Constellation makes big moves to stay on top

Constellation Brands is confident of dynamic growth in the next 12 months, with an Oregon winery purchase, cannabis beverage empire and a hushed-up deal with Monster energy drinks all potentially on the horizon.

Constellations chief executive Bill Newlands says that he expects the American drinks group to build further on the success of the last year, in which Constellation achieved double-digit organic earnings growth.

The beer business based on the Modelo and Corona brands delivered strong net sales growth of 11% which boosted operating margin performance, while the wine and spirits division also reported strong organic net sales growth, mostly driven by its Meiomi, Kim Crawford, and The Prisoner brands.

Constellation sold its commodity-end wines brands to Gallo for US$800 million 15 months ago to concentrate on the premium sector, which has now delivered 9% net sales growth in a year.

After generating operating and free cash flow of US$2.7 billion and US$1.7 billion, respectively, Constellation has already returned nearly US$2 billion to shareholders in share repurchases and dividends as part of a US$5 billion programme and plans a further US$500 million of share repurchases in the next three months.

Newlands is looking at earnings growing by up to 10% in the next year with operating cash flow of between US$2.6 billion and US$2.8 billion and is projecting free cash flow of  up to US$1.4 billion.

“Our business continues to gain momentum” he said. “Despite various headwinds, we extended our leadership position in the high-end of the US beer market, our high-end wine and spirits brands continue to outpace the industry complimented by successful innovation, we continue to invest aggressively in our core business and we’ve set a strong foundation for future growth.”

For the new financial year, the beer business is targeting net sales growth of 7% to 9% while the wine and spirits business expects net sales to decline 1% to 3%, largely as a result of restructuring and increasing costs.

Despite consumer inflation that could rise above 10% later this year, Newlands does not expect households to cut back on their consumption.

“One of the things that I’ve seen over the course of my career in the alcoholic beverage business, is many, many times, when there is recessionary environments, consumers are still interested in our category and almost view it as a small luxury that they can still experience where they might pass on buying a new refrigerator or something that’s a bigger purchase,” he said.

Constellation is intent on improving the depth and extent of its portfolio and is buying its first Oregon winery, Lingua Franca, founded by Master Sommelier Larry Stone a decade ago. It has also acquired full ownership of Austin Cocktails, a rapidly growing, ready-to-drink cocktail company based in Austin, Texas in which it took an initial stake in 2018.

Later this year, Constellation will launch with Coca-Cola a new line of spirit-based ready-to-drink cocktails under Coke’s Fresca label and it is adjusting its own hard seltzer portfolio.

“We are getting much more focused on where we bring differentiated products rather than me-too products into that particular sector ” Newlands said.

And there is hope too that Constellation’s US$4 billion investment in its 38% of Canopy Growth, the Canadian cannabis group, could be a step nearer to paying off.

Last week the  Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act passed through the House of Representatives, which is seen as a major step towards federal legalisation of cannabis in the US.

If passed by the Senate,  the act would remove cannabis from the US Controlled Substances Act and erase certain federal convictions. While some states might still impose their own restrictions on cannabis based products, Constellation would be in prime position to lead the market for infused drinks.

Constellation is also believed to be in ongoing talks about a merger, or joint venture, with energy-drinks producer Monster Beverage Corporation.  While both sides refuse to comment, analysts are split on its potential merits.

A whole range of new products would be possible and both companies would gain access to each other’s US distribution network. On the other hand, initially at least, there would be fewer cost savings than would normally be expected from such a union because of the different sectors in which the two groups operate.

Intriguingly in the context of further expansion, the Sands family, which owns a controlling stake in Constellation,  is proposing relinquishing some of its voting power, which could make the group more flexible for deals.

At present, Constellation’s shares are divided into two classes, A and B, with the latter holding the votes.

The Sands family has proposed that each ‘B’ share be converted into 1.35  ‘A’ shares. If accepted, the family would remain the company’s largest shareholder, but their voting power would be cut to 19.7% from 59.5%.

In his letter to shareholders, chairman Rob Sands said the family’s proposal for one vote per share was not being made in connection with any other corporate transaction. And Constellation itself refused to comment further.

However, if approved, the change should be well-received by investors, since they have been frustrated by their lack of say in how the company spends its cash. Further, a dual share structure could impede any future corporate negotiations, especially if shares swaps were to be part of a deal.

“We believe that a declassification will help the company continue in its growth,” Sands wrote.  He added that the family would also “be pleased to maintain our ability to control the company” should the board or shareholders prefer the status quo.

Constellation’s board has created a special committee to evaluate the proposal. It will advise other shareholders in about three month’s time.