Apparently, it's not easy to quench your thirst for acquisitions when you're in the alcoholic-beverage distribution industry.
Just days after I noted how much better offConstellation Brands
An insatiable thirst, indeed.
The $900 million bid for Vincor represents a 39% premium over that company's Sept. 8 closing price, the date on which Constellation made its offer. Vincor ultimately rejected the bid, which also included the assumption of $260 million worth of debt. Despite the winery's rebuff, Constellation says it is willing to raise the offer if necessary.
Constellation's acquisition binge has allowed the wine, beer, and liquor distributor to increase sales by three times and profits by nearly six times over the past six years. Dozens of acquisitions, large and small, have propelled Constellation forward, but at the same time they have made for a large amount of debt -- some $3 billion worth, which absolutely dwarfs Constellation's $19 million in cash.
However, fellow Foolish contributor Stephen Simpson, who has followed the cash flows of this company for some time, notes that on a quarterly basis, things have been improving. This is borne out with the most recent figures -- a basic free cash flow calculation (i.e., operating cash flow minus capital expenditures) shows a continuously improving picture. For the trailing-12-month period, such cash flows stood at $298 million, a 55% improvement over the $191 million generated in the same period last year.
Vincor's website says that it is one of the world's top 10 wineries by revenue and North America's fourth-largest producer and marketer of wines by volume. It has also been an acquisitive company, buying up over the past few years a number of wineries in Canada, New Zealand, Australia, South Africa, and Washington state. Wine Business Monthly ranks it as the 14th-largest wine company in the U.S., with 1.4 million cases sold in 2004. In comparison, Constellation sold 56 million cases, Brown Forman
Where Constellation's well-known brands include Almaden, Ravenswood, and Robert Mondavi (very well-known by me, at least), Vincor has some brands that haven't exactly made it big here in the U.S. yet -- names like Inniskillin, Toasted Head, and Hawthorne Mountain. Even so, its Kumala brand is the largest South African import into the U.K., with 2.2 million cases shipped last year.
While the U.S.-based alcoholic-beverage distributor has said that acquisitions will remain a primary driver of its growth, investors need to consider how these purchases will affect their ownership interests. Yes, the industry is undergoing consolidation, but the ownership interests of Constellation's shareholders continue to be diluted. Share counts have grown exponentially, increasing by more than 50% over the past six years. And the company continues to pile on the debt.
At some point, all of this will become problematic: Either it will have trouble servicing its debt as sales ebb (they are doing so already in Europe), or it will be more expensive to service the debt as the rating agencies lower its investment grade (Standard & Poor's did that to Pernod Ricard after its Allied purchase). Trying to keep pace with industry behemoth and Motley Fool Income Investor selection Diageo
Constellation may find that the acquisition bender it's been on -- its goodwill-to-assets ratio is a hefty 40.6% -- will end up giving it a hangover that no aspirin will alleviate.
Connect the dots with these related Foolish articles about Constellation:
- Make Mine a Double
- Raise a Glass to Constellation Brands
- Constellation Finds Its Partners
- Everyone Dances in Whiskey Waltz
- I'm Drinking Stars!
- Constellation's Dimmed Spirits