Wine sale edges closer with signed consent order (STZ)
Constellation Brands announced that it signed a consent order with E. & J. Gallo and the Bureau of Competition of the FTC. The consent order marks the final stages in the FTC review process. Last week we wrote that a sale should be a positive event. It has been a long process of going through each brand's competitive dynamics, along with supply agreements further complicated by COVID-19. The wine and spirits portfolio of brands retailing at $11 and below was first announced in April 2019 for $1.7B. By May, the deal was delayed after additional information requests by the FTC. It is a favorable development to sign the order before an administrative change in the FTC. It remains subject to review and approval by the FTC Commissioners, who typically take 30-45 days. The transaction price is $1.03B, which includes a $250M two-year earnout. Separately, Constellation Brands expects to sell the Nobilo Wine brand for $130M to Gallo. Besides, Constellation Brands expects to sell the Paul Masson Grande Amber Brandy brand for $255M, all by the end of Q4.
Constellation Brands also provided a business update saying it expects to report FQ3 results in line with its medium-term goals of sales and operating income growth of 7-9%. There were some expectations that FQ3 could exceed the company’s goals, but there are important caveats. Scanner data has improved as inventory levels have improved, but there has been a lag. Besides, on-premise and smaller retailers not captured in the scanner data continue to be challenged. Constellation Brands’ valuation is arguably not penalized for its leverage, but a higher growth rate from the remaining brands could help the multiple expand.
NOMD announces a tuck-in acquisition
Nomad Foods announced the acquisition of Findus Switzerland for €110M, reuniting it with the seven other European countries it owns the brand in. A chart of Nomad Foods’ sales mix by geography and brand is below. The acquisition is expected to be immediately accretive in 2021. Acquiring the same brand in a different country lowers the execution risk for management and provides several areas of integration synergies.
Recognizing that the initial reaction yesterday was to sell COVID-19 winners and buy the losers, our investment thesis for Nomad Foods has always looked out to 2021. The acquisition provides a source of growth that should help against pandemic comparisons. Investors may be looking for big vaccine winners at the moment. Still, Nomad Foods will layout at the investor day today why steady LSD% organic growth plus low-risk acquisitions are also appealing.
Grocery promotions continue to be muted (ACI)
Grocery inventory distribution levels continue to improve since the summer. The week ended October 24th total distribution points (a measurement of breadth and depth of items) as measured by Nielsen improved to -4.5% from -4.8% in the previous week and compared to ~-6% during July and August as seen in the left-hand chart below. The week ended October 24th, the average percentage of items sold on promotion was 15.8% lower than the prior year, lower than the 14.4% in the previous week, as seen in the right-hand chart below. The lower promotions are a tailwind to supermarket gross margins during the pandemic and lower shrink from less food spoilage as a result of faster turns.
