Industry eyebrows were raised last month when powerhouse producer (think Corona and Modelo) Constellation Brands Inc (STZ.N) confirmed plans to unload a big chunk of their wine portfolio ASAP. Now, the deal is official and the buyer (and the deal) feels pretty logical. E. & J. Gallo announced that they will be shelling out some $1.7 billion to acquire 30 low-end wine and spirits brands and six wineries from Constellation.
“We are committed to remaining a family-owned company focused on growing the wine industry,” said Gallo CEO Joseph E. Gallo in a statement. “While we continue to invest in our premium and luxury businesses, we see a tremendous opportunity with this acquisition to bring new consumers into the wine category.”
Constellation, formerly America’s third largest wine company, will be handing Gallo, the largest wine company in the nation, brands including Clos du Bois, Black Box, Estancia, Mark West, Wild Horse, Franciscan, and Ravenswood. Notably, the majority of the brands in the deal retail for $11 or less per bottle.
The wineries in the sale are Mission Bell, Turner Road Vintners, Clos du Bois and Wild Horse in California; Hogue Cellars in Washington; and Canandaigua in New York.
“One of the hallmarks of our success over the years has been our ability to evolve and stay on the forefront of emerging consumer trends,” said Bill Newlands, Constellation Brands President and CEO. “This decision will help enhance organizational focus on a more premium set of wine and spirits brands that better position our company to drive accelerated growth and shareholder value.”
Constellation will hold onto some lower priced, entry level wines including the Robert Mondavi brand family, The Prisoner Wine Company brand family, Ruffino, and Meiomi. In addition, the conglomerate still owns numerous premium offerings such as SIMI, Schrader Cellars and Mount Veeder Winery.
Why It Matters
Industry watchers will quickly observe that the move is yet another example of a shift towards premium and ultra premium products sweeping through the wine and spirits world. The two companies will offer an interesting case study about low profit margin, high volume sales vs. low volume, high profit margins moving forward.
Equally significant, the move appears to be final piece of the puzzle in Constellation’s ongoing restructuring. In a series of high-profile moves, Constellation has been shifting their focus over the past two years.
Garnering the most attention was a move into the cannabis via Canopy Growth, a large, Canadian medical marijuana provider. In August, Constellation spent $4 billion (US) to increase their existing stake in Canopy from 9.9% to 38%. Constellation purchased 104.5 million shares directly from Canopy Growth at a price of C$48.60 per share. In addition, Constellation exercised previously held warrants and received new warrants that would allow the company to purchase a 50% share moving forward.
Such sweeping changes are not out of character for Constellation. In October, the company announced that its chief executive of 11 years, Rob Sands, will conclude his tenure in March, with Newlands taking the helm.
Likewise, the summer re-up on cannabis was accompanied by layoffs of entire craft beer sales team. There is even precedent for the wine sales; in 2016, the conglomerate’s Canadian wine portfolio was sold to the Ontario Teachers’ Pension Plan for about C$1.03 billion ($775 million).