Fuad Fadel Jim Fish Kevin Kaznica Matthew Krajna. Constellation Brands. Business Segments Wine Spirits Crown Joint Venture Key Risks Health of the Consumer Joint Venture uncertainty Financial condition Corporate governance Valuation Multiple Scenario DCF Sum of Parts
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Crown Joint Venture
Wine Sales YoY
5 Year Wine Sales CAGR
Health of the Consumer
Joint Venture Uncertainty
Dual-Class share structure
Over 50% of voting rights
11.81% Equity stake
Elect majority of Directors
Strong resistance to changes in class structure
Strong Academic Support
Harvard, Wharton, Stanford
Entrenchment decreases performance
Share repurchasesCorporate Governance
Multiple Scenario DCF
Sum of Parts
Average of all 11 scenarios
WACC 10.49%, 13.97%
Average sum of the parts valuation
Price on 4/5/2012:
(1-2% per item)
EPS: 1.79 TTM restated
Price: 423.62 on 1/12/12
California’s 2011 wine grape crush, from all varieties, totaled 3,342,689 tons, down 7 percent from 2010
varieties accounted for the largest share of all grapes crushed, at 1,917,132 tons, down 7 percent from 2010. The 2011 white wine varieties crush totaled 1,425,557 tons, down 7 percent from 2010.
On the price side, record highs were set for both red and white wine grapes
average price for the 2011 crop of red wine grapes was $702.70, up 12 percent from 2010, while the average price for white wine grapes came in at $541.11, up 8 percent from last year. The 2011 average price of all varieties reached a record high of $588.96, up 8 percent from 2010 and 3 percent above the previous record high set in 2009.Wine Crush Data
Company had negative earnings
Manager’s protected from the market for corporate control tend to pursue inefficient investment products
Mr. Kenneth Steiner of 14 Stoner Avenue, 2M, Great Neck, New York 11021, who has indicated that he owns 1,100 shares of our stock, has given notice that he or his designee intends to make the following stockholder proposal at the Meeting. The Board recommends that you vote AGAINST the stockholder proposal. In accordance with applicable regulations, we include this stockholder proposal and supporting statement in the form proposed by Mr. Steiner:
Equal Shareholder Voting
RESOLVED: Shareholders request that our Board take steps to adopt a plan for all of our company’s outstanding stock to have one-vote per share. This would include all practicable steps including encouragement and negotiation with family shareholders to request that they relinquish, for the common good of all shareholders, any preexisting rights, if necessary…
The Board of Directors recommends that you vote AGAINST Proposal 5. Unless you properly direct otherwise, the shares represented by your proxy, if properly submitted and not revoked, will be voted AGAINST such proposal.Opposition to more balanced class structure
Scenario 4 – “10yr No Real Growth & JV Termination”: Base Case, but with termination of JV. AB InBev would increase their stake in Grupo Modelo, triggering a cash payment of 4x EBIT to Constellation. In 2017, earnings from the Crown Imports JV will only incorporate 10 months due to the timing of the termination. Equity earnings going forward will be significantly impacted and no longer material. Constellation would receive a cash payment, estimated at $2 billion, upon notice being granted for FY2014. The scenario shows the effect of the joint-venture termination by Grupo Modelo.
Scenario X – “10yr No Real Growth & JV Termination”: Base Case, but with termination of JV. AB InBev would increase their stake in Grupo Modelo, triggering a cash payment of 4x EBIT to Constellation. In 2017, earnings from the Crown Imports JV will only incorporate 10 months due to the timing of the termination. Equity earnings going forward will be significantly impacted and no longer material. Constellation would receive no cash payment. The scenario shows the effect of the joint-venture termination by Grupo Modelo.
Stress Tested Scenario 3 – “Decreasing SG&A significantly”: Same as Scenario 3, but with SG&A decreasing as a perfect of sales from 20.5% to 15%. We feel this significant of an efficiency gain would be significant, but drastic, and unlikely.
5yr Crown Cash Now, Best Case -- Modeled Scenario 3 with a $2 billion cash payment in year 2014.
5yr Crown Cash Later, Best Case -- Modeled Scenario 3 with cash payment of $300 million approximating estimated 50% of BV of the joint venture, upon termination this payment would be received by Constellation.
10yr Model with JV Continuing -- Base case, but assuming 10yr model
5yr Crown Cash Now, Base Case -- Modeled Scenario 1 with a $2 billion cash payment in year 2014.
5yr Crown Cash Later, Base Case -- Modeled Scenario 1 with cash payment of $300 million approximating estimated 50% of BV of the joint venture, upon termination this payment would be received by Constellation.Additional Scenarios
Holding all else equal for Scenario 1:
At WACC of 7.18%, in order to justify price approximating current levels:
A growth rate of 5% in CWNA
A growth rate of 30% in Spirits
A COGS of 56% in all five years
SGA of 17% in all five years
Equity earnings growth rate of 20%
Income tax rate of 19%Reverse Engineering
U.S. mid-caps have historically provided only minor diversification benefits, having a correlation to large caps of more than 0.94 over the past 10 years. Mid-caps have behaved similarly to U.S. small-cap equities, exhibiting a correlation of 0.98. The volatility of return on mid-capstocks as measured by standard deviation was 18.8%, more than 3 percentage points greater than that of large caps. One way to interpret this number is to assume a normal distribution of returns. If you expect mid-caps to earn an average return of 6% in any given year, there is at least a 2% chance that the return will be less than 31.6% (two standard deviations less than the average). Viewed in this light, the 36% drop in 2008 should be viewed as unlikely but not impossible.
Source: MorningstarSMID Premium
Imports grew 3.9 percent to 109.8 million cases. - account for 32 percent of the volume of wine sold in the U.S.
As the USD appreciates in value against the Euro and Aussie Dollar, imported value wines become cheaper to import, thus flooding the market with value brands
This is a negative for Constellation, as the U.S. consumer is still trending towards value brandsWine Import Data
Modelo gives notice by 2013 that the JV will NOT renew after 2016, and Modelo will import their brands into the U.S.
Modelo does NOT renew JV, chooses different party (other than STZ) as importer
Modelo renews the JV for another 10 yearsCrown JV Potential Outcomes