Investors Toast Constellation's Buyback

Published May 7, 2007

Shares climbed Monday after the wine and spirits company said it would repurchase $421 million in stock

Bar patrons are fond of buybacks, and it seems investors in alcoholic beverage companies are too. Shares of No. 1 wine producer Constellation Brands (STZ) climbed May 7 after the company announced a stepped-up share repurchase and kept its 2007 earninmgs guidance steady.

Fairport (N.Y.)-based Constellation, with a well stocked cabinet of brands including Robert Mondavi, Black Velvet, and SVEDKA, said it has entered into an accelerated share repurchase transaction with Citibank to buy back on May 8, 2007 a minimum of 16.9 million shares of its Class A common stock for $421.1 million. Constellation has already repurchased 3.5 million shares of its Class A common stock since March 1, 2007, through open market purchases at a cost of $78.9 million, or $22.55 per share.

The cumulative effect of the deals: The company will use up its previously announced $500 million share repurchase authorization. The company said its repurchases will be made with proceeds from borrowings under its existing revolving credit facility.

"We believe this accelerated share repurchase transaction demonstrates our strong commitment to maximizing shareholder value and also aligns well with our stated objective of harvesting opportunities that enhance our long-term value creation goals," said Constellation CEO Richard Sands in a May 7 press release.

And while the buyback binge continues, investors were pleased with another piece of news. The company kept its earnings guidance for the fiscal year ending Feb. 29, 2008, unchanged, saying it expected net income adjusted for one-time items to be between $1.30 and $1.40 per share ($1.16-$1.26 including items). Analysts expect earnings of $1.36 for fiscal 2008, according to a consensus earnings estimate from Reuters.

Market players liked the sound of the buyback news and bid the shares highwer by 2.3% on May 7 to $23. That's well below the 52-week high of $29.17 reached on Jan. 3 but a marked improvement over the 52- week low of $18.83 reached on Mar. 8.

The company has tried to keep on the Street's good side by goosing its growth via a steady diet of deals. Through an aggressive acquisition program over the past few years, Constellation has become a leading international producer and marketer of alcoholic beverages in North America, Europe and Australia, according to a Stabndard & Poor's report. The April, 2003, acquisition of BRL Hardy Ltd., Australia's largest producer of wine, vaulted Constellation to the No. 1 spot in the global wine businesss. It also snapped up other big names like Robert Mondavi in December, 2004, and Vincor, a large Canadian producer and distributor of wines, in June, 2006.

In January, 2007, the company completed a joint venture with Mexican brewer Modelo to consolidate the importation of its family of beers. The new venture has the rights to import Corona Extra, Modelo, Pacifico, and other brands for the entire U.S. In April, the company unveiled a joint venture with Punch Taverns plc to jointly own U.K. beverage wholesaler and distributor Matthew Clark.

Will the good news continue? Standard & Poor's Equity Research sees healthy global demand for premium wines continuing, and U.S. wine exports benefiting from a relatively weak U.S. dollar. If Constellation can keep on a steady track, investors may be ready for another round.