Constellation Brands Inc. (STZ), the world’s largest wine seller, is doubling down on Corona as it looks to widen its lead as the top U.S. beer importer.
The $1.85 billion agreement to buy the other half of its Crown Imports joint venture with Grupo Modelo SAB (GMODELOC) gives Constellation more control over the best-selling import beer in the U.S. The perpetual contract also gives the winemaker confidence to invest more heavily in beer, according to Chief Executive Officer Rob Sands.
Owning all of Crown will diversify Constellation’s sales, boost profit and give it room to take on other import beers, said Kaumil Gajrawala, a New York-based analyst for UBS AG. The company had faced losing Modelo’s brands -- which include Modelo Especial, Victoria and Pacifico -- in 2016.
“We believe this deal is a game-changer,” Gajrawala said yesterday in a note in which he recommended buying the shares. Crown “gives the company a more significant foothold in the U.S. beer market.”
Constellation’s pending purchase of the Crown stake is tied to Anheuser-Busch InBev NV (ABI)’s decision to acquire the rest of Modelo for about $20.1 billion. Constellation will become the sole U.S. importer of Modelo’s brands. The deal also gives Crown more flexibility to import other non-Mexican brands. The company sells Chinese Tsingtao in the U.S. now.
“Everybody was interested in making sure the momentum behind these brands and this portfolio remains intact,” Sands said yesterday in an interview.
Grupo Modelo first imported Corona into the U.S. in 1979, more than 50 years after it was founded in Mexico. The beer, often served with a wedge of lime, was popular enough in the mid-1980s that a black market emerged in cities such as New York and Denver, according to the company.
Sales of Corona, the sixth-largest beer brand in the U.S., fell in the downturn as consumers traded down to cheaper brews. Crown has managed to stop the slide by keeping prices stable and refreshing the “find your beach” advertising campaign that has been Corona’s mainstay for a decade. The new iterations show suited office workers and frequent fliers morphing in and out of relaxed beach scenes as they sip from frosty, longneck Corona bottles.
Sales grew 9.3 percent and Crown boosted its dollar market share by 0.2 percentage points in the year ended May 13.
AB InBev will retain ownership of Crown’s Mexican brands and will act as the supplier. The Leuven, Belgium-based brewer will have no control or influence over pricing, marketing or distribution, Sands said. Discussions began several weeks ago and the only option considered was a buyout of Crown by Constellation, he also said.
Crown will run independently of Constellation brands with the same management, marketing and sales teams, said Sands, adding, “We expect basically no changes whatsoever.”
Sands declined to say whether Crown would raise Corona prices after the deal closes early next year.
“We’re going to do what commercially makes the most sense for Crown and the brands,” Sands said. “We are entirely comfortable investing behind Crown to ensure it remains the No. 1 competitor in the marketplace, especially for imports.”
The agreement for the Modelo brands is perpetual and allows AB InBev to buy them back back in 10 years at 13 times earnings before interest and taxes.
“This is a huge positive for STZ, as it will be the sole importer of the fastest growing imported beer,” Tim Ramey, an analyst for D.A. Davidson & Co., said in a note. He estimated the deal will add about 25 cents to per-share earnings in fiscal 2014.
The deal “gives Constellation better certainty concerning the future of the Crown business,” Linda Montag, senior vice president of the corporate finance group at Moody’s Investors Service, said in a note. Moody’s affirmed Constellation’s Ba1 rating, one rung below the lowest investment grade.
Separately, Constellation said yesterday in a statement that it would purchase the Mark West wine brand for about $160 million. The maker of California pinot noir sells almost 600,000 cases a year, Constellation said.
The company also said first-quarter earnings, excluding some items, were 40 cents a share, compared with the 39-cent average of analysts’ estimates compiled by Bloomberg. Constellation reiterated fiscal 2013 earnings per share would be $1.93 to $2.03. Analysts estimated $2.01.
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