Fairport, N.Y., Jan. 12 - Constellation Brands, Inc., the world's largest wine company and a leading international producer and marketer of beverage alcohol, today announced it has entered into an agreement to sell its value spirits business 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 million 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 underscores the effectiveness of our focus on cash flow generation."
Spirits 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 mid-premium spirits that are each number two by volume 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 within Constellation's portfolio strategy, which is focused on well-known, trusted premium brands that represent good value to consumers."
As a result of this transaction, 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 year 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.
"To achieve synergies and operating efficiencies we will consolidate the retained premium spirits business into our North American wine operations," explained Sands. "A consolidation plan is expected to be finalized by the close of the transaction. This is a good example of how we are creating efficiencies in our 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 approximately $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-deductible 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. "Sazerac has 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.