Acquisitions, Divestitures, and Business Transformation
|3 Months Ended|
May 31, 2020
|Business Combinations [Abstract]|
|ACQUISITIONS, DIVESTITURES, AND BUSINESS TRANSFORMATION||ACQUISITIONS, DIVESTITURES, AND BUSINESS TRANSFORMATION
Nelson’s Green Brier
In May 2019, we increased our ownership interest in Nelson’s Green Brier Distillery, LLC (“Nelson’s Green Brier”) to 75%, resulting in consolidation of the business and recognition of a 25% noncontrolling interest. This acquisition included a portfolio of award-winning, Tennessee-based craft bourbon and whiskey products. The fair value of the business combination was allocated primarily to goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of Nelson’s Green Brier are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
We recognized a gain of $11.8 million for the three months ended May 31, 2019, related to the remeasurement of our previously held 20% equity interest in Nelson’s Green Brier to the acquisition-date fair
value. This gain is included in selling, general, and administrative expenses within our consolidated results of operations.
Ballast Point Divestiture
On March 2, 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs (the “Ballast Point Divestiture”). We received cash proceeds of $41.1 million which were primarily utilized to reduce outstanding borrowings.
Black Velvet Divestiture
On November 1, 2019, we sold the Black Velvet Canadian Whisky business and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory at a transaction value of $266.3 million (the “Black Velvet Divestiture”). We received cash proceeds of $269.7 million, subject to estimated working capital adjustments. The cash proceeds were utilized to partially repay the 2.00% November 2017 senior notes. In total, we have recognized a $73.5 million net gain associated with the Black Velvet Divestiture, with a $74.1 million net gain recognized for the year ended February 29, 2020, and a $0.6 million net loss recognized for three months ended May 31, 2020. The following table summarizes the net gain recognized in connection with this divestiture:
Business transformation and other updates
We have committed to a business transformation strategy which aligns our portfolio with consumer-led premiumization trends and growing segments of the Wine and Spirits and Beer markets.
Original 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 (the “Original Wine and Spirits Transaction”).
Wine and Spirits Transactions
In December 2019, we agreed to revise and supersede the Original Wine and Spirits Transaction. The revisions to the transaction address competitive concerns raised by the U.S. Federal Trade Commission (the “FTC”) specifically related to the sparkling wine, brandy, dessert wine, and concentrate categories. As a result, the brands Cook’s California Champagne, J. Roget American Champagne, Paul Masson Grande Amber Brandy, and our concentrate business will be excluded from the Original Wine and Spirits Transaction. In May 2020, we further revised the Original Wine and Spirits Transaction to also exclude the Mission Bell Winery in Madera, California and certain related real estate, equipment, contracts, and employees, resulting in an adjusted transaction price of approximately $783 million, with the potential to earn an incremental $250 million of contingent consideration if certain brand performance provisions are met over a two-year period after closing (the “Further Revised Wine and Spirits Transaction”). The Further Revised Wine and Spirits Transaction is expected to close in the second quarter of fiscal 2021, and is subject to FTC review and clearance. Additionally, in a separate, but related, transaction, we agreed that upon execution and delivery of a definitive agreement for the Further Revised Wine and Spirits Transaction, we would enter into an agreement to sell the New Zealand-based Nobilo Wine brand and certain related assets and liabilities for $130 million (the “Nobilo Wine Transaction”). The Nobilo Wine Transaction is expected to close by the end of second quarter of fiscal 2021, and is subject to FTC review and clearance. Completion of the Nobilo Transaction is also conditioned on completion of the Further Revised Wine and Spirits Transaction. We expect to use the net cash proceeds from the Further Revised Wine and Spirits Transaction and
the Nobilo Wine Transaction (collectively, the “Wine and Spirits Transactions”) primarily to reduce outstanding borrowings.
We have communicated our intent to retain the brands Cook’s California Champagne and J. Roget American Champagne and the Mission Bell Winery contemplated to be sold in the Original Wine and Spirits Transaction. The FTC is currently reviewing our business plans to support these brands in the future. The Mission Bell Winery has the production capability to support these retained brands.
