Constellation Brands, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Wine and Spirits Transformation

Wine and Spirits Transformation

6 Months Ended

Aug. 31, 2019

Wine and Spirits Transaction

In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities, for approximately $1.7 billion, subject to certain adjustments (the “Wine and Spirits Transaction”). The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval, and is expected to close by the end of Fiscal 2020. We expect to use the net cash proceeds from the Wine and Spirits Transaction primarily to reduce outstanding borrowings.

Subsequent event

We now believe it is likely that a portion of the Wine and Spirits Transaction purchase price may be revised to take the form of contingent consideration, receivable based on future brand performance. We record contingent consideration when it is determined to be realizable. Therefore, we now expect to recognize an additional loss of approximately $300 million on the write-down of assets held for sale during the three months ended November 30, 2019.

Black Velvet Transaction

In August 2019, we entered into a definitive agreement to sell Black Velvet Canadian Whisky and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, for approximately $266 million, subject to certain adjustments (the “Black Velvet Transaction”). We expect to recognize a gain of approximately $70 million to $80 million upon closing. The Black Velvet Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals, and is expected to close in the fourth quarter of calendar 2019. We expect to use the net cash proceeds from the Black Velvet Transaction primarily to reduce outstanding borrowings.

Assets Held for Sale

In connection with the Wine and Spirits Transaction and Black Velvet Transaction, certain Wine and Spirits segment net assets have met the held for sale criteria as of August 31, 2019. For the six months and three months ended August 31, 2019, a long-lived asset impairment of $27.0 million was recognized. For additional information refer to Note 6.

The carrying value of assets held for sale consists of the following:



	August 31, 2019
	Wine and Spirits Transaction		Black Velvet Transaction		Total
(in millions)
Assets
Inventories	$	593.7	$	63.3	$	657.0
Prepaid expenses and other	9.0		—		9.0
Assets held for sale - current	602.7		63.3		666.0

Property, plant, and equipment	175.8		18.2		194.0
Goodwill	353.2		62.6		415.8
Intangible assets	347.2		59.8		407.0
Equity method investments	1.1		—		1.1
Other assets	0.3		0.9		1.2
Assets held for sale	877.6		141.5		1,019.1

Liabilities
Accounts payable	4.7		—		4.7
Other accrued expenses and liabilities	31.1		1.6		32.7
Deferred income taxes and other liabilities	0.1		2.1		2.2
Liabilities held for sale⁽¹⁾	35.9		3.7		39.6
Net assets held for sale	$	1,444.4	$	201.1	$	1,645.5


⁽¹⁾	Liabilities held for sale are included in the Consolidated Balance Sheet as of August 31, 2019, within the respective liability line items noted above.

Wine and Spirits Optimization

We recognized charges in connection with our ongoing efforts to gain efficiencies and reduce our cost structure within the Wine and Spirits segment as follows:



	Results of Operations Location	For the Six Months Ended August 31, 2019		For the Three Months Ended August 31, 2019
(in millions)
Loss on inventory write-downs	Cost of product sold	$	40.9	$	13.7
Contract termination costs	Cost of product sold	20.1		4.3
Employee termination costs	Selling, general, and administrative expenses	12.1		0.2
Impairment of long-lived assets	Selling, general, and administrative expenses	27.0		27.0
Other costs	Selling, general, and administrative expenses	6.3		—
		$	106.4	$	45.2