Constellation Brands, Inc. STZ inked in an agreement with Heaven Hill Brands to divest the Black Velvet Canadian Whisky brand and related assets for cash proceeds of around $266 million. The sale also includes the brand’s related production facilities in Lethbridge, Alberta, Canada, with a subset of Canadian whisky brands.
The sale is valued at eight to nine times of the company’s gross profit after marketing. With the sale of this brand, the company is on track with its wine and spirits business transformation strategy. Notably, the transaction is anticipated to close in the second half of calendar 2019, subject to regulatory approvals.
Per management, the deal is in sync with consumer-led premiumization strategy to deliver accelerated growth and shareholder value.
Constellation Brands remains keen on reviving the performance of the wine & spirits business. As part of its efforts, the company agreed to sell nearly 30 low-end brands from the wine & spirits portfolio, which are priced at or below $11 per bottle, to E. & J. Gallo Winery for $1.7 billion. This deal also includes the divestiture of related facilities in California, New York and Washington. This transaction is expected to conclude by second-quarter fiscal 2020.
Sale of these low-end brands will help it concentrate on more lucrative premium wine & spirits brands, which should enhance returns and shareholder value. The company expects to use proceeds from the transaction to reduce debt. Although it provided soft guidance for the wine & spirits business for fiscal 2020, it targets achieving mid single-digit power brand depletion growth due to gains from wine and spirits transformation strategy. In the long run, this business is anticipated to generate mid single-digit net sales growth with operating margin of 30%.
Additionally, the company displays a consistent earnings record backed by strength in the beer business. It is also poised to gain from exposure in the cannabis space with its investment in Canopy Growth CGC. Furthermore, its constant brand-building efforts, acquisitions and pipeline of innovations are commendable.
However, persistent softness in the company’s wine & spirits business is weighing on its performance. Moreover, it expects higher interest expense related to investment in Canopy Growth and weakness in wine & spirits business to hinder earnings growth in fiscal 2020.
Notably, shares of this Zacks Rank #4 (Sell) stock have decreased 6% in the past three months, underperforming the industry’s growth of 7.4%.
2 Alcohol Stocks to Watch Out For
Anheuser-Busch InBev SA/NV BUD has an expected long-term earnings growth rate of 9.1%. Moreover, it currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Boston Beer Company, Inc. SAM, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 10%.
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