Constellation / Australian Vintage talks collapse

Uncertainty continues to reign in the Australian wine industry following the breakdown of merger talks between Constellation Brands, the world’s largest producer, and Australian Vintage.

Both sides say that despite their best efforts, they were trying to achieve different goals and so the talks have been terminated.

The proposed deal would have seen AVL buying part of Constellation’s business with AVL shares, leaving existing AVL shareholders holding the controlling interest in the combined business.

In December 2009, both sides obtained informal merger clearance from the Australian Competition and Consumer Commission in relation to a possible combining of part of Constellation’s Australian and UK wine operations with AVL in return for a non-controlling, 50% equity interest in the combined entity that would have been listed separately on the Australian stock market.

The objective was to streamline operations and reduce costs in an effort to counter the effects of continuing oversupply, especially at the cheaper end of the price spectrum, combined with the strengthening of the Australian dollar, which has risen by almost 20% against sterling in the past 12 months.

The deal would also have had a significant improving effect on Constellation’s balance sheet.

News of the breakdown of the talks came only weeks after Foster’s said that it remained undecided on what to do with its ailing wine division.

Both groups’ shares slumped, with AVL slipping to an eight month low, despite the chairman saying: “Australian Vintage is in good financial shape with its lowest debt level in nine years.”

Constellation owns Australian brands such as Hardys, Banrock Station and Leasingham and in the nine months to 30 November had net branded wine sales of $381.7 million in Europe. The company doesn’t issue separate figures for its UK arm, Matthew Clark.

It now plans to continue to try to boost results in its Australian and UK operations by making them more efficient and further paring costs.

Constellation has written off large portions of the value of its business in Australia and the UK, including a $599.9m impairment loss in the fourth quarter of 2008. It has also drastically restructured its Australian interests by selling vineyards and reducing work force.

Australian Vintage produces such brands as McGuigan, Miranda, Yaldara and Sunnyvale. Last month, it announced that its chief executive, Dane Hudson, is leaving in May, which fuelled speculation that a deal with Constellation was near.

Australian Vintage said at the time that it would begin a process to identify Hudson’s successor after a decision was reached regarding a deal with Constellation.

Now the breakdown of the talks with Constellation only adds to the uncertainty about the group’s future strategy.

Ron Emler, 08.04.2010