Constellation Brands is in the midst of a transformation. How Active Elliott Can Create Value

Modelo Beer Special was held on Tuesday, November 23, 2021 in the Borough of Brooklyn, New York.

Gabby Jones | Bloomberg | Getty Images

Company: Constellation Brands (STZ)

Business: Constellation Brands Corona Extra is an international producer and marketer of beer, wine and spirits with operations in the United States, Mexico, New Zealand and Italy, with strong, consumer-relevant, high-quality brands such as Corona Extra, Modelo Especial, the Robert Mondavi family of brands, Kim Crawford. , Meiomi, The Prisoner Wine Company, High West, Casa Noble and Mi Campo.

Stock Value: $49.4 billion ($269.50 per share)

Activist: Elliott Investment Management

Ownership percentage: no

Average price: no

Comment from the activist: Elliott is a very successful and smart activist investor, especially in the technology sector. The firm’s team includes analysts, engineers, operating partners – former technology CEOs and COOs – from leading technology private equity firms. When evaluating an investment, the firm also employs specialty and general management consultants, expert cost analysts, and industry experts. Elliott often watches companies for years before investing and has a broad stable of impressive board candidates. The firm did not disclose its stake in the investment, but based on its history, we expect it to be more than $1 billion.

What is happening?

On July 18, Elliott and Constellation entered into a partnership agreement, under which the company agreed to increase the number of its board from 11 to 13 and to appoint William T. Giles (former chief financial officer and executive vice president – ​​finance, information). technology and store development, for customer satisfaction AutoZona) and Luca Zaramella (CFO and EVP Mondelez International), as members of the board whose initial term expires at the company’s 2024 annual meeting. Elliott has agreed to comply with certain customary voting and standstill provisions.

Behind the scenes

Constellation Brands produces and markets beer, wine and spirits, but it is actually a beer company that derives 85% of its revenue from beer sales. Historically, it has been a niche brand marketer in a family-run business. But all this is changing. In November 2022, the company underwent a reclassification, which resulted in the Sands family paying $1.5 billion for Class B shares, removing the company from family control. Plus, it’s no longer a niche beer business. Modelo Especial has become the No. 1 selling beer in the U.S. and is experiencing high-single-digit volume growth, a rarity in a beer industry oligopoly. It is an industry with stable cash flow and high margins. Comparable businesses are trading at 30-35 times earnings, compared to 22.6 times for Constellation. So what went wrong here?

First, the company traded at a discount because of the dual-tier share structure that allowed the Sands family to control Constellation. Second, as we often see in family-controlled companies, there have been lapses in discipline that have eroded shareholder value and eroded shareholder confidence. In 2018, Constellation increased its stake in cannabis company Canopy Growth by $4 billion. This is in addition to its initial investment of approximately $190 million in 2017. The deal didn’t work out and resulted in more than $1 billion being written off. The company also began construction on a $1.4 billion brewery in Mexicali, Mexico, which it was forced to close in 2020. Constellation also bought the Ballast Point brewery in 2015 for $1 billion, only to sell it about four years later.

However, after these missteps, the company took meaningful steps in the right direction. In March 2019, Bill Newlands succeeded Rob Sands as president and CEO. Also, the restructuring removed the company from family control and led to the Sands family giving up executive and committee roles, including Rob Sands announcing his retirement as chairman earlier this month. Now, after Elliott has been working amicably with the CEO and management for several months, they have appointed two activist-driven directors to the board. The company is now looking for a new independent chairman and for the first time is in a position to be run as a public company for the benefit of shareholders.

It shouldn’t be too difficult for such a company. The low-hanging fruit here is for management to simply stay out of their way. A renewed board of non-Sands CEOs should lead to a more disciplined capital and strategic plan that not only avoids the self-inflicted mistakes of the past, but also aligns with shareholder value and earnings per share. This leaves the core beer business which can now be managed without unnecessary distractions. This business has high single digit revenue growth. While some of this can be attributed to missteps by Anheuser-Busch, Modelo has established itself as a top brand alongside Budweiser and Coors and has a wider path for growth. Unlike Budweiser and Coors, Modelo does not currently have mass penetration in the United States. It is very well represented in the West, but has a wide distribution potential in the rest of the country, especially in the middle of the country and on the Eastern Seaboard. It shouldn’t take much more than basic “blocking and tackling” to sustain this growth and the high margins that come with it. Finally, there is the opportunity to develop and manage a wine and spirits business. A disciplined board and management team that regains shareholder confidence can make some strategic acquisitions to grow this business.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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