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Constellation Brands, Gallo scale back and cut price of wine deal after federal regulators balk

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In order to appease federal regulators, Constellation Brands Inc. and E. & J. Gallo Winery on Thursday said they have scaled back their $1.7 billion wine and spirits deal amid anti-competitive concerns — a move that gives local grape growers and wholesalers certainty that the blockbuster sale eventually will be approved.

The Constellation sale of low-price wine and spirits brands will now be worth $1.1 billion. The company’s sparkling wine, brandy, dessert wine and concentrate assets that originally were in the deal have been excluded.

That means Constellation will not be selling its Cook’s California Champagne, J. Roget American Champagne and Paul Masson Grande Amber Brandy to Modesto-based Gallo. Those brands sell about 5 million cases annually.

Locally, the Clos du Bois winery in Geyserville and the Ravenswood and Mark West brands still will be part of the sale to Gallo.

The revised deal likely will bring comfort to both wholesalers and grape growers since it should remove uncertainty that the transaction could fall apart, said Rob McMillan, founder of Silicon Valley Bank’s wine division. However, “it’s a pain on the supply channel,” McMillan said of the delay.

The Thursday announcement came after the Federal Trade Commission balked over the deal announced in April, in which Constellation would have sold more than 30 low-price wine and spirits brands along with six wineries to Gallo.

“It isn’t really surprising,” said industry consultant Jon Moramarco of the FTC’s decision. He said that Gallo’s market share in categories of $10 or under bottles of sparkling wine and dessert wine could have gone up to as much as 80% under the initial deal and it “would basically own the whole category” for wine concentrate.

The two companies said they expect the revised transaction to be completed before March 1, 2020. It will still have to be approved by federal regulators.

“We remain confident in our wine and spirits transformation strategy and we are committed to continuing to work with Gallo and the FTC to finalize this transaction,” Bill Newlands, Constellation Brands chief executive officer, said in a statement.

The proposed smaller sale would still rank as a tremendous moment within the U.S. wine sector, as Gallo would grow even bigger as the top U.S. producer and No. 3 Constellation would shrink to focus on its more profitable premium wine market. Gallo has 23% of the domestic wine market, while Constellation has 11%.

As part of the transaction, Gallo will pay $250 million to Constellation if brand performance metrics are reached over a two-year period after closing.

In a separate transaction, Constellation said it also would sell its New Zealand-based Nobilo Wine to Gallo for $130 million. That deal also would require regulatory approval by the FTC and New Zealand authorities.

In a statement, Victor, New York-based Constellation said it still plans to divest the beverage brands and its concentrate business now carved out of the deal with Gallo “to companies whose business strategies better align with the brands.”

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

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