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TEXT-Fitch rates Constellation Brands senior notes 'BB+'
August 8, 2012 / 9:45 PM / 5 years ago

TEXT-Fitch rates Constellation Brands senior notes 'BB+'

Aug 8 - Fitch Ratings has assigned a 'BB+ rating to Constellation Brands,
Inc.'s (STZ) $650 million 4.625% senior unsecured notes due 2023. STZ had
approximately $3.4 billion of debt at May 31, 2012.

Net proceeds from the notes issuance combined with additional borrowings under
the company's senior credit facility and available cash will be used to finance
STZ's acquisition of the remaining 50% interest in Crown Imports LLC (Crown).
The notes will rank equally to the company's other senior unsecured debt and are
fully and unconditionally guaranteed on a senior basis, jointly and severally,
by the subsidiaries that are guarantors under the credit facility. The
acquisition financing follows STZ's June 29, 2012 announcement that it had a
definitive agreement with Anheuser Busch InBev (AB InBev) to purchase the
remaining 50% interest in Crown.The consummation of the acquisition is
conditioned on AB InBev completing its acquisition of Grupo Modelo.

Crown has the exclusive right to import, market and sell primarily Grupo
Modelo's Mexican beer portfolio in the 50 states of the U.S., the District of
Columbia and Guam. The Crown portfolio of brands includes Corona Extra, and
according to the company; it's the best-selling imported beer and the sixth
best-selling beer overall in the industry and Corona Light is the leading
imported light beer.

Fitch believes there is good strategic rationale for the transaction, given the
importance of Crown's cash flows to Constellation's credit profile, the growth
of imported beer sales in the U.S., and the strength of the Corona brand. The
purchase price for the remaining 50% interest in Crown is $1.85 billion. This
values the Crown distribution business at approximately 8.5 times(x) Crown's
fiscal 2012 EBIT of $431 million. The transaction, subject to regulatory
approval, is expected to close during the first quarter of calendar 2013.

STZ has fully committed bridge financing in place for the acquisition. Permanent
financing is expected to consist of a combination of revolver borrowings, a new
term loan under the company's current senior credit facility and the issuance of
new notes. Separately, STZ completed the acquisition of the Mark West wine brand
from Purple Wine Brand Company LLC, on July 16, 2012 for $160 million and
utilized it revolver to provide the financing.

Upon closing, the transaction is expected to increase debt-to-EBITDA to the
mid-4x range when factoring in a full year of the additional Crown EBITDA. In
the first quarter of fiscal 2013, Constellation completed $383 million of share
repurchases under its $1 billion authorization but has suspended its share
repurchases for the remainder of fiscal 2013 in order to use free cash flow
(FCF) to restore total debt-to-EBITDA back to its targeted 3x-4x range within 12
months of the acquisition closing. The company's total debt-to-EBITDA including
equity income for the latest twelve months ended May 31, 2012 was 3.7x and
EBITDA-to-interest expense including equity income was 4.7x. FCF was $572
million for the period. The LTM FCF amount continues to benefit from onetime
lower working capital usage that occurred during the first nine months of the
prior fiscal year.

Fitch believes Constellation can generate annual FCF in excess of $600 million
post the closing of the Crown transaction, based on the estimated after-tax EBIT
and the expectation of minimal additional capital requirements, and therefore
views this level of deleveraging as achievable. STZ accounted for its current
50% interest in Crown under the equity method and recognized $215 million of
equity earnings in Crown in fiscal 2012. Upon completion of the transaction STZ
plans to consolidate the full financial results of Crown. Fitch had included
equity method earnings from Crown in STZ EBITDA, since cash distributions were
roughly equivalent and STZ exercises a considerable amount of control of Crown.

STZ and Crown will control the distribution, marketing and pricing for all
Modelo brands in the U.S., while AB InBev will ensure continuity of supply,
product quality and innovation. The new importation agreement will be perpetual
and provides AB InBev with the right, but not the obligation, to exercise a call
option every 10 years, subject to regulatory approval, at a multiple of 13x
Crown's EBIT from the Modelo brands.

STZ's ratings and Outlook reflect the company's leading global market positions
and well-known portfolio of wine, spirits and beer brands, as well as its
significant FCF. The ratings balance the general stability of the company's
operations, good operating margins and ample FCF generation with its acquisitive
nature and near-term increase in leverage.

The company generates a substantial amount of FCF as evidenced by its averaging
over $450 million in FCF annually the past five years. Fitch believes STZ's
expectation of producing between $425 million and $475 million in FCF in fiscal
2013 without the acquisition is achievable. STZ has used a combination of FCF
and divestitures to reduce debt to $3.4 billion from a peak of almost $5.3
billion at May 31, 2008.

Net sales for Constellation Wines and Spirits were $634.8 million for
first-quarter fiscal 2013, flat with the prior year. Consolidated operating
income increased 4% to $106.1 million for the period. Net sales for Crown
Imports increased 7% to $724.1 million for first-quarter 2013 compared to the
prior year period. The increase resulted primarily from volume growth within the
Crown Imports' Mexican beer portfolio driven largely by increased advertising
spend. Operating income increased 3% to $123 million for the period. Operating
income growth was attributed to volume growth previously mentioned partially
offset by selling, general and administrative expenses, primarily due to timing
of advertising spend.

Fitch anticipates wine category growth in calendar 2012 will be in the low
single digits and expects STZ's volume growth to be in line with the industry.
Crown Imports is expected to see mid-single-digit growth of depletions and
domestic category depletion continuing to decline in the low single digits.
Fitch forecasts 2012 U.S. beer category growth will be flat to down in the low
single digits and expects Crown Imports' volume also to grow in the low single
digits. Fitch believes this will translate into modest operating income growth
overall.

STZ's liquidity remains adequate. As of May 31, 2012, the company's liquidity
includes approximately $800 million of availability under its revolving credit
facility due in May 2017 and $69.1 million of cash and equivalents. Maturities
of long-term debt in fiscal 2013, 2014, and 2015 were $28.2 million, $36.4
million, and $550 million, respectively, for the remaining nine months of fiscal
2013. Fitch believes the security of the credit facility, being equity in
subsidiaries rather than hard assets, is relatively weak and therefore has
chosen not to distinguish between the secured credit facility rating and the
senior unsecured notes at the current rating level. STZ's capital structure does
not provide an advantage structurally to any one issue. STZ is the issuer of all
the company's notes outstanding and the borrower under its credit agreements for
its facilities.

What Could Trigger a Rating Action
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Given the increase in leverage as a result of the acquisition, an upgrade of
STZ ratings is not anticipated in the near to intermediate term.

Future developments that may, individually or collectively, lead to a negative
rating action include:
-- Significant and ongoing deterioration in operating results that inhibits a
reduction in leverage back to the 3x-4x range within 12-18 months.

Fitch currently rate STZ as follows, with a Stable Outlook:

--Long-term IDR at 'BB+';
--Secured bank credit facility at 'BB+';
--Senior unsecured notes at 'BB+'.

Contact:

Primary Analyst
Wesley E. Moultrie II, CPA
Managing Director
+1-312-368-3186
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602

Secondary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195

Committee Chairperson
John C. Culver, CFA
Senior Director
+1-312-368-3216


Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
brian.bertsch@fitchratings.com.

Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research
--'Corporate Rating Methodology' (Aug. 12,2011)

Applicable Criteria and Related Research:
Corporate Rating Methodology

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