Why Constellation Brands Just Spent $160 Million For Craft Whiskey

Bottles of Mexican Corona beer are pictured in a supermarket in Mexico city on September 28, 2016. Belgian-Brazilian brewer AB InBev savoured its status as the global leader in the beer industry after investors approved Wednesday its buyout of British rival SABMiller. Shareholders in SABMiller -- currently the producer of Foster's, Grolsch and Peroni lagers -- overwhelmingly approved $103-billion (92-billion-euro) takeover from the maker of Budweiser, Corona and Stella Artois. / AFP / RONALDO SCHEMIDT (Photo credit should read RONALDO SCHEMIDT/AFP/Getty Images)
Ronaldo Schemidt—AFP/Getty Images

Corona beer and Robert Mondavi wine maker Constellation Brands has agreed to pay $160 million to buy High West Distillery, the latest bet by a major alcohol producer that high-end craft spirits will continue to allure consumers.

Constellation Brands—which is the largest U.S. alcohol maker to participate in the beer, wine and spirits categories—says that with the deal, it will enter the high-end craft whiskey market, where growth as been strong as consumers increasingly look for premium priced beverages with local flair. High West’s portfolio, which sells about 70,000 cases annually, includes four core products: American Prairie Bourbon, Double Rye!, Rendezvous Rye and Campfire. It has reported double-digit volume growth for the past three years.

The deal is expected to close by the end of October. It will help bolster Constellation’s (STZ-B) spirits portfolio, which includes Svedka vodka and Casa Noble tequila and is dwarfed in size by the company’s historic strength in wine and more recent bolstered standing in beer after it got full control of the U.S. assets of Mexican beer brands like Corona and Modelo Especial.

Meanwhile, craft spirits have become an emerging, fast-growing category that experts estimate only command as little as 2% of the total nearly $72 billion U.S. market, meaning market share penetration is far less than the success craft brewers have had in the beer category. But growth for craft spirits has hit a compound annual growth rate of 16% between 2007 and 2015. And the number of production facilities in the U.S. has more than tripled since 2007—now at the highest level since Prohibition.

Big alcohol players are taking notice and inking deals. Recent transactions include French beverage giant Pernod Ricard’s majority share investment in dry-gin brand Monkey 47 earlier this year and rum maker Bacardi’s first-ever acquisition of a bourbon brand, Kentucky based Angel’s Envy, last year.

Constellation Brands, meanwhile, has been particularly acquisitive in the past year. Besides High West, it also inked two separate deals for The Prisoner Wine Company portfolio and it spent almost a $1 billion for craft brewer Ballast Point.

Separately, Constellation Brands reported impressive quarterly sales results. Net sales for the fiscal second quarter jumped 17%, boosted by double-digit sales growth for beer and wine and a more modest 4% increase for the tiny spirits segment. Growth was powered by the company’s Mexican beers as well as additional sales from the acquired Meiomi and Prisoner wine brands.

“During the quarter, we gained share and improved margins across our business, while continuing to make smart investments designed to fuel growth today and in the future,” said Rob Sands, Constellation Brands president and chief executive officer, in a statement.

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