortune Brands' wine business for $885 million. The deal includes five California wineries, 1,500 acres of vineyards in Napa, Sonoma and Carneros, and several wine brands, the biggest among them Clos du Bois. The deal should be complete by the end of the year, and Constellation will pay cash.

One analyst that tracks Constellation estimated that the vineyard portion of the deal is worth $350 million to $400 million, assuming a price of $250,000 per acre, but that was not confirmed by Constellation or Deerfield, Ill.-based Fortune.

The five wineries Constellation picks up in the deal are Clos du Bois, Wild Horse, Geyser Peak, Buena Vista and Gary Farrell, but the company also gets Fortune's well-known brands such as Atlas Peak and XYZin. This is the third time Gary Farrell has changed hands since 2004, when Farrell, the winery's founder, sold it to Allied Domecq. It was later sold to Fortune Brands' wine division, called Beam Wine Estates, after Allied Domecq was acquired by French spirits giant Pernod Ricard.

"The portfolio is very good, with very solid growth and a solid consumer franchise," said Rob Sands, CEO of Constellation. He added that the deal increases Constellation's annual production by 2.6 million cases, 70 percent of which comes from Clos du Bois. In all, the acquired brands have seen significant revenue growth since 2005, which made them especially attractive to Constellation, Sands said. And more deals could lie ahead. "As opportunities arise, we'll continue to attempt to take advantage of them as long as they meet our financial discipline and generate what we term as true growth," said Sands during an investor conference call.

Sands and Constellation CFO Bob Ryder noted during the call that the company has struggled over the past year or so in the international market. Along with the new acquisitions, Constellation also announced that it is consolidating some of its Hardys business in Australia. It will be pulling out of one of its facilities, the Buronga winery in New South Wales, and moving the production of brands there to the larger Berri Estates winery in South Australia. The cost will be about $22 million, but Ryder said the "Hardys restructuring eliminates excess capacity, improves operating margins, and will pay back in less than three years."

But the California acquisitions could help Constellation turn things around in the United Kingdom and continental Europe, Sands said. "These wines are perfect additions to those markets," he said. He also pointed out that the U.S. distributors of the acquired brands are the same ones Constellation already uses, so there will be no availability problems or glitches in U.S. wine shops and grocery stores. "It'll be a much smoother integration with very little risk at the retail level. No real room for disruption in the marketplace."

Fortune did not sell its spirits brands, such as Jim Beam and Sauza, to Constellation, despite the giant's growing interest—and holdings—in that sector. (Constellation recently acquired the premium vodka brand Svedka, and Sands said the company will continue to look at acquisition opportunities in both wine and spirits.) Fortune will also hold onto its fortified brands, which include Cockburn Port and Harveys Sherry.

The only question marks remaining are what will happen with the wine brands Fortune was importing into the United States, such as New Zealand's Wither Hills and Australian brands Petaluma and St. Hallett, all three of which are owned by Australian beverage giant Lion Nathan. A spokesperson for Beam Wine Estates said the future of those brands in the United States will be up to Constellation and Lion Nathan.

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