Constellation CFO Talks Recent Headlines, Company Outlook

Dear Client:  

Constellation Brands has certainly been busy in 2019. Today, Constellation cfo David Klein provided more insight and updates on the company’s recent deals and divestitures as well as what to expect moving forward at the Goldman Sachs Global Staples Forum.

MORE COLOR ON CANOPY/ACREAGE DEAL. Last month, Canadian marijuana supplier Canopy Growth Corp. announced it entered into a “definitive arrangement” with US-based Acreage Holdings that grants Canopy the right to acquire 100% of Acreage should cannabis become federally legal in the US [see WSD 04-22-2019].

Because of that deal, Constellation (which owns 38% of Canopy) modified its warrants and other rights to Canopy that gives the bev alc company more flexibility.

The goal is to win in the US market, which Constellation believes will be the biggest cannabis market in the world. “We already think it’s $55 billion market in the US,” said David, adding, “We think it could double from there which would make it as big as the US beer market.”

David broke down the complex deal during today’s session. Canopy had to use stock instead of Constellation’s capital for this transaction, according to David. As a result, Constellation extended its warrants, which “gives us more time to assess how the market’s unfolding before there’s a requirement that we either put cash in or we lose the warrant rights,” he said.

Essentially, the Canopy/Acreage tie-up complicated Constellation’s path to 50% ownership of Canopy. But, overall, “it’s a really good deal for all parties,” said David.   

GALLO SALE PENDING ANTITRUST CLEARANCE. Also in April, E&J Gallo officially agreed to purchase more than 30 of Constellation Brands’ wine and spirits brands for $1.7 billion [see WSD 04-03-2019]. Initially, the transaction was expected to close by the end of Constellation’s first quarter of FY2020. But it doesn’t look like they’ll meet that deadline because they’ve yet to receive Hart-Scott-Rodino Antitrust Act (HSR) clearance, according to David.

“We’re two weeks away from [end of Q1] right now and we still don’t have HSR clearance, and so we’re doing all of the work to be prepared to close as quickly as we can. But I don’t expect it will happen at the end of the quarter, so we continue to function business as usual.”

As for expected Q1 results, David said their wine business will be down 10% at the top line and down 20% at the bottom line. He didn’t go into much further detail, saying we’ll hear more during the company’s Q1 earnings call in June.

THE CASE AGAINST USPS ALCOHOL SHIPPING

Earlier this month, Congresswoman Jackie Speier reintroduced a bill to allow the US Postal Service to start shipping alcohol. The bill would allow USPS to ship alcohol directly from licensed producers and retailers to consumers over the age of 21 in states where direct-to-consumer shipping is allowed [see WSD 05-08-2019].

While suppliers and retailers generally favor this legislation–including the Distilled Spirits Council, WineAmerica, and the Wine Institute among others–distributors have come out against the legislation.

“Our concerns with the bill really focus on the fact that the Postal Service is really not accountable to state law enforcement or government authority,” Wine & Spirits Wholesalers of America svp of government affairs Dawson Hobbs tells WSD. “If they were to deliver into a dry county or a state that did not allow wine, beer or spirits to be delivered or ship to it, the state would have no recourse. Whereas other common carriers, like FedEx and UPS, have common carrier licenses and are accountable to state authority.”

In response to the bill, the Wine & Spirits Wholesalers of America, National Beer Wholesalers Association and American Beverage Licensees sent a joint letter to Congress today, urging lawmakers to oppose the legislation.

The trade groups contend that the bill would “create a delivery pipeline immune to state oversight and enforcement,” per the letter, because they believe that the USPS is “not equipped to deal with state regulations of the alcohol industry and its sale” and there’s “no legal mechanism” for states to enforce those regulations.

We’ll keep an eye on this legislation as it progresses.

WSD BRIEFS:

B-F LAUNCHES JACK DANIEL’S LEGACY EDITION 2. Legacy Edition 2 is, as the name suggests, the second release in the Jack Daniel’s Legacy Edition series. The unique label is an ode to the one of the first black JD labels, per a release. It is now available for a limited time nationwide as well as select international markets.

WOODFORD RESERVE RELEASES 2019 BATCH PROOF SERIES. Brown-Forman has also released the annual limited-edition Woodford Reserve Batch Proof, part of the annual Master’s Collection series. The proof on this year’s release is 123.2. It’s available nationwide for approximately $130 a 750 ml.

SPIRIT HOUND DISTILLERY DEBUTS COLORADO HONEY WHISKY. Colorado-based Spirit Hound Distillery created Colorado Honey Whisky in collaboration with local Bee Squared Apiaries. Spirit Hound and Bee Squared aged raw honey in spent whisky barrels for 100 days; the empty honey barrel then returns to Spirit Hound where it is filled with a finished two-year-old whiskey and aged an additional three months. It is now available in limited quantities throughout the distiller’s home state for approximately $65 a 750 ml.

Until tomorrow,
Sarah

“I’ve never met an animal I didn’t like, and I can’t say the same thing about people.” – Doris Day

——- Sell Day Calendar ———
Today’s Sell Day: 10
Sell days this month: 23
Sell days this month last year: 23
This month ends on a: Fri.
This month last year ended on a: Thurs.
YTD sell days Over/Under: 0