Gallo paying $1.7 billion for 30 wine and spirits brands from Constellation Brands, including Sonoma's Ravenswood

In one of the biggest wine industry acquisitions in U.S. history, Constellation Brands Inc. announced a $1.7 billion deal Wednesday to sell more than 30 low-price wine and spirits brands along with six wineries to E. & J. Gallo Winery, including the Clos du Bois winery in Geyserville and notable brands with local ties Mark West and Ravenswood.

The deal comes as Constellation Brands sheds its portfolio of wines priced at or less than $11 a bottle to focus on premium wines and spirits, beer and cannabis. Meanwhile, Modesto-based Gallo, already the nation's largest wine company, concentrates on growing and diversifying its portfolio amid a slowdown in the $70.5 billion wine market. The transaction, which is subject to regulatory approval, should be completed early in 2020.

Constellation, a publicly traded company based in Victor, New York, had signaled for months that it was looking to offload underperforming brands since they are a drag on its bottom line compared to other businesses, most notably the strong growth of its U.S. distribution of Corona and Modelo beers. Its stock closed Wednesday at $179.69 a share on the New York Stock Exchange, up $2.98.

“One of the hallmarks of our success over the years has been our ability to evolve and stay on the forefront of emerging consumer trends,” Bill Newlands, CEO of Constellation Brands, said in statement. “This decision will help enhance organizational focus on a more premium set of wine and spirits brands that better position our company to drive accelerated growth and shareholder value.”

Recently, Constellation ventured into cannabis, placing a big bet for a 38% stake in Canadian marijuana producer Canopy Growth. Last year, the company was the country's third-largest wine producer with 50 million cases sold, including Simi Winery in Healdsburg and iconic Robert Mondavi Winery in Napa, according to Wine Business Monthly. In 2004, Constellation paid $1 billion for Mondavi in another blockbuster deal.

Gallo's pending acquisition, however, goes against the grain of its recent strategy to expand the premium wine division, which has represented about a third of its portfolio. The bargain brands it's buying include Rex Goliath, Arbor Mist and Cook's, packaged boxed wine Black Box, kosher wine Manischewitz and fortified wine Wild Irish Rose. The six Constellation wineries included are in California, New York and Washington.

“Maybe they can resurrect some of those brands,” said Rob McMillan, executive vice president of Silicon Valley Bank's wine division in St. Helena, said of Gallo. “They zag when everyone else is zigging.”

In recent years, Gallo, producer of popular low-price Barefoot Wine and André sparkling wines, has been aggressively acquiring premium wines. They include the Napa Valley labels of Orin Swift and William Hill, the Stagecoach Vineyard in Atlas Peak and The Ranch Winery in St. Helena. Wine Business Monthly estimated the private company sold about 70 million wine cases last year in the United States.

“While we continue to invest in our premium and luxury businesses, we see a tremendous opportunity with this acquisition to bring new consumers into the wine category,” CEO Joseph E. Gallo said in a statement. “We will continue to provide our customers and consumers with quality products at every price point.”

Analysts said Constellation wanted to jettison its less profitable brands as a package, which meant only a major company like Gallo would be a possible buyer. Pat Roney, CEO of Vintage Wine Estates in Santa Rosa, the 14th-largest wine company in the country, said his team looked at the brands in September but balked because they were in a declining price category.

Gallo, however, has the resources to squeeze growth out of many of those brands and can play the long game that one or two of the labels may take off under a new home. For example, Black Box in Madera could be a sleeper given the premium boxed wine category has shown signs of growth and its only rival is Bota Box by the Delicato Family Wines in San Joaquin County, said Jon Moramarco, managing partner of bw166, a winery consulting group.

The future of the Clos du Bois label is more uncertain, according to analysts. Its legacy as Sonoma County's first Bordeaux-style red blend and as a local premium brand during the 1980s has faded now that it is being priced as low as $7 a bottle.

Analysts said they would not be surprised if Gallo placed another label at what's now the Clos du Bois tasting room just off Highway 101 to better showcase the scenic property.

“I don't think that brand can be dusted off,” McMillan said of Clos du Bois. “I would expect a new star in its place.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.

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