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Gallo Acquires 30 Brands, Six Wineries from Constellation Brands in $1.7 Billion Deal

by Kerana Todorov
April 04, 2019

Constellation Brands has announced the sale of more than 30 of its less expensively priced wine and spirits brands to E&J Gallo for $1.7 billion.

Modesto-based E&J Gallo, already the world’s largest winery, also acquires wine production facilities in California, including Clos du Bois, as well as wineries in Washington and New York. The deal, announced Wednesday, requires regulators’ stamp of approval.

The transaction will give Gallo about 22 percent market share by volume of the US wine market, estimated Jon Moramarco, managing partner at bw166 LLC and editor and partner at Gomberg & Fredrikson.

Gallo last year shipped roughly 83 million cases from its California wineries, including 68 million cases in the United States. The deal adds perhaps 22 to 24 million cases of wine to Gallo’s portfolio, Moramarco estimated.

Constellation, of Victor, NY, said the agreement includes 30 brands from its wine and spirits portfolio, most of them priced at $11 per 750 ml botle retail and below, including Black Box; Clos du Bois; Capri, Richards Wild Irish Rose, Ravenswood, Hogue Cellars and Mark West.

In addition to Clos du Bois, Gallo is acquiring the following wineries, most of them quite large: Mission Bell, Turner Road Vintners and Wild Horse in California; Hogue Cellars in Washington, and Canandaigua in New York.

In a press release, Joseph Gallo, chief executive officer at Gallo, said,  “We are committed to remaining a family-owned company focused on growing the wine industry. While we continue to invest in our premium and luxury businesses, we see a tremendous opportunity with this acquisition to bring new consumers into the wine category. We will continue to provide our customers and consumers with quality products at every price point.”

Constellation retains such wines as The Prisoner Wine Company; Schrader Cellars; Kim Crawford; Ruffino; SVEDKA as well as Robert Mondavi and Mount Veeder Winery wine brands;

“One of the hallmarks of our success over the years has been our ability to evolve and stay on the forefront of emerging consumer trends,” said Bill Newlands, Constellation Brands president and chief executive officer. “This decision will help enhance organizational focus on a more premium set of wine and spirits brands that better position our company to drive accelerated growth and shareholder value. In turn, Gallo is acquiring a collection of great brands that complement their operational model and business strategy to provide quality products to consumers at every price point.”

Rob McMillan, executive vice president and founder at Silicon Valley Bank sees two winners in the agreement between Gallo and Constellation.

“For Constellation, this is a way to focus their strategies around premium wines and remove the distraction the lower-priced wines have in their portfolio and sales strategies,” he said.

As a public company, it is harder for Constellation to be patient with rebranding strategies that could reposition those brands, McMillan said. “Furthermore, the sale of certain real estate assets probably had a positive impact on ROA immediately,” he also said.

“Gallo slipped a little bit last year in volume sales,” McMillan said. The deal remedies that.

Most of the brands purchased from Constellation are below $9 a bottle, which are difficult to sell for most producers, McMillan also said.

However, Gallo “has a great deal of expertise in lower price points,” McMillan said. Gallo will slot these brands into its existing portfolio effectively and develop new brand strategies to attract younger consumers, he predicted.

“At these bottle price points, I expect the target to be younger consumers so it might be interesting to see historic brands like Wild Irish Rose resurrected possibly as a vintage brand for a younger consumer,” he said.

“I did notice the Black Box brand as part of the portfolio. While technically under $9 when converted to 750ml bottles, that is a strong premium label and should be a good source of premium volume growth. I'm sure that was a particular Target in the negotiations,” McMillan said.

Hogue Cellars in Prosser, Washington state, was included in the agreement. Gallo already owns another winery in Washington state, Columbia Winery.

Bob Betz, master of wine and consulting winemaker at Betz Family Winery north of Redmond, Washington State, welcomed the news, calling it a great move for the state and Gallo.

“Gallo is part of the international winemaking community that has recognized Washington’s ability with premium varieties and quality winemaking,” Betz said. “They and other winemakers from California, Canada, Italy, France and Spain have planted their flags in Washington for future expansion,” he added. “Gallo brings additional horsepower to the state’s efforts for vineyard and winemaking excellence, and for distribution nationally and globally, raising the opportunities for all Washington wineries.”

Marcus Miller, whose family owns Airfield Estates in the Yakima Valley, also welcomed the news.

“I think the writing was on the wall that Constellation was moving away from Hogue Cellars,” Miller said.

“(Constellation’s) vision seemed to be that Hogue was a twilight regional brand that had no upward price movement potential,” Miller said. “(E&J Gallo) may be the best chance for Hogue to stay relevant. Sub $8 wines are rough business but E&J is the best and Washington value is phenomenal at those price points.”

Other companies considered buying the brands.

Pat Roney, chief executive officer and founding partner at Vintage Wine Estates in Santa Rosa, said he was approached in September to buy the brands. Roney backed out. “Too big a deal for us,” Roney said Wednesday. Other potential buyers included Bain Capital and The Wine Group.

Additional brands included in the $1.7 billion agreement include: Arbor Mist; Blackstone; Blufeld; Cook’s; Cribari Tables & Desserts; Diseño; Estancia; Franciscan; Hidden Crush; J. Roget; Manischewitz; La Terre; Milestone; Paul Masson Grande Amber; Paul Masson; Primal Roots; Rex Goliath; Simply Naked; Taylor; Toasted Head; V. No; Vendange; and Wild Horse.

The agreement is expected to be discussed during Constellation Brands' fiscal year and fourth quarter results conference call today, April 4, starting at 10:30 EST.

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