A Look Back On Wineries And Distilleries In 2011

By Will Ashworth | December 26, 2011 AAA
As we toast this past year with a glass of champagne, it's time once again to reflect on all the interesting happenings in the wineries and distillers industry in 2011. There's been some highs, some lows and some significant changes. What will happen in 2012? The answers are anybody's guess. Just the same, I'll make a few predictions. Cheers!

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There was no bigger story in 2011 than Fortune Brands splitting into two separate companies. As part of a strategy to realize greater shareholder value, Fortune Brands first sold its Titleist and Foot Joy business in late July for $1.23 billion, to a group led by sportswear company Fila Korea. Once completed, it was able to move forward with its plan to split the liquor business from its home and security-related businesses. Beam (NYSE:BEAM) and Fortune Brands Home & Security (NYSE:FBHS) began trading as separate, independent companies on Oct. 4, 2011. In the first two months as public companies, both achieved double-digit returns, up 24 and 34% respectively, compared to a 12% increase for the S&P 500. Activist investor Bill Ackman pushed hard for this to happen. Still early in the proceedings, it appears he was right.

Look Out Below

Also making news in 2011, but for all the wrong reasons, was vodka producer Central European (Nasdaq:CEDC), whose stock closed out 2010 at $22.90. What happened to the once-mighty stock that traded as high as $77.25 in July, 2008? What didn't happen? Firstly, earnings went in the tank. Over the four most recent quarters ended Sept. 30, 2011, CEDC missed earnings estimates by an average of 34%. It's a wonder that analysts even attempt to figure out a number, when earnings have been so inconsistent. In March, it announced full-year net sales guidance of $880 million to $1.1 billion, with diluted earnings per share of $1.05 to $1.25. It then reaffirmed guidance two months later in May, only to lower them in August and again in November. By the time its two-step was over, its earnings expectations for all of 2011 were 65% lower than just seven months earlier.

Class action lawsuits are the order of the day, as a result of its mismanagement. Is there a business to save? That's a good question. Standard & Poor's cut the long-term credit rating for CEDC in early December to "B-" from "B," citing a poor operating performance, the deterioration of its credit ratios, and the general decline in vodka consumption in both Poland and Russia. The future is bleak and the sharks are circling. (To know more about EPS, read How To Evaluate The Quality Of EPS.)

Family Business

In March, rumors were flying that the Beckmann family, owners of José Cuervo, would put their tequila empire up for sale for $2 billion. Speculation had Diageo (NYSE:DEO) as the most logical suitor, because they already held the global distribution rights for José Cuervo. Other potential suitors include Pernod Ricard and Brown-Forman (NYSE:BF.B). Since the first mention of the potential deal surfaced last spring, there's been little new information or speculation, suggesting serious negotiations are underway.

Whomever wins the bidding process, I doubt very much that it will be Brown-Forman. First, in 2010, the company began a 10-year plan for growth that included expanding the reach of its el Jimador and Herradura tequila brands acquired in 2007. Secondly, and probably more importantly, it's not the way Brown-Forman does business. In September, long-time CEO Owsly Brown II, died of complications from pneumonia at the premature age of 69. Brown was instrumental in the company's global expansion and current success. In a June speech, he said this about growth: "One thing seems clear to me; pursuing size for its own sake is a very poor choice." Brown-Forman has plenty to keep itself busy.

The Year Ahead

The two most likely events to occur in 2012 are as follows:

1. Central European Distribution Corp. will be acquired by Russian Standard, whose billionaire owner Roustam Tariko, acquired 9.9% of its stock in November. Mark Kaufman, founder of the Whitehall Group, a leading importer of wines and spirits in Russia, owns another 9.6% of the company, thanks in large part to his $92 million cash and stock deal to sell Whitehall to CEDC. The two men could easily band together to buy the hemorrhaging firm. The only thing stopping Tariko would be if the tycoon feels it's too far gone and that's definitely a possibility. (To know more about acquisitions, read Analyzing An Acquisition Announcement.)

2. Diageo breaks open the bank and pays $2-$3 billion for José Cuervo. It's important that it get the deal done sooner than later, as its distribution agreement runs out in 2013. An excellent, albeit a more expensive alternative, would be for it to buy Beam Global for $12 billion, which would likely double debt, keeping Jim Beam and one or more of its premium bourbons, Courvoisier and Sauza, and selling off the other brands. Sauza might be the number two tequila brand globally, but the deal would fill several holes in Diageo's lineup.

The Bottom Line
The past year has a had a lot of ups and downs, for wineries and distilleries; there's been some good, some bad and hints of what's to come. In the coming year we could see more of the same or some interesting, and perhaps lucrative, developments. So raise a glass on New Years Eve, and give a toast to a profitable year ahead.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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