Constellation enters Africa with Vincor acquisition

Canada’s Vincor has finally succumbed to the charms of Constellation, which acquires its first South African brand in the takeover, in the shape of Kumala. We discuss the pros and cons of Constellation’s acquisition

The deal that no one thought would ever happen has finally taken place. After spurning Constellation Brands’ advances four times in just over six months, Vincor International has finally agreed to a bid of C$36.50 (US$31.05) per share, which values the company at C$1.52 billion – 13 times the company’s projected turnover for the year.

The Vincor board must be delighted with this high multiple, particularly given that, until recently, Constellation chief executive officer Richard Sands claimed that Vincor (despite being one of the world’s top-ten wine firms by revenue) did not have the margins or the scale to justify the high multiples Constellation paid for the Robert Mondavi winery in 2004.

A number of industry experts have questioned Constellation’s wisdom in making such a large acquisition only 18 months after spending US$1.6bn on Robert Mondavi. Indeed, the Vincor takeover has left some critics wondering whether Constellation is trying to make up for rather unexceptional organic growth with a rapacious expansion strategy.

An industry commentator said: “Although Constellation’s US business is very successful, its European and UK operations appear to be giving their wine away. Constellation has some good products but it doesn’t know how to manage them. The company can’t handle its current portfolio and could be in danger of completely losing the plot in Europe following the Vincor takeover.”

But drinks consultant Hew Dalrymple dismisses this suggestion as sour grapes. He says: “From a UK perspective, this deal takes Constellation Brands onto another level and puts the company streets ahead of the competition. Now that Constellation is so far ahead, its competitors will be jockeying for second place in the market.”

Constellation claims it has absorbed Robert Mondavi, and the company’s fundamentals appear sound. In fact, the
US$4bn that the firm has spent on acquisitions since 1998 seems to have been well invested, with the company witnessing a substantial increase in market capital, from US$900m to US$6.1bn.

There is no doubt that Constellation’s brand portfolio will be boosted by the acquisition, which was driven
by the prospect of owning the Kumala brand and Vincor’s North American distribution. Constellation’s acquisition of
the largest South African export brand has given it the opening it needed in the category. “Interest by multinational companies has to be good for the South African wine industry as it shows confidence in the category,” says Herman Böhmer, CEO, The Company of Wine People, formerly called Omnia Wines.

Although Constellation’s entry into the South African market could be great for the South African wine industry as a whole, it could adversely affect the boutique producers, who won’t be able to compete with Constellation’s economies of scale.

There are also fears that Constellation may restructure the Kumala bottling process and begin bulk-importing into the UK and bottling there, leading to job losses. “Kumala would be foolish not to look at the possibility of bottling its wine in the UK, since this could save the wine producer as much as £1 per case. Many other brands are looking at doing this and, apart from various ethical trading and labour issues in South Africa, there is nothing to stop it from going down this route”, says Alan Cheesman, consultant.

Meanwhile, the acquisition of the iconic Canadian wine label Inniskillin and the New Zealand premium brand Kim Crawford Wines should add to Constellation’s North American capability and give it access to the growing Canadian wine market. Jobs in Canada look safe for the time being, since Constellation had to agree to support the growth of Vincor’s Canadian business in order to have the deal approved by the Canadian competition authorities. This requires not only maintaining the existing wineries, warehouses, vineyards and wine-rack retail shops, but also keeping virtually the same management teams.

So far, Western Wines itself has been little affected by the deal, but there are fears within the company that Constellation will try to integrate the UK wine importer vertically into its business. The question is, as the golden handcuffs come off following the 2004 Vincor buy-out: when will Mike Paul and his colleagues use the proceeds from the $323m sale to set up Eastern Wines? db  May 2006

INSIDER OPINION

Vernon Davis, CEO, Winecorp  “I believe the deal is a positive development for the South African wine industry, as it may have a stabilising influence on prices for grapes and base wines. Constellation’s distribution ability is strong, and a well-distributed volume brand in the US will do the category a lot of good. The Kumala brand certainly has the potential to grow significantly and utilise a large volume of wine, which will be good for removing possible fluctuations in supply and thus any wine ‘surpluses’. I do not see many negatives in such a venture, since it will probably get those who drink wine to drink more and those who don’t, to start.”

Allan Cheesman, consultant  â€œThere aren’t many key brands up for grabs in South Africa, now that Kumala has been purchased. Kumala hasn’t been very successful in penetrating the US or the Canadian market, possibly because of its lack of heritage. It will be interesting to see how Kumala, which is a clever concept with a well-delivered brand, fares under Constellation’s wider and more in-depth distribution network.”

Hew Dalrymple, consultant  “This deal has made Constellation a category leader with a strong presence in the

on-trade, California, Australia and now South Africa. All the main multiples will have to deal with them. The challenge for Constellation will be to make sure that their big brands don’t crowd out their smaller products. Constellation’s acquisition of the Kumala brand is a good move for the group. It will be easier for Constellation to integrate Kumala into its portfolio because Western Wines’ approach to Kumala is similar to Constellation’s approach to marketing Hardy’s: it operates a more tactical, controlled strategy covering all price points, based on regular promotions.
  It is not clear how strong South Africa is in the US market. I would be surprised if Kumala became a huge brand in the
US. It seems more likely that Constellation will focus its efforts on selling Canadian wine, such as Inniskillin, to the US market.
The more forward-thinking of the smaller suppliers, such as BrandPhoenix, won’t be affected by the deal. But the pressure will  be on the likes of Foster’s, Pernod Ricard and E&J Gallo, which aren’t as well diversified as Constellation is now.”

Off the record…
A leading UK wine supplier to the multiples trade, who prefers not to be named, says: “Many people in the wine trade are concerned about the power wielded by large companies, but they still only account for a small percentage of the wine industry. Although we can expect to see Constellation double in size, its growth will be held back by the techniques used by the Old World wine producers.”

Finally
Sources within the industry are confident that it won’t be long until the Telford branch of Western Wines is shut down as
its new owners look to cut costs.  db  May 2006