STZ Constellation Brands Inc

--Constellation to buy rest of high-growth beer joint venture

--Also buying a brand of pinot-noir wine

--Earnings slip, but adjusted bottom line rises slightly to beat consensus

--Shares jump on deal news, increasing market capitalization by one-quarter

(Adds executive and analysts comments, other information, updates share movement, in the second, fourth through sixth, 10th, 13th and 18th paragraphs.)

 
   By Joan E. Solsman 
 

Constellation Brands Inc.'s (STZ, STZB) investors toasted a milestone acquisition that firmly plants the alcoholic-beverage maker in a U.S. beer market with stronger growth than the fragmented wine business, making the fiscal first-quarter's slim rise in adjusted earnings an afterthought.

Shares rocketed up 25% to $27.23 in recent trade after Constellation said it would buy the remaining 50% stake of Crown Imports LLC, its thriving joint venture with Mexican brewer Grupo Modelo SAB (GPMCY, GMODELO.MX), which makes beers such as Corona and Modelo Especial.

The $1.85 billion deal with Anheuser-Busch InBev NV (ABI.BT, BUD) gives Constellation--the maker of Robert Mondavi and Ravenswood wines and Svedka vodka--the full sales and earnings of the top beer importer in the U.S. and removes a stock-deflating uncertainty about Constellation's future in the venture.

During a conference call to discuss the news, Chief Executive Rob Sands called it a transformational step that enhances the company's participation in one of the most-attractive sectors of the alcoholic-beverage industry. In addition, with its first-quarter results, Crown has outperformed the total U.S. beer industry for more than two years, he said.

Morningstar Inc. analyst Kenneth Perkins noted that Crown's first-quarter sales increase of 7% also outstripped that of Constellation's wine business.

He added that Crown brands have potential to be leveraged across the U.S., more so than the wine portfolio. "Wine is a lot more fragmented...whereas people know Corona and specifically look for it," he said.

With Constellation as the highest gainer on the S&P 500 in midday trading Friday, its performance Friday stands in sharp contrast to when it reported its previous quarterly report. Shares slumped then on a weak outlook for the fiscal year because of spending on building its brands and sales, while many wine consumers remained budget-conscious.

The stock had remained in the doldrums until it climbed earlier this week on speculation that Anheuser-Busch InBev would buy Grupo Modelo. Early Friday, the Belgian beer company confirmed it would take over the Mexican brewer and sell the other half of the Crown joint venture to Constellation, a measure that alleviates some antitrust worries.

After the deal's expected close in early 2013, Constellation and Crown will have complete, independent control of distribution, marketing and pricing for all Modelo brands in the U.S., while Anheuser-Busch InBev will ensure continuity of supply, quality of products and the ability to introduce innovations.

Chief Financial Officer Robert Ryder said the Crown deal strengthens Constellation's financial profile, diversifies its consumer base and provides a higher operating return on invested capital than wine and spirits.

D.A. Davidson analyst Timothy S. Ramey called it "an unbelievably good outcome" for the company. The highly accretive acquisition should accelerate its growth rate and brushes away a dark cloud that had been hanging over the stock, he said. The assumption that Constellation would lose the Crown business in 2017 had penalized shares by about $7 each, he estimated.

The new importation agreement with Anheuser-Busch InBev is perpetual, though the Belgian brewer has the option to buy back the entire business at a high multiple every 10 years. However, Mr. Ramey said he didn't expect that to happen, barring a dramatic change in Anheuser-Busch InBev's market-share position, which is at about 50% of the U.S. beer market by volume. If it did happen, it would occur at a very attractive price, he said.

In addition, Constellation on Friday agreed to buy pinot-noir brand Mark West for $160 million, which Mr. Sands called a high-growth, complementary tuck-in acquisition to its existing portfolio of wine brands. It is expected to close in July and be slightly accretive to earnings this year.

The deal making follows a period in which Constellation pared back the acquisitiveness that fueled growth for several years. Last year, it opted to divest itself of underperforming assets, such as most of its struggling Australian and U.K. business.

Because of the deals, the company said it would suspend its $1 billion share-repurchase program with about $700 million of authorization remaining. However, as it had completed nearly 70% of its target repurchases for fiscal 2013 during the first quarter, it affirmed its full-year forecast.

The news of the Crown deal overshadowed Constellation's fiscal first-quarter results, which didn't stray far from expectations. Sales slipped slightly, instead of rising as analysts anticipated. Mr. Sands said the sales crimp was partly the fault--as he had predicted--of fourth-quarter product launches affecting first-quarter sales and depletions. Higher promotional cost and decrease in volume were mostly offset by positive mix, the company said.

Constellation recently has been spending more on incentives and price promotions to drive sales.

In the latest period, adjusted per-share earnings pushed above analyst consensus estimates by one cent as the number of shares outstanding fell. Mr. Sands said Constellation's overall growth was in line with that of the total U.S. wine-and-spirits industry across all channels at about 4%.

Constellation reported a profit of $72 million, or 38 cents a Class A share, compared with a year-earlier profit of $74.5 million, or 35 cents a share, for the quarter ended May 31. The number of Class A shares outstanding decreased 11% year over year.

Excluding restructuring and related charges, earnings rose to 40 cents a share from 39 cents. Net sales, which exclude excises taxes, edged down slightly to $634.8 million from $635.3 million.

Analysts polled by Thomson Reuters expected earnings of 39 cents a share and $647 million in sales.

Looking ahead, the company expects second-quarter earnings before interest and taxes to fall by a mid-single-digit percentage because of sales pressures similar to the first quarter and an increase in promotional spending.

--Saabira Chaudhuri contributed to this article.

Write to Joan E. Solsman at joan.solsman@dowjones.com.