Constellation's Growing Wine Cellar

Further solidifying its position in the cellar -- the wine cellar, that is -- Constellation Brands (NYSE: STZ) announced that it would buy the winemaking business of rival Fortune Brands (NYSE: FO), which is trying to shed low-margin products.

There are some trends afoot in the world of wine and spirits that make this a shrewd move, but other factors ought to give investors pause before moving in here.

Constellation has been on an acquisition binge, snapping up the wineries of BRL Hardy for more than $1 billion in 2003, Robert Mondavi in 2004 for $1.3 billion, and Vincor last year for another $1.3 billion. The Hardy deal hasn't been sour grapes, but it hasn't been a bumper crop, either. In a separate announcement made along with the Fortune Brands purchase, Constellation said it was consolidating the Hardy unit's Australian operations and taking a $22 million charge.

Australia's wine industry has been affected by a glut of cheap wines, as a result of overplanting last year, but this year's withering drought has ruined harvests that could cut next year's production in half. Industry analysts forecast that grape production will fall from 2 million tons to somewhere between 800,000 and 1.3 million tons.

Is Constellation trying to shore up its wine division as industry trends point to growing consumption -- marketing industry magazine Brandweek shows wine sales outpacing beer by more than 2 to 1 -- or is it trying to mask the effects of crop failure? Constellation's latest earnings report had shrinking distributor inventories denting an otherwise strong performance in Canada; overall branded wine net sales in North America fell 4% year over year.

The wine and spirit distributor has been making a lot of acquisitions to help better position it against rivals Diageo (NYSE: DEO) and Brown-Forman (NYSE: BF-B), but it's also been running up a tab in the process. It looks to be trying to buy its way to growth, which may be hiding faltering sales within domestic divisions. It even created a joint venture with Anheuser-Busch (NYSE: BUD) to push Corona beer.

Constellation's wine cellar is certainly impressive, even before the $885 million Fortune purchase. Let's just hope though the vintner hasn't sampled too many of its own bottles in the process.

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