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TEXT-Fitch affirms Constellation Brands at 'BB+' on Crown acquisition
July 2, 2012 / 9:41 PM / 5 years ago

TEXT-Fitch affirms Constellation Brands at 'BB+' on Crown acquisition

July 2 - Fitch Ratings has affirmed the ratings for Constellation Brands,
Inc. (STZ) as follows, upon STZ's definitive agreement with Anheuser
Busch InBev (AB InBev) to purchase the remaining 50% interest in Crown
Imports LLC (Crown):

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

The Rating Outlook is Stable.

This rating action affects approximately $3.4 billion of debt at May 31, 2012.

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 8.5x 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. Constellation has also agreed to purchase the Mark West wine brand for
$160 million, to be financed by revolver borrowings.

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 FCF to restore
total debt-to-EBITDA back to its targeted 3-4x range within 12 months of the
acquisition closing. 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 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 free cash flow (FCF). The ratings balance the general stability of
the company's operations, good operating margins and ample free cash flow
generation with its acquisitive nature and near term increase in leverage.

Fitch does not anticipate upgrades to STZ's ratings in the near to intermediate
term. Negative rating actions are possible if a significant and ongoing
deterioration in operating results occur or the company does not reduce leverage
back to the 3-4x range within 12-18 months.

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 is very 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.

STZ's North American shipment volume decreased 0.8% for the fiscal year ended
Feb. 29, 2012 due to an overlap of the 2011 distributor inventory build as part
of the company's U.S. distributor consolidation. 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 industry. Crown Imports had a good year with
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 low single digits and expects Crown Imports volume
to grow in the low single digits. Fitch believes this will translate into modest
operating income growth.

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 $315.1 million, $314.1
million, and $599.7 million, respectively, at the fiscal year ended Feb. 29,
2012. 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 rating 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.

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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