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The City: Fighting talk from Constellation

Published:  18 January, 2007

If further confirmation were needed about how tough wine retailing is in the UK, it has come from the world's largest producer, Constellation Brands. In a recent update on trading, including second-quarter earnings figures, chairman Richard Sands said the company's sales growth was a little lower than expected' and that this reflected tougher trading conditions in the UK market' due to consolidation among retailers.

Overall, Constellation's figures were in line with expectations. Sales were up 15%, but wine sales grew by 19% to $800m, much of that attributable to the inclusion of Robert Mondavi in the portfolio. Constellation has also begun distributing Ruffino in the USA after buying a 40% stake in the group.

For Constellation's wine division as a whole, operating income rose 41% to $123.7m.

Wine sales in the States soared by 59%, but branded wine net sales were flat in Europe and fell by 1% in the Australasian market, hit by the weak US dollar. Nevertheless, Constellation expects its business to grow further, with third-quarter profits of about 50 cents a share, compared with 34 cents in the quarter to the end of August.

While the figures were much as expected, the real interest came in the accompanying comment from Sands about Constellation's $930m bid for Vincor of Canada, which includes Western Wines in Britain. He took a sideswipe at critics, saying Constellation did not need the acquisition to cover up weaknesses in our businesses', and was scathing about Canadian analysts, who, he said, would have you believe' that Vincor was a must-have acquisition'. He went on to say, We do not need to make acquisitions to further strengthen our business.'

That is just the sort of comment the market would expect from a predator, especially one it perceives as trying to buy the target company cheaply. But Sands then seemed to undermine his own case by saying that Canada, where Vincor has about 52% of its sales, was a second-tier market' and that the company does not have must-have brands like Robert Hardy and Mondavi'.

So why is Constellation so keen to land Vincor? Sands says he is ready for a fight, and he turned up the heat on the Canadian company's board by saying its planned cost savings would end in significant lay-offs and impact the underlying value of the company and its ability to grow'.

The war of words will continue as Vincor woos rival suitors. But in the meantime, Constellation's shares are up about 10% so far this year.