Constellation sued by JV partner, shares fall

AP News
Posted: Dec 16, 2009 11:26 AM

Shares of wine maker Constellation Brands Inc. tumbled Wednesday after a downgrade amid news the company was being sued by its Mexican-based partner in a joint venture.

Shares of the maker of Robert Mondavi wine, based in Victor, N.Y., fell 91 cents, or 5.6 percent, to $15.26 in heavy volume Wednesday.

On Tuesday Mexican brewer Grupo Modelo SA sued Constellation over its alleged refusal to pay for increased marketing costs for the Crown Imports joint venture next year.

The lawsuit, filed in U.S. District Court in the Southern District of New York, said Constellation has violated its duties to the joint venture by refusing to approve a plan that called for increased marketing spending on the business. The 50-50 joint venture, which includes brands such as Corona and Modelo Especial, started in 2007 and is slated to last through 2016.

Grupo Modelo argued in its complaint that a higher level of marketing would increase the amount of beer sold and income. It said a decrease would mean a loss of volume and income.

Any references to the amount of money involved in the marketing have been removed from the filings.

The suit asks for damages and a jury trial.

Constellation said in a news release Wednesday the amount of money in question is not material to Constellation's finances.

"Constellation believes that the claims lack merit and will defend its position," the company said.

Stifel Nicolaus analyst Mark Swartzberg cut his rating on Constellation to "Hold" from "Buy" on the news, not because he expects the case will cost Constellation money, but because it means the business will be less predictable.

"We believe the suit implies that a commonly held view of contractually 'locked-in' per case margins for Crown is, in fact, debatable and that suing one's business partner is generally a bad precedent for ongoing business relations," he told clients in a note Wednesday.

The dispute also shows differences in how the two companies approach business, said Deutsche Bank-North America analyst Marc Greenberg. The alcohol industry is seeing softening sales amid the recession as consumers cut back on spending, so companies want to increase marketing to keep up their sales.

But Modelo is focusing on volume growth _ which means it would want to increase its marketing spending _ while Constellation is looking to increase profits, which means it wouldn't want to boost its spending.

This dispute "opens up a philosophical investment gap," the analyst wrote. "But seeking legal resolution can not possibly be the best way for JV partners to come to terms ... unless it marks the beginning of a larger endgame for control of the country's leading import franchise."