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A $970 Million Bid for Mondavi

Constellation offers to take over the entire Robert Mondavi Corp.

Daniel Sogg
Posted: October 20, 2004

Constellation Brands, the Fairport, N.Y.-based global beverage giant, has made an unsolicited $970 million cash bid to acquire publicly traded Robert Mondavi Corp., indicating that it would keep the company intact, rather than split it in two as Mondavi has proposed doing. If it succeeds, Constellation -- whose wine holdings range from Simi and Ravenswood to Almaden and Arbor Mist -- would edge even closer to E. & J. Gallo's spot as the largest wine marketer in the United States.

News of the Constellation offer fueled a surge in Mondavi shares (MOND), which closed on NASDAQ on Tuesday at $51.88, up from Monday's close at $39.87. That 30 percent increase in the stock's value is in line with Constellation's bid of $53 per class A share and $61.75 for each of the class B shares, which are held by members of the Mondavi family. Constellation would also assume about $333 million in Mondavi debt -- bringing the deal's total value to about $1.3 billion.

Mondavi CEO and president Greg Evans said the board of directors met on Monday and "did not reject" the bid. "We are considering the offer as we are considering other strategic options," he said.

Constellation's offer further complicates an already uncertain future for Robert Mondavi Corp. In September, the company said it intended to sell its high-end wineries -- including Robert Mondavi Winery in Napa Valley and Opus One, a partnership in Oakville with Baronness Philippine de Rothschild of Bordeaux -- in order to focus on its $15-and-under brands, notably Woodbridge and Robert Mondavi Private Selection.

Since that September announcement, the corporation and its namesake family have been severing ties with each other. Earlier this month, Michael Mondavi resigned from the board of directors under pressure from corporate officials. Though he remains on the board, Tim Mondavi, Michael's brother, is no longer vice chairman nor head of the company's winemaking operations, a position he held since the late 1970s.

Over the past six years, Constellation, which was formerly called Canandaigua and was largely known for inexpensive wines, has been expanding and reshaping its portfolio, acquiring well-respected California brands such as Franciscan Estates, Ravenswood and Simi, as well as Australian wine giant BRL Hardy. Earlier this year, Constellation made a joint offer to buy California's Chalone Wine Group, in a three-way deal that is still pending.

Mondavi -- with "its great portfolio of wines, unmatched brand equity and storied tradition," as Constellation chairman Richard Sands said in a statement -- would add even more breadth to Constellation's wine portfolio. While Mondavi has struggled in an increasingly competitive market, Constellation officials said they believe that their company's vast global distribution network could strengthen the position of the Mondavi wines both domestically and abroad.

According to Impact Databank research, if Constellation acquires all of Mondavi, it would have an 18.9 percent share of the U.S. wine market, closing in on Gallo's 20.9 percent. (Those figures are based on the companies' 2003 case volume depletions.) Mondavi's Woodbridge brand alone accounted for 2.6 percent by volume of the U.S. market in 2003. But because Mondavi has several high-priced lines, the combined companies would beat out Gallo in terms of their average retail price per bottle, coming in at $4.79 versus Gallo's $4.25.

Though the Mondavi board is considering Constellation's bid, it is proceeding with the recapitalization plan that was proposed in August, which will be subject to a shareholder vote at Mondavi's annual meeting, rescheduled for Nov. 30. If approved, the recapitalization plan would decrease the Mondavi family's voting shares in the company to about 39 percent from about 85 percent. It would also reincorporate the California-based company in Delaware.

While Constellation does not oppose the recapitalization plan (as Mondavi has claimed in a statement), it does oppose the proposed restructuring that would sell off the high-end brands, said Mike Martin, vice president of corporate communications. "We feel for a variety of reasons that it is important to keep Mondavi intact," he said.

In its statement, Constellation said it believes that the restructuring plan would reduce the company's value. It also said it wants to expedite the acquisition process. "We would like to commence discussions with Mondavi immediately with a goal of entering into a merger agreement with Mondavi as soon as possible," Sands said. "The Mondavi board of directors has expressed its commitment to maximize shareholder value and has indicated that Mondavi would meet with us to discuss our offer."

Constellation released a series of correspondence between Sands and Mondavi chairman Ted Hall, starting with an Oct. 12 letter outlining details of the Constellation bid. Although Sands stated that he wanted negotiations to remain private, Mondavi publicized the offer on Oct. 18, without disclosing its source or any financial details. That led to a surge in Mondavi's share price. "In negotiations like this, there's a lot of high-stakes gamesmanship," Martin observed. Shares of Constellation (STZ) closed Tuesday at $36.25, down 8 percent from Monday's close of $39.50.

If Constellation grows dissatisfied with the pace or tenor of negotiations with Mondavi's board, it could present a public tender offer directly to shareholders. In Sands' Oct. 12 letter, he told Hall that he believes shareholders "would strongly prefer our plan to the proposed recapitalization and restructuring."

Wine industry analyst Tim Ramey, a vice president with D.A. Davidson & Co., called the offer "a very, very attractive bid. Not at all lowball. It's roughly the same [valuation] Constellation paid for BRL Hardy, but Hardy was growing faster."

Members of the Mondavi family had indicated that they would be interested in trying to buy back Robert Mondavi Winery, which they founded in 1966, and take it private again. That may not be possible in the face of the Constellation bid, or if other competing bids are presented.

But in his correspondence with Hall, Sands wrote that he hopes the Mondavi family would be interested in "remaining involved in the Mondavi business."

Other longtime Napa vintners expressed sadness rather than shock at Constellation's offer and the possibility that the Mondavis may lose control of even their original winery. "I'm not surprised. Is anybody surprised that the big wineries are swooping in?" said John Shafer, who started Shafer Vineyards in 1972. (Despite the fact that Mondavi is one of California's largest wineries, it is small in comparison to some of the global drinks giants, and many people still view it as a family winery.)

"This is sort of a logical consequence of the [previously announced restructuring]. But because of the history of the Mondavis and our personal connection to Robert and Margrit, my response is on an emotional level, rather than a financial one," Shafer said.

Given the track record of smaller wineries that have been acquired by larger companies, particularly in Napa's past, Shafer isn't optimistic about the future of Robert Mondavi wines. "History will tend to support the idea that quality will go down, not up," he said.

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