Constellation Brands: Stock Poised to Go Higher
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Early this month, the United States Department of Justice blocked the agreement of Anheuser-Busch InBev (NYSE: BUD) to acquire the remaining 50% stake it does not already own in Grupo Modelo (NASDAQOTH: GPMCY) citing that the deal is harmful to consumers because it would undermine the existing head-to-head competition in the beer industry. The agency argued the deal violates antitrust laws. In my previous blog, I mentioned that AB InBev has options to resolve the antitrust concerns of the Justice Department such as the sale of one of its breweries to Constellation Brands (NYSE: STZ) and remove the term in its agreement with the company regarding its right to repurchase 100% of Crown Imports every 10 years.
At present, the DOJ and AB InBev are in settlement talks. A positive development would help the stock value of Constellation Brands go higher.
AB InBev amended its agreement with Constellation and removed its right to repurchase Crown every 10 years. Surprisingly, the world’s largest brewer also agreed to sell its state-of-the-art brewery in Piedras Negras, Mexico. The brewery has the capacity to produce 10 million hectoliters, and it represents 70% of the export volume of Grupo Modelo’s Corona beers in the United States. Many believed that selling its newest brewery is a deal breaker. Some analysts even suggested that AB InBev could sell any of its seven other breweries except Piedras Negras.
The decision of AB InBev demonstrated its strong commitment to remove the competition concerns of the Justice Department and obtain the approval of its merger agreement. Its merger with Grupo Modelo will allow the combined company to hold the number one position in four of the top five pools in the beer industry worldwide including Canada, Mexico, Brazil, and United States.
According to the company, the sale of its state-of-the-art brewery does not have a negative impact to the potential growth of Modelo brands in Mexico and other countries worldwide. AB InBev estimates $1 billion in annual synergies upon completion of the deal.
The revised agreement is highly beneficial for Constellation Brands because it will become the third largest producer and seller of beer in the United States. It will also gain perpetual rights of the Modelo brands. Under the deal, Constellation will purchase the remaining 50 percent stake in Crown for $1.85 billion and $2.9 billion for Piedras Negras brewery. The total amount of the agreement is $4.75 billion, which will be financed by the company through a combination of senior notes and term loans as well as its existing revolving credit facility, accounts receivable securitization facility, and available cash.
U.S. District Judge Richard Roberts in Washington suspended the proceedings of DOJ’s lawsuit against AB InBev until March 19. The parties parties requested the delay to discuss possible settlement. If both parties reach a settlement AB InBev and Constellation will be able to move towards achieving their potential growth.
Following the announcement of the revised agreement on February 14 the stock price of the company surged from around $31 per share to more than $44 a share as of this writing. Based on the consensus estimate of analysts, the stock could go as $54 per share.
Time To Buy?
Is it time to buy Constellation Brands? Constellation Brands is experiencing strong momentum, driven by the positive development on the AB InBev agreement and its strong financial performance in the third quarter of FY13. Its adjusted earnings climbed by 21 percent to $0.63 per share and net sales increased by 9 percent to $766.9 million. The results beat the consensus estimates of analysts at $0.55 earnings per share and $744 million sales. Energized by its solid performance, the wine company raised its earnings guidance for the current fiscal year to around $2.10-$2.20 per share.
Constellation Brands’ stock performance was 186.6% over the past three years and 94.5% over the past 12 months. The company outperformed the S&P 500 and AB InBev’s total returns at 46.20% and 92.95%, respectively over the past three years.
Based on the table above, I am convinced that Constellation Brands is a compelling stock. It has generated excellent returns. Investors who held the stock have a lot of reason to drink a glass of wine or beer and celebrate. Bottoms up!!!
MarieCabural has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!