The wine industry’s problems continue to produce moves to rationalise.
Despite drought, there’s still too much wine, too many producers and too many brands trying to capture smaller shares of a fairly static local and tougher international market.
Fosters is slimming down, selling wine assets.
But the big deal may have emerged yesterday with news that Australian Vintage (McGuigan and Nepenthe wines, among others) is in preliminary talks with US-based Constellation Brands (Hardy, Leasingham, Banrock Station and others) about merging their Australian and UK wine operations.
That tiny Australian Vintage, with a market cap around $41 million (it used to be much larger three years ago) is in talks with the giant Constellation, says a lot about who wants to cut their involvement: it’s the US company.
Constellation is the world’s biggest wine group.
Australian Vintage would find it tough to do a big deal, unless it got ‘a deal’ from Constellation in exchange for a stake in the local company.
It would have to be a ‘creative’ deal to overcome Australian Vintage’s very small size.
But Constellation obviously is looking to exit direct involvement in part of the Australian wine industry.
It is selling assets, cutting costs and trying to reduce debt here and around the world.
The global recession and credit crunch has hurt it; the high value of the Australian dollar has hurt returns from Australia, while it’s become increasingly tough to grow sales in the highly competitive UK market where the economic slump has cut sales as well.
On top of that, Australian wines are no longer the flavour of the month, day or year.
It’s all about selling to price points and wines from Chile, Argentina and South Africa have become trendier.
AVL said yesterday the discussions were focusing on a possible merger of CBI’s Australian and UK wine operations with AVL in exchange for a substantial, but non-controlling interest, in the combined entity.
The combined company would be listed on the ASX.
AVL said yesterday (as did Constellation ) that any gains created from the merged entity "would better position both companies for success in the current challenging operating environment, the company said and the talks between the two companies are continuing, with a number of material issues to be addressed before any deal could be finalised."
Australian Vintage warned that the talks may not lead to the conclusion of any deal.
Australian Vintage shares sank nearly 6% to 32 cents yesterday as the overall market fell 2.2%.
In its statement, Constellation brands said:
"The Australian wine industry is facing unprecedented negative operating conditions," said Rob Sands, president and CEO of Constellation Brands.
"This combination would create a more competitive entity better positioned to deal with the current environment.
"Constellation Brands remains focused on achieving stronger, more sustainable results by tightening the focus of the portfolio, optimizing assets and finding synergies across all aspects of the business."
That tells us that Constellation is doing it tough in Australia and wants someone to take some of its underperforming brands off its hands, and might be willing to do a deal to get a deal done.
