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

Quarterly report pursuant to Section 13 or 15(d)

Acquisitions, Divestitures, and Business Transformation

Acquisitions, Divestitures, and Business Transformation

6 Months Ended

Aug. 31, 2020

Business Combinations [Abstract]

ACQUISITIONS, DIVESTITURES, AND BUSINESS TRANSFORMATION

Acquisitions

Empathy Wines

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 are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

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 six months ended August 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.

Divestitures

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”). Prior to the Ballast Point Divestiture, we recorded the results of operations of the Ballast Point craft beer business in the Beer segment. 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 payment of final working capital adjustments. The cash proceeds were utilized to partially repay the 2.00% November 2017 senior notes. In total, our Wine and Spirits segment recognized a $70.5 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 $3.6 million net loss recognized for the six months ended August 31, 2020. The following table summarizes the net gain recognized in connection with this divestiture:


(in millions)
Cash received from buyer	$	269.7
Net assets sold	(213.3)
AOCI reclassification adjustments, primarily foreign currency translation	20.9
Direct costs to sell	(3.8)
Working capital adjustments to be paid	(3.0)

Gain on sale of business	$	70.5

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 were 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 base transaction price of approximately $783 million, subject to purchase price and closing adjustments, 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 by the end of third quarter of fiscal 2021, and is subject to FTC review and clearance. Additionally, in a separate, but related, transaction, we entered into a definitive agreement to sell the New Zealand-based Nobilo Wine brand and certain related assets and liabilities for a base transaction price of $130 million, subject to purchase price and closing adjustments (the “Nobilo Wine Transaction”). The Nobilo Wine Transaction is expected to close by the end of third 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.

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 by the end of third 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 by the end of third quarter of fiscal 2021.

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 August 31, 2020, and February 29, 2020. For the six months and three months ended August 31, 2020, long-lived asset impairments of $3.0 million and $(22.0) million were recognized, respectively. 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 5.

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


	August 31, 2020		February 29, 2020
	Wine and Spirits		Beer⁽¹⁾		Wine and Spirits		Consolidated
(in millions)
Assets
Accounts receivable	$	—	$	2.4	$	—	$	2.4
Inventories	563.9		13.7		576.9		590.6
Prepaid expenses and other	16.9		2.8		32.7		35.5
Assets held for sale - current	580.8		18.9		609.6		628.5

Property, plant, and equipment	133.2		55.9		172.6		228.5
Goodwill	287.2		4.7		304.3		309.0
Intangible assets	377.6		28.2		384.0		412.2
Equity method investments	0.4		—		1.0		1.0
Other assets	28.2		24.8		26.3		51.1
Less: Reserve for assets held for sale	(410.0)		(42.7)		(407.0)		(449.7)
Assets held for sale	416.6		70.9		481.2		552.1

Liabilities
Accounts payable	1.5		0.2		0.6		0.8
Other accrued expenses and liabilities	13.8		11.0		17.8		28.8
Deferred income taxes and other liabilities	—		33.3		—		33.3
Liabilities held for sale⁽²⁾	15.3		44.5		18.4		62.9
Net assets held for sale	$	982.1	$	45.3	$	1,072.4	$	1,117.7

⁽¹⁾In March 2020, we completed the Ballast Point Divestiture.

⁽²⁾Liabilities held for sale are included in the Consolidated Balance Sheets at August 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:


		For the Six Months Ended August 31,						For the Three Months Ended August 31,
	Results of Operations Location	2020		2019		2020		2019
(in millions)
Loss on inventory write-downs	Cost of product sold	$	4.0	$	40.9	$	(0.1)	$	13.7
Contract termination costs	Cost of product sold	16.9		20.1		—		4.3
Employee termination costs	Selling, general, and administrative expenses	2.5		12.1		3.8		0.2
Other costs	Selling, general, and administrative expenses	1.0		6.3		1.0		—
Impairment of long-lived assets	Impairment of assets held for sale	3.0		27.0		(22.0)		27.0
		$	27.4	$	106.4	$	(17.3)	$	45.2

Mexicali Brewery

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 are in 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 August 31, 2020, we capitalized approximately $720 million of construction in progress and are committed to an estimated additional $200 million of expenditures. We are continuing to evaluate a variety of alternatives for the Mexicali Brewery and related assets, including transferring certain constructed assets to different locations in Mexico, where possible. Future impairments may result for any capitalized amounts that are not deemed recoverable based upon our plans for these assets.