Constellation to Sell Value Spirits Brands to Sazerac for $334 Million

Constellation is divesting more than 40 brands including Barton, Skol, Mr. Boston, Fleischmann’s, the 99 schnapps line, the di Amore line, Chi-Chi’s pre-mixed cocktail line, Montezuma Tequila, in addition to numerous other brands representing over 600 SKUs.

14/01/09 Constellation Brands, Inc., the world’s largest wine company and a leading international producer and marketer of beverage alcohol, announced it has entered into an agreement to sell its value spirits brands to New Orleans-based Sazerac Company, Inc. for $334 million, subject to closing adjustments. The transaction is subject to routine and customary regulatory review, and is expected to close by the end of February 2009.

The entire net after-tax proceeds of approximately $210 million will be used to reduce Constellation’s borrowings. The sale price includes $274 in cash and $60 million in medium-term financing by Constellation at market interest rates.

“This transaction is consistent with our strategic focus on premium, higher-growth and higher-margin brands in our portfolio, and allows us to continue the process of reducing debt, generating free cash flow, creating efficiencies and increasing ROIC,” stated Rob Sands, Constellation Brands president and chief executive officer. “With the proceeds from asset sales, along with our targeted free cash flow for fiscal 2009, we now expect our debt to comparable basis EBITDA ratio to be approximately four times by the end of the current fiscal year, which is a significant accomplishment given the current global economy,” Sands added.

Brands the company is retaining include SVEDKA Vodka, Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy. SVEDKA Vodka is the fourth largest imported vodka brand in the U.S. and one of the fastest growing major spirits brands in the world. Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy are two leading mid-premium spirits that are number two in their respective categories.

“Totaling almost five million cases, the three principal spirits brands we are retaining have scale in the marketplace, good margins, are at mid-premium price points and continue to grow ahead of their respective categories,” said Sands. “These are exactly the type of scale brands that fit well with Constellation’s portfolio strategy, which is focused on well-known, trusted premium brands that represent good value to consumers.”

Constellation is divesting more than 40 brands including Barton, Skol, Mr. Boston, Fleischmann’s, the 99 schnapps line, the di Amore line, Chi-Chi’s pre-mixed cocktail line, Montezuma Tequila, in addition to numerous other brands representing over 600 SKUs. The total volume for brands being sold was more than 10 million cases for fiscal 2008, with net sales for the divested brands totaling approximately $200 million. Distillery and bottling facilities included in the sale are located at Bardstown and Owensboro, Ky., as well as a leased bottling facility at Carson, Calif. Constellation will retain its distillery and production facility at Lethbridge, Alberta, Canada. 

“We will also use this opportunity to consolidate the retained premium spirits business into our North American wine operations,” explained Sands. “To achieve synergies, the company is evaluating a consolidation plan that is expected to be finalized by the close of the transaction. This is a good example of how we are creating efficiencies in the business by leveraging our existing infrastructure to propel growth and enhance ROIC.”

The transaction is expected to result in a pre-tax reported loss of approximately $11 million or an after-tax loss of $0.20 diluted earnings per share on a reported basis, and will be excluded from the company’s comparable basis diluted earnings per share. The loss on the disposal is primarily driven by the write-off of non-deductable goodwill unrelated to the brands being sold as required by generally accepted accounting principles in the U.S. Due to the anticipated impact on reported results, and assuming the completion of this transaction, the company is adjusting its fiscal 2009 reported diluted EPS guidance to $0.45 - $0.49, from its previous reported diluted EPS guidance of $0.65 - $0.69.

The impact of this transaction is expected to be neutral to ongoing reported basis and comparable basis diluted earnings per share for fiscal 2009 and fiscal 2010. As a result, the company’s fiscal 2009 comparable basis diluted EPS guidance remains $1.68 - $1.72. The gross proceeds from this transaction do not impact free cash flow as defined by the company. Free cash flow guidance for fiscal 2009 remains unchanged at $360 - $390 million.

“The brands being sold will be in good hands and complement Sazerac’s existing portfolio,” said Sands. “They have a track record for growing brands they own, which makes this a mutually beneficial transaction.” While many employees associated with the brands being sold will transfer to the new owner, some will be impacted by this change and the company is taking appropriate actions to support those who are displaced.

Brands Retained by Constellation Brands Include:

Balblair Scotch; Black Velvet; Black Velvet Reserve; Danfield's Private Reserve Whisky; Garduno's Tequila; Golden Wedding Whisky; MacNaughton; McMasters; O.F.C. (Original Fine Canadian); Old Pulteney Scotch; Order of Merit; Paul Masson; Royal Command; Schenley (family); Silver Wedding; Speyburn Scotch; and SVEDKA Vodka (family).

Brands Transferred to Sazerac Include:
99 schapps (family); Barton (family); Calypso (family); Canadian Host Whisky; Canadian LTD Whisky; Canadian Supreme Whisky; Capitan Tequila; Caravella (family); Chi Chi's (family); Colonel Lee; Crystal Palace (family); Czarina (family); Diamore (family); Effen Vodka (family); El Toro Tequila (family); Fleischmann's (family); Fourth Colony (family); Glenmore (family); Hartley's Brandy, Highland Mist Scotch; House of Stuart Scotch; Imperial Blend Whiskey; Inverhouse Scotch; Jacques Bonet Brandy; Kentucky Gentleman (family); Kentucky Tavern Bourbon; Lauders Scotch; Meukow Cognac; Montaillac Cognac; Monte Alban; Montezuma Tequila (family); Mr. Boston (family); Naked Jay Vodka; Northern Light Canadian Whisky; Old Thompson Blend Whiskey; Olo Rum; Pikeman Gin; Ridgemont Reserve 1792; Royal Award (family); Royal Club Blend Whiskey; Royal Embassy (family); Sabroso (family); Skol (family); Ten High (family); Tom Moore Bourbon; Very Old Barton Bourbon; and Wide Eye Schnapps (family).