Constellation Brands, Inc. (STZ) Returns to Earth

Constellation Brands, Inc. (NYSE:STZ) isn’t looking so bright after its stock plummeted nearly 16% the week following the Justice Department’s block of Anheuser-Busch InBev NV (NYSE:BUD)‘s proposed purchase of Grupo Modelo. The DOJ feels the merger would serve up pricing command on a silver platter to AB InBev. By taking Grupo out of the equation, AB InBev would essentially be free to increase pricing without fear of losing market share.

So, why is this potentially fizzled-out deal such a big disappointment for a seemingly unrelated wine company?

Backstory
For years, Belgium brewer AB InBev firmly secured the sought-after No. 1 and No. 2 beer brands. But in 2011, AB InBev eventually lost the No. 2 position to Molson Coors Brewing Company (NYSE:TAP)‘s  Coors brand. Ever since, the two megabrewers have been brawling, partly through dueling acquisitions. For example, last year AB InBev agreed to buy a Dominican Republic brewer, while Molson Coors quickly responded with an announcement to buy Eastern European StarBev.

Then, AB InBev announced in June 2012 that it would sell its stake in Crown Imports to Constellation Brands. Crown Imports is a joint venture between AB InBev and the wine company. The deal would’ve allowed Constellation to solely distribute Mexican brewer Grupo Modelo’s products in the U.S. Due to the dominant market share position it would create, AB InBev couldn’t buy Constellation or Crown Imports outright.

With the deal, Constellation was to import Corona, the leading import beer in the U.S and 37 other countries. The New York-based wine company would’ve also gained rights to import Mexico’s premium beer brand, Modelo Especial, a brand that’s enjoyed double-digit growth annually for practically the past two decades. Behind Corona and Heineken NV‘s Heineken, Modelo Especial represents the No. 3 imported beer in the U.S. With the goal of growing Modelo Especial to 100 million cases, 35 million were sold in 2011.

With full control of Crown Imports, Constellation Brands projected its annual revenue would double, and the wine company would emerge a fantastic, albeit unlikely, beer war beneficiary. Ever since the June announcement, Constellation’s shares have hit meteoric highs. The vibrantly burning stock closed the year out with a 70%-plus gain.

Grounded
But the Justice Department’s block of AB InBev’s purchase of Grupo Modelo brought Constellation stock back into the atmosphere. Challenging economic environments and ever-changing tastes of fickle consumers continually force alcoholic beverage companies to seek out the next big thing that’ll pump new life into their revenue streams.

Known primarily as a wine company, Constellation is increasing its beer and spirits portfolio. However, as the company expands its spirits offerings, it faces stiff competition from liquor heavyweights Brown-Forman Corporation (NYSE:BF.A), BEAM Inc (NYSE:BEAM), and Diageo plc (NYSE:DEO).