Delevering accelerates for Constellation Brands
admin | April 5, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Constellation Brands announced it will sell approximately 30 lower-end wine brands and apply the proceeds to debt reduction. The accelerated delevering should be a catalyst for STZ debt to outperform debt of peers General Mills and Anheuser-Busch InBev in the 10-year to 30-year parts of the curve.
Constellation Brands announces asset sale
It was a busy week for STZ as the company announced that it would be selling approximately 30 lower-end wine brands to E. & J. Gallo for roughly $1.7 billion, ahead of its fiscal 4Q19 earnings announcement. The deal includes related facilities located in California, New York and Washington. The asset sale was expected as the company has been looking to shed some labels from its wine portfolio in an effort to focus on more premium brands. The wine labels being sold all retail for $11 or below. Management believes the sale will help position the portfolio for growth while delivering higher margins, after the company just delivered its second consecutive quarter of sales and operating income declines in the division. Despite the weaker results in the wine and spirits unit, STZ’s beer portfolio continues to drive growth on record volume levels and effective price increases. The deal is expected to close by the end of STZ’s fiscal first quarter (5/31/19).
While the $1.7 billion of proceeds came in a little light of expectations of $2.0 billion, the sale and continued commitment to debt reduction is a positive for STZ credit spreads. Management reiterated that proceeds from the sale will be used to for debt reduction, and that they will not return cash to shareholders via buybacks until reaching their leverage target. The company has $1 billion of debt maturing in 2019 which will likely be repaid, and $2 billion of term loans outstanding which can be prepaid in order to hit their leverage target.
Leverage to decline relative to peers
Constellation Brands ended the fiscal year with leverage of 4.4x. Applying the wine proceeds and free cash flow (after dividends) to debt reduction could decrease leverage to 3.6x over the next 12 months, bringing them roughly in line with their 3.5x target. The ability to not only bring leverage below the 4.0x threshold but close to their target should push spreads tighter relative to similarly rated food and beverage peers.
General Mills (GIS – Baa2/BBB/BBB(n)) ended its most recent quarter with leverage of 4.3x. While the company is in the process of delevering from its Blue Buffalo acquisition, free cash flow (after dividends) will only reduce leverage by roughly 3 ticks annually, bringing it down to the 3.6x to 3.7x by the end of fiscal 2021. Furthermore, Anheuser-Busch Inbev (ABIBB – Baa1/A-(*-)/BBB) has been slow to reduce debt and ended the most recent year with leverage of 5.0x. Even after cutting the dividend by 50% to free up cash for debt reduction, ABIBB will be hard pressed to bring leverage below the 4.0x threshold over the next 2 years.
Exhibit 1: Current and estimated leverage metrics
Source: Company reports, Bloomberg consensus estimates
While STZ currently trades on top of ABIBB, the wine sale is likely a catalyst for STZ to trade through ABIBB and closer to GIS. In the 30-year part of the curve, STZ’s mean spread trading differential has been roughly 13 bp through ABIBB year to date. That said, given the expectation for STZ to bring leverage to the mid 3.0x area approximately one year ahead of GIS, we think STZ spreads could collapse closer to, if not on top of, GIS. Currently, STZ trades roughly 14 bp behind GIS in both the 10-year and 30-year parts of the curve.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.