Gallo finalizes blockbuster $810 million wine deal with Constellation Brands

E. & J. Gallo Winery announced Tuesday it completed an acquisition of low-price wine brands from Constellation Brands Inc., in a scaled-back $810 million deal that still is one of the biggest in the U.S. wine industry.

The transaction originally was valued at $1.7 billion when first announced in April 2019. However, regulators balked and forced the two alcohol beverage giants to shrink the deal to preserve competition in the U.S. wine industry. Gallo is the country’s largest wine company, and with this sale Constellation Brands drops two spots to No. 5 nationwide.

As part of its purchase, Gallo picks up the Clos du Bois winery in Geyserville and the brand. Ravenswood and Mark West wines, which began in Sonoma County and now are produced elsewhere, also are included.

“The closing of this transaction represents our company’s long-term commitment to the wine industry,” Ernest J. Gallo, chief executive of the Modesto-based, family controlled Gallo business, said in a statement.

To gain approval from the Federal Trade Commission to clear the way to close the deal, Constellation a year ago agreed to a major concession. Constellation would not sell to Gallo Cook’s California Champagne, J. Roget American Champagne and Paul Masson Grande Amber Brandy brands. They would have given Gallo a large slice of the sparkling wine market. The companies also made other more minor concessions to finally get FTC final approval last month.

Still, the acquisition expands Gallo’s reach and leadership in the domestic wine industry.

“You have a behemoth that's going to be bigger,” said Rob McMillan, executive vice president of Silicon Valley Bank’s wine division in St. Helena.

Under final terms, Gallo bought five wineries from Constellation and more than 30 U.S. wine brands, such as Arbor Mist, Black Box, Estancia, Franciscan, Hogue, Manischewitz, Taylor, Vendange and Wild Horse. Gallo also gets the Nobilo New Zealand sauvignon blanc wine brand in an separate transaction with Constellation.

The American brands Gallo added all sell at a price range of $11 a bottle or less. This cheap wine segment is experiencing declining growth, compared to the more robust nation’s premium wine market centered in Sonoma and Napa counties.

According to research by wine sector consultant Jon Moramarco, Gallo brands now represent almost 30% of all bottles of wine produced in California, by far the country’s largest producer. Last year, Gallo’s share was at 24.4%. Meanwhile, Constellation drops from 12% to 6.5% of the state’s wine wine production.

An estimated 81% of all U.S. wine is produced in the Golden State. In 2019, wine shipments nationwide had a retail value estimated at $75.1 billion, a figure that also includes imports.

A former executive at Constellation Brands, Moramarco said the blockbuster wine deal fits the objectives of both companies.

For privately held Gallo, the family can play the long game to help revitalize some of the cheaper wine brands that have lost their luster. And it gives the company more wineries to increase wine production capacity for the future, analysts said.

Completing the deal gives certainty to wholesalers, retailers and grape growers across the state who know Gallo finally is taking over these low-end Constellation wine assets, analysts said. If Gallo indeed opts to reinvest in some of these brands, grape growers in regions outside the North Coast premium wine market would be the likely beneficiaries, said Moramarco, citing Central Valley growers.

In recent years, Gallo was primarily focused on buying premium wine assets in Sonoma and Napa counties, such as J Vineyards & Winery in Healdsburg and the Napa Valley brands of William Hill Estate and Orin Swift, plus the 600-acre Stagecoach Vineyard in the Atlas Peak region in Napa County.

McMillan said Gallo doesn’t have to be concerned about quarterly sales and profit growth and meeting financial targets to please Wall Street.

That’s not the case for Constellation, a publicly traded company based in Victor, New York. Its stock closed Tuesday at $216.89, up $0.15 in New York Stock Exchange trading. Propelled by the announcement of the deal closure with Gallo after stock trading ended for the day, Constellation’s shares rose $0.61 in after-hours trading to $217.50.

Constellation owns prime local properties such as the iconic Robert Mondavi Winery in Napa, for which it paid $1 billion in 2004, and Simi Winery in Healdsburg. The deal with Gallo reinforces its goal to focus primarily on premium brands that have good potential for growth, while offloading underperforming wine assets.

Also, Constellation is a big player in the beer and spirits business — notably its U.S. distribution of Corona and Modelo beers — and jumped into the legal marijuana market in 2017 with a $190 investment in Canopy Growth Corp., a Canadian cannabis beverage products company. To date, Constellation has plowed $4 billion into Canopy, but the firm has so far struggled to reach its potential.

Bill Newlands, CEO of Constellation, said acquiring assets from Gallo and other recent deals “positions our wine and spirits business for accelerated revenue growth and operating margin performance going forward.”

Driven by consumer taste for premium alcoholic beverages, ”these moves align with our vision of building a winning portfolio of bold and distinctive higher-end brands,” Newlands said.

Meanwhile, Gallo did not reveal details Tuesday about its plans for once beloved brands, such as Clos du Bois and Ravenswood, though it promised better days.

“We recognize that these are iconic brands within their categories that resonate with consumers,” said Lon Gallagher, a Gallo spokesman. “We plan to respect the legacy of these brands, while devoting our efforts to revitalizing brands and continuing to make the highest quality wine.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.