Modelo Especial beer arranged in the Brooklyn Borough of New York, U.S., on Tuesday, Nov. 23, 2021.
Gabby Jones | Bloomberg | Getty Images
Business: Constellation Brands is an international producer and marketer of beer, wine and spirits with operations in the U.S., Mexico, New Zealand and Italy with powerful, consumer-connected, high-quality brands like Corona Extra, Modelo Especial, the Robert Mondavi brand family, Kim Crawford, Meiomi, The Prisoner Wine Company, High West, Casa Noble and Mi Campo.
Stock Market Value: $49.4B ($269.50 per share)
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Elliott is a very successful and astute activist investor, particularly in the technology sector. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEO and COOs. When evaluating an investment, the firm also hires specialty and general management consultants, expert cost analysts and industry specialists. Elliott often watches companies for many years before investing and has an extensive stable of impressive board candidates. The firm has not disclosed its stake in this investment, but based on its history, we would expect it to be in excess of $1 billion.
On July 18, Elliott and Constellation entered into a cooperation agreement, pursuant to which the company agreed to increase the size of its board to 13 directors from 11 and appoint William T. Giles (former chief financial officer and executive vice president – finance, information technology and store development, customer satisfaction for AutoZone), and Luca Zaramella (CFO and EVP of Mondelez International), as members of the board with initial terms expiring at the company’s 2024 annual meeting. Elliott agreed to abide by certain customary voting and standstill provisions.
Constellation Brands produces and markets beer, wine and spirits, but it’s essentially a beer company with 85% of its revenue coming from beer sales. Historically, it has been a niche brand marketer in a family-controlled business. But that is all changing. In November 2022, the company undertook a reclassification, which led to the Sands family getting paid $1.5 billion for their Class B stock and took the company out of family control. Moreover, it is not just a niche beer business anymore. Modelo Especial has become the No. 1 selling beer in the U.S. and has high single-digit volume growth, something that is very rare in the oligopoly of the beer industry. This is an industry with stable cash flow and high margins. Similar businesses trade at 30 to 35 times earnings as opposed to 22.6 times for Constellation. So, what has gone wrong here?
First, the company has traded at a discount because of the dual-class share structure that allowed the Sands family to control Constellation. Second, as we often see with family-controlled companies, there has been a lack of discipline that has led to the erosion of shareholder value and the loss of shareholder confidence. In 2018, Constellation raised its stake in a cannabis company, Canopy Growth, by $4 billion. That’s in addition to its initial investment of about $190 million in 2017. The arrangement has not worked out, leading to a write down of more than $1 billion. The company had also commenced the construction of a $1.4 billion brewery in Mexicali, Mexico and ultimately was forced to close it in 2020. Constellation also bought craft brewer Ballast Point in 2015 for $1 billion, only to sell it about four years later.
However, since these missteps the company, has taken meaningful steps in the right direction. In March 2019, Bill Newlands became president and CEO, succeeding Rob Sands. Also, the restructuring took the company out of family control and led to the Sands family abdicating their executive and committee roles, including Rob Sands announcing his retirement as chairman earlier this month. Now, they have appointed two activist-induced directors to the board after Elliott has been working amicably with the CEO and management for several months. Now, the company is looking for a new independent chair and for the first time ever is in a position to be run like a public company for the benefit of shareholders.
That should not be that difficult for a company like this. The low hanging fruit here is for management to just stay out of its own way. A refreshed board with a CEO not beholden to the Sands family should lead to a more disciplined capex and strategic plan that should not only avoid the self-induced errors of the past but be accretive to shareholder value and earnings per share. This leaves a core beer business that can now be operated without unnecessary distractions. This business has had consistent revenue growth of high single digits. While some of this can be attributed to missteps made by Anheuser-Busch, Modelo has established itself as a top brand along Budweiser and Coors and has a much larger path for growth. Unlike Budweiser and Coors, Modelo does not currently enjoy mass U.S. penetration. It is very well represented in the West, but has a lot of distribution growth opportunity throughout the rest of the country, particularly in the middle of the country and the Eastern Seaboard. It should not take more than just basic “blocking and tackling” to continue this growth and the high margins that come along with it. Finally, there is an opportunity to grow and operate the wine and spirits business. A disciplined board and management team that regains the confidence of shareholders could do some strategic acquisitions to grow this business.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.