Canandaigua Goes on an Acquisition Binge

The upstart marketer goes on a buying spree of wine and spirits brands. But who will pay the tab remains unknown.
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Has Canandaigua Brands (CBRNA) bitten off more than it can chew -- again?

In the past six months, the scrappy marketer of beer, wine and spirits has gorged itself on almost $ 1 billion in new acquisitions. But with a market cap of only $933 million, and gross sales totaling $1.98 billion for the 12 months ending February, 1999, the upstart risks another bout of corporate indigestion.

The most recent of these, the purchase of Napa's

Franciscan Winery

for $240 million (including $20 million in assumed debt) was announced late last week. Before that, Canandaigua had purchased Sonoma's

Simi Winery

from

Moet Hennessy Louis Vuitton

(LVMHY)

for $56 million in early April, as well as Black Velvet Canadian whiskey and other brands from

Diageo

(DEO) - Get Report

for $186 million. And before that, British cider maker

Mathew Clark PLC

for $480 million.

One interpretation of the moves is that Canandaigua may be diversifying away from the low end of the market, which has been the source of much of the company's

success to date. But the move could be a very smart one, given that the cheap jug wine segment is declining -- down about 4% in 1998 from 1997, according to industry consultant Jon Fredrikson of San Francisco-based

Gomberg, Fredrikson & Associates

, the industry's leading statistical firm. Significantly, wines costing more than $7 a bottle -- which includes most of the wines from Simi and Franciscan -- grew by 14% in 1998 from 1997.

It's clear that Canandaigua needs some serious help in the wine department. After taking a big charge for an accounting

change, operating income for their wine segment grew just 1.9% over the 12 months ending Feb. 28, 1999. But one wonders whether Canandaigua's entry into the upper echelons of premium wine has happened too late, and too close to a potential wine grape glut that could force prices and margins downward.

Another warning sign should be just how much the current feeding frenzy is reminiscent of a painful growth period in 1991-1993 when the company assembled a stable of wines, including

Paul Masson, Taylor California Cellars, Almaden, Inglenook

and

Cribari

wines, and

Corona, St. Pauli Girl,

and other imported beers.

While the acquisitions boosted Canandaigua's net sales to $1.1 billion for fiscal 1997 from $176.6 million in fiscal 1991, it also caused a severe case of operational indigestion, including higher-than-anticipated costs, difficulty integrating production facilities and unanticipated complexity in some winery operations. These problems led to more than $26 million in re-engineering charges in 1994, '95 and '96 and ultimately sparked a sickening plunge in the share price -- to less than $16 in November 1996 from $53 in September 1995.

All this leads one to wonder whether Canandaigua remembers the pain from its last binge. The company's not talking, but it has shaken up the ranks recently. A new management team includes Bill Newlands, vice president and general manager of Table Wines who was CEO for both Simi Winery and

Domaine Chandon

. Another recent addition is former

Hambrecht & Quist

wine analyst Jean-Michel Valette, hired last year by Franciscan as CEO to run the operation and look for a suitable buyer, and who will be managing both the Simi and Franciscan operations.

On the minus side, Canandaigua lost its wine subsidiary CEO, Dan Barnett, early this month. Neither Barnett nor Canandaigua had any comment on his departure, but sources close to the company say he disagreed with a wine subsidiary reorganization plan that would have decreased his authority.

Even so, the $962 million tab is a big stretch for the Canandaigua credit line, and

Standard & Poor's

downgraded its rating of Canandaigua's debt from "stable" to "negative" following the Fransciscan acquisition announcement. The company's end-of-February balance sheet shows $832 million in long-term debt, and that doesn't include the latest two acquisitions.

While brokerage analysts are falling all over themselves to reaffirm their previous recommendations, and a near-unanimous target price of $68, the market has taken a less sanguine view with shares falling slightly from $53-1/8 on April 21, the day before the Franciscan announcement, closing at 51 1/2 on Friday. It remains to be seen whether Canandaigua's latest bacchanal will be the source of elation, or regret, on the part of its shareholders.

************************

Divertissements

As Drinks & Diversions

pointed out in February, the California wine harvest is the single most important factor in wine prices. While the wine industry suits, analysts and trade press were minimizing the 1998 harvest, cheering that it was down 13% over 1997's all-time record, D&D emphasized that 1998 was the second largest in history -- and that even normal weather this year could produce a new record harvest.

Well, the first of 1998's white wines are hitting the bulk market, and the first victim is

Golden State Vintners

(VINT)

. The market blew the bottom out of Golden State on Wednesday after the company announced that it would probably miss analyst earnings estimates -- which First Call pegged at $1.22 for fiscal 1999 -- by 15 cents to 25 cents per share. Golden State dropped more than $4 Wednesday to close at $6, but it was back up to 7 3/16 at the close Friday. The way we see it, consider Golden State the canary in the coal mine.

Lewis Perdue is editor and publisher of

Wine Investment News . While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.