Wednesday, October 20, 2004

Mondavi - Constellation Offer

At first blush, the Constellation offer to buy 100% of Mondavi's stock seems like a great offer, a chance to keep to company together, and a chance for shareholders to get a very nice return. The offer is for 21.6 times the company's trailing operating income and 15.1 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). By any reasonable wine industry standard, this is a great offer, possibly one that will be outbid, but still a great offer.

Rational management would jump at the chance to take a 37% premium on the current share price, but I believe that the board will turn the offer down. Why? Because Ted Hall, as the new Chairman of the Board, has displayed nothing but arrogance right from his $750,000 signing bonus up to his nonchalant attitude toward Constellation's offer. Hall and Greg Evans, the CEO, have said that they can get $800-900 million pre tax and at least $500 million post-tax for the luxury brands alone. If they believe that the luxury assets are worth at least $800 million, they must believe that the lifestyle assets are worth at least another $800 million for a total of at least (and probably much more than) $1.6 billion. This is $300 million of the Constellation bid and will be their justification for rejecting it.

Therefore, the board cannot accept the Constellation offer without admitting that they are completely wrong in their approach to and valuation of their luxury assets. They will then have to reject the offer (or have it voted down via the Mondavi family's voting control) and stay their course (there's the arrogance I mentioned above). Twelve to twenty-four months from now, however, they had better have company worth more than $1.3 billion or they are liable to be sued for not maximizing shareholder value.


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