Other Wine and Spirits Transactions
We plan to divest the Paul Masson Grande Amber Brandy brand and concentrate business excluded from the Original Wine and Spirits Transaction to companies with more aligned business strategies (the “Other Wine and Spirits Transactions”). See “Subsequent Events - Paul Masson Transaction and Concentrate Business Transaction” below.
Assets held for sale
Primarily in contemplation of the Wine and Spirits segment transactions noted above, certain net assets met the held for sale criteria as of May 31, 2020, and February 29, 2020. For the three months ended May 31, 2020, long-lived asset impairments of $25.0 million were recognized. No long-lived asset impairment was recognized for the three months ended May 31, 2019. For additional information refer to Note 5.
The carrying value of assets held for sale consist of the following:
(1)In March 2020, we completed the Ballast Point Divestiture.
(2)Liabilities held for sale are included in the Consolidated Balance Sheets at May 31, 2020, and February 29, 2020, within the respective liability line items noted above.
Wine and spirits optimization
We recognized charges in connection with our business transformation strategy which aligns our portfolio with consumer-led premiumization trends within the Wine and Spirits segment as follows:
In fiscal 2017, we began construction of a new, state-of-the-art brewery located in Mexicali, Baja California, Mexico (the “Mexicali Brewery”). In March 2020, a public consultation was held on the construction of the Mexicali Brewery. We have initiated early stage discussions with government officials in Mexico regarding next steps for our brewery construction project and options elsewhere in the country following the negative result of the public consultation. These discussions have been positive and we will continue working with government officials to mutually agree upon a path forward. At this time, we have paused all Mexicali Brewery construction activities. In the medium-term, we have ample capacity, based on current growth forecasts and production capabilities, under normal operating conditions, at the Nava and Obregon breweries, to meet consumer needs. As of May 31, 2020, we capitalized approximately $740 million of construction in progress and are committed to an estimated additional $200 million of expenditures. We are evaluating a variety of alternatives for the Mexicali Brewery and related assets. No conclusion to abandon the property or to sell the assets has been reached, therefore, as of May 31, 2020, no impairment has been recognized. Future impairments may result based upon our plans for these assets for any capitalized amounts that are not deemed recoverable.
In June 2020, we acquired the Empathy Wines business, including the acquisition of a digitally-native wine brand (“Empathy Wines”) which strengthens our position in the direct-to-consumer and eCommerce markets. This transaction primarily included the acquisition of goodwill, trademarks, and inventory, plus an earn-out over five years based on performance. The results of operations of Empathy Wines will be reported in the Wine and Spirits segment and will be included in our consolidated results of operations from the date of acquisition.
Paul Masson Transaction
In June 2020, we entered into a definitive agreement to sell the Paul Masson Grande Amber Brandy brand, related inventory and interests in certain contracts with an estimated aggregate purchase price of approximately $255 million, subject to certain purchase price and closing adjustments (the “Paul Masson Transaction”). The Paul Masson Transaction is subject to FTC review and clearance, and is expected to close in the second quarter of fiscal 2021. We expect to use the net cash proceeds from the Paul Masson Transaction primarily to reduce outstanding borrowings.
Concentrate Business Transaction
In June 2020, we entered into a definitive agreement to sell certain brands used in our concentrates and high-color concentrate business, and certain intellectual property, inventory, goodwill, interests in certain contracts, assets, and liabilities of our concentrates and high-color concentrate business ( the “Concentrate Business Transaction”). The Concentrate Business Transaction is subject to FTC review and clearance, and is expected to close in the second quarter of fiscal 2021.
Nobilo Wine Transaction
In June 2020, we entered into a definitive agreement to sell the New Zealand-based Nobilo Wine brand and certain related assets and liabilities, subject to certain purchase price adjustments. The definitive agreement was generally consistent with the terms described above.
The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef