CHICAGO Shares of Constellation Brands Inc (STZ.N) fell as much as 7.1 percent Wednesday on investor concerns that a lawsuit by Mexico's Grupo Modelo GMODELOC.MX over the companies' U.S. joint venture could hit a key segment of Constellation's profits.
Modelo said on Tuesday it was suing a Constellation unit in a dispute over marketing at U.S. joint venture Crown Imports LLC, the exclusive U.S. importer of Modelo's Corona Extra, Modelo Especial, Corona Light, Pacifico and Negra Modelo brands, as well as St. Pauli Girl and Tsingao beers.
Modelo said it has had to cover marketing costs at Crown that Constellation refused to fund. It did not say how much compensation it was seeking in Manhattan federal court. Constellation on Wednesday said it would defend itself.
"The funding at issue is not material to Constellation's overall financial position," Constellation said in a statement. "Constellation believes that the claims lack merit."
But investors fear the dispute could hurt ties between Constellation and its Mexican partner and affect a key portion of Constellation's business. Stifel Nicolaus analyst Mark Swartzberg cut his rating on Constellation shares to "hold" from "buy," citing the lawsuit.
"Suing one's business partner is generally bad precedent for ongoing business relations," he said in a research note. The equity income from Crown represents about 29 percent of Constellation's earnings before interest and taxes (EBIT), he said.
"The suit may prove to be a nonevent or even a prelude to a positive for Constellation," Swartzberg added. "However, we recommend the sidelines because of the relationship's significance to Constellation and potentially sustained and low visibility on the dispute."
UBS analyst Kaumil Gajrawala said in a research note that the dispute likely only involves tens of millions of dollars, but it may be a move by Modelo to get out of the joint venture before the end of 2016.
Credit Suisse analyst Carlos Laboy said in a research note that Modelo may have to either buy Constellation's 50 percent share in Crown or watch its brands decline further in the United States.
He said Constellation may have leverage in such a deal while Modelo grapples with arbitration against Anheuser-Busch over its U.S. partner's acquisition by Inbev NV, which created Anheuser-Busch InBev (ABI.BR), the world's largest brewer.
Laboy said there is probably pressure on Modelo to sell the entire company to Anheuser-Busch InBev, and the decline of its Corona brand in the United States hurts the company's overall value. He said the Crown venture represents about 28 percent of Constellation's profit.
Shares of Constellation fell as much as 7.1 percent and were still off 87 cents, or 5.4 percent, at $15.30 near midday on the New York Stock Exchange.
(Reporting by Ben Klayman; editing by John Wallace)