Tuesday, November 08, 2005

Is Constellation a House of Cards?

There has been much rumbling of late as to the reality that exists behind the veil at Constellation. Some analysts worry that Constellation's "organic" growth (growth from existing brands) is insufficient and that their only growth has been through acquisitions (Ravenswood in 2001, Blackstone in 2001, BRL-Hardy in 2002, Mondavi in 2004, Rex Goliath in 2005 and Vincor in 2006?). The concern being that one bad acquisition will send the company into a financial tailspin as debt will overburden the decline in profits.

As I understand it, however, this is exactly what their strategy has been for some time (growth from acquisitions, not the tailspin). Their older brands (Almaden, Cook's, Wild Irish Rose, Inglenook, etc.) provide very nice cash flow since, without growth but with nice profits on still-high volumes, they aren't sucking up cash through inventory reinvestment. It is this very cash flow that allows them to continue to look for new things to bolt onto their existing machine.

Further, the debt they've added ($3 billion since 2003 and likely another billion or so if they acquire Vincor) has been in line with the assets they've acquired at is still running at historic levels - debt at 64% of asset book value. Obviously, they have significant cash flow to service this debt (cash flow from operations was $320,000,000 last fiscal year!).

Interestingly, Moody's and S&P have looked unfavorably on Constellation's bond rating recently, perhaps because they feel that the proposed purchase of Vincor would over-leverage Constellation. I find it a bit tough to believe that Constellation is looking to buy something that won't pay for itself cash-flow-wise as their purchase of Mondavi caused not a blip to the company's performance for an acquisition of roughly the same price.

Of interest recently, though is an article on a strategic acquisition of STZ (Constellation's ticker symbol) by Anheuser-Busch :

"Flood said the company would be better off joining or acquiring a wine and spirits company like Constellation Brands Inc. or privately held Bacardi."

Bud at $16 billion in assets is roughly twice the size of STZ, but wouldn't that be a fascinating buyout in light of the way STZ is treating Vincor?


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