Constellation Brands Inc. reported a first-quarter drop in profit Friday, due to a drop in wine and spirit sales.
The news came hours after the Victor firm reported it was purchasing the remaining 50 percent stake of Crown Imports LLC that it does not already own for $1.85 billion. The move would give the Victor firm total control of distribution of popular Corona beers in the United States.
The company also said it will be buying the Mark West pinot noir brand for roughly $160 million.
The company announcements, which started to be released shortly after 2 a.m., led to a double-digit percentage jump in Constellation Brands’ stock when the market opened. Company shares (NYSE: STZ) opened at $26.05, up some 20 percent from its Thursday close of $21.76.
For the quarter, Constellation brands earned $72 million, or 38 cents a share, down from earnings of $74.5 million, or 35 cents a share, a year ago. Excluding restructuring charges and other items, earnings were 40 cents a share.
The company logged sales of $634.8 million, down less than 1 percent from sales of $635.3 million, a year ago. The current results largely were due to higher promotional costs and a decrease in volume, partially offset by favorable product mix, the company said.
Analysts polled by Thomson Reuters expected Constellation Brands to report earnings per share of 39 cents on sales of $646 million.
The company said the Mark West acquisition is expected to close in July and likely will add slightly to its fiscal 2013 earnings per share. Launched in 2002, Mark West is primarily a California pinot noir that has grown into a nearly 600,000-case brand selling in the United States for $10 to $12.
Constellation maintained its forecast for fiscal 2013 adjusted earnings of $1.93 to $2.03 a share.
Moody's Investors Service affirmed Constellation Brand's Ba1 rating and stable rating outlook after the acquisition news. Moody's said the acquisitions are both positives for the company, although leverage will temporarily spike up beyond the range that is comfortable for the current rating level.
More importantly, however, the deal with Anheuser-Busch InBev SA/NV gives Constellation better certainty concerning the future of the Crown Imports LLC business, Moody’s said.
Constellation Brands currently owns 50 percent of Crown Imports, which is a 50-50 joint venture with Grupo Modelo S.A.B. de C.V. Constellation signed a definitive agreement with AB InBev to purchase the remaining 50 percent interest as AB InBev completes its proposed acquisition of Mexico-based Modelo in a reported $20.1 billion deal.
Constellation Brands has agreed to pay $1.85 billion, which represents 50 percent of a multiple of approximately 8.5 times Crown`s earnings before interest and taxes, the company said. The deal, which is subject to regulatory approval, is expected to close during the first quarter 2013.
Constellation Brands has bridge financing in place to complete the acquisition, company leaders said. Permanent financing is expected to consist of a combination of revolver borrowings, a new term loan under the company’s current senior credit facility and the issuance of senior notes.
While the move likely will increase Constellation Brands’ total debt initially, strong free cash flow will help to offset that increase in the long run, the company said.
In a related note, the company plans to suspend its current share repurchase program. The business has some $700 million remaining under its $1 billion share repurchase authorization.
The deal will solidify Constellation Brands’ position as the largest multicategory supplier of beverage alcohol and the third-largest total beverage alcohol company in the United States, company leaders said.
"This is a significant milestone in the history of Constellation Brands," said Robert Sands, president and CEO, in a statement. "We have been the importer, marketer and seller of the Modelo brands in the U.S. for almost two decades. During this time, the Crown team has successfully built the Modelo portfolio into an enviable position of leadership and growth.
“Our full ownership of this significant beer business provides an additional strategic lever for driving overall profitable organic growth.”
Crown’s portfolio of brands includes Corona Extra, Corona Light, Modelo Especial, Pacifico, Negra Modelo and Victoria. Corona Extra is the best-selling imported beer and the sixth best-selling beer overall in the industry. Corona Light is the leading imported light beer and Modelo Especial is the third-largest and one of the fastest growing major imported beer brands.
The terms of the transaction give Constellation Brands and Crown complete, independent control of distribution, marketing and pricing for all Modelo brands in the United States. AB InBev will ensure continuity of supply, quality of products and the ability to introduce innovations, Constellation Brands said.
During Constellation’s fiscal 2012, Crown sold 164 million cases and generated $2.47 billion of net sales and $431 million of operating income.
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