EX-99.1 3 a2103123zex-99_1.htm EXHIBIT 99.1

Exhibit 99.1

 

 

 

 

Scheme Booklet

 



 

 

 

This document is important and requires your immediate attention

 

If you are in doubt as to how to deal with it, please contact your legal, financial or other professional adviser immediately

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheme Booklet

 

 

 

 

 

 

for the Schemes of Arrangement between

 

BRL Hardy Limited

 

(ACN 008 273 907)

 

 

 

 

and

 

the holders of ordinary shares in BRL Hardy Limited and the holders of options to subscribe for ordinary shares in BRL Hardy Limited

 

 

 

 

in relation to the proposed Merger with

 

Constellation Australia

 

Pty Limited

 

(ACN 103 362 232)

 

 

 

(a company incorporated in the Australian Capital Territory which is an indirect wholly owned subsidiary of Constellation Brands, Inc.)

 

 

 

 

 

Explanatory Statement

 

 

 

Notices of Scheme Meetings and General Meeting

 

 

 

IMPORTANT

 

These notices are set out in Sections 16 and 17 of this Scheme Booklet

 



 

Table of Contents

 

 

 

 

 

Important Dates for BRL Shareholders and Option Holders

1

 

 

Letter from the Chairman of BRL Hardy Limited

2

 

 

Letter from the Chairman of Constellation

3

 

 

The Merger at a glance

4

 

 

The Merger – Your Questions Answered

5

 

 

An Introduction to Constellation

10

 

 

Action Required of BRL Shareholders and Option Holders

12

 

 

Important Notices

14

 

 

1

Key Features of Share Scheme and Considerations for BRL Shareholders

17

 

1.1

Overview

18

 

1.2

What you will receive

18

 

1.3

Directors’ Recommendation

20

 

1.4

Reasons to vote in favour of the Share Scheme

20

 

1.5

Assessing the Choice of Consideration

21

 

1.6

Relevant Considerations Against the Share Scheme

23

 

1.7

Other Relevant Considerations

24

 

1.8

Implications of Failure to Approve the Merger

24

 

1.9

Conditions

24

 

 

 

 

2

Share Scheme Implementation and Financial Assistance

25

 

2.1

Overall effect of the Share Scheme

26

 

2.2

Classes of members affected by the Share Scheme

26

 

2.3

Steps in implementing the Share Scheme

26

 

2.4

Termination of the Implementation Deed

26

 

2.5

Court ordered meeting of BRL Shareholders

27

 

2.6

Voting majority required

27

 

2.7

Opposing the Share Scheme

27

 

2.8

Effective Date

28

 

2.9

Determination of persons entitled to Share Scheme Consideration

28

 

2.10

Provision of Share Scheme Consideration

29

 

2.11

Suspension of trading of BRL Shares

29

 

2.12

Stamp duty

29

 

2.13

Financial assistance

29

 

 

 

 

3

Information about Constellation

31

 

3.1

Introduction to Constellation and available information

32

 

3.2

Historical Development of Constellation

32

 

3.3

Constellation Operations

33

 

3.4

Selected Financial Data

37

 

3.5

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

 

i



 

 

3.6

Constellation Securities

50

 

3.7

Directors and Executive Officers

53

 

3.8

Constellation Australia Pty Limited

56

 

 

 

 

4

Information about BRL Hardy

57

 

 

 

5

Information about the Merged Group

59

 

5.1

Overview

60

 

5.2

Constellation’s intentions upon approval of Share Scheme

62

 

5.3

Other Intentions

63

 

5.4

Synergies from the Combined Groups

63

 

5.5

Financial Position

64

 

5.6

Outlook

64

 

5.7

Cautionary Statements Regarding Forward-Looking Information

64

 

5.8

Unaudited Pro Forma Combined Financial Data

65

 

 

 

 

6

Risk Factors

75

 

6.1

Risks relating to Constellation’s business

76

 

6.2

Risks relating to the Merger and investing in Constellation Scrip

79

 

 

 

 

7

Information concerning the consideration to be provided under the Schemes

81

 

7.1

Nature of securities offered

82

 

7.2

Information about and rights attaching to Constellation CDIs

82

 

7.3

Description of Constellation capital stock

84

 

7.4

Rights Attaching to Constellation Shares

85

 

7.5

Post-acquisition Capital Structure

89

 

7.6

Constellation is controlled by the Sands Family

89

 

7.7

Provision of Consideration

89

 

7.8

Exchange Rate Information

92

 

7.9

Share Registry

92

 

 

 

 

8

Key Features of Option Scheme and Considerations for BRL Option Holders

93

 

8.1

Overview

94

 

8.2

Relationship with the Share Scheme

94

 

8.3

What will you receive?

94

 

8.4

Directors recommend that you vote in favour

95

 

8.5

Reasons to vote in favour of the Option Scheme

95

 

8.6

Relevant Considerations Against the Option Scheme

95

 

8.7

Other relevant considerations

95

 

8.8

Implications of Failure to Approve the Option Scheme

96

 

8.9

Conditions of the Option Scheme

96

 

8.10

Right to inspect and obtain copy of Option Register

96

 

 

 

 

9

Option Scheme Implementation

97

 

9.1

Overall effect of the Option Scheme

98

 

9.2

Classes of creditors of BRL Hardy affected by the Option Scheme

98

 

9.3

Steps in implementing the Option Scheme

98

 

9.4

Termination of the Implementation Deed

99

 

9.5

Court ordered meetings of Option Holders

99

 

9.6

Voting majority required

99

 

9.7

Opposing the Option Scheme

99

 

9.8

Effective Date

100

 

9.9

Provision of Option Scheme Consideration

100

 

9.10

Stamp duty

100

 

ii



 

10

Tax Implications of Share Scheme and Option Scheme

101

 

10.1

Tax Considerations for Share Scheme: Australian Residents

102

 

10.2

Tax Considerations for Share Scheme: United States Holders

105

 

10.3

Tax Considerations for Option Scheme

105

 

 

 

11

Additional Information

107

 

11.1

Documents available for inspection

108

 

11.2

Creditors of BRL Hardy

108

 

11.3

Directors of BRL Hardy

108

 

11.4

Interests of Directors and Executive Officers

108

 

11.5

Intentions of the BRL Board

110

 

11.6

BRL Hardy Securities and Substantial Shareholders

110

 

11.7

Particulars of Dealings

111

 

11.8

FIRB Approval

111

 

11.9

BRL Hardy’s ASX Material Disclosures

111

 

11.10

Disclosure of Interests

111

 

11.11

Disclosure of Fees and Other Benefits

112

 

11.12

No solicitation letter and transaction compensation deed

112

 

11.13

No unacceptable circumstances

113

 

11.14

Quotation of Constellation Shares and Constellation CDIs

114

 

11.15

ASIC Relief and ASX Waivers

114

 

11.16

Other Material Information

114

 

11.17

Interests of Independent Expert and other third parties

114

 

11.18

Consents to be Named

114

 

11.19

Material change in financial position

114

 

11.20

Date of this Scheme Booklet

114

 

 

 

 

12

Implementation Deed

115

13

Scheme of Arrangement with Shareholders

145

14

Deed Poll

155

15

Scheme of Arrangement with Option Holders

161

16

Notices of Scheme Meetings

169

17

Notice of General Meeting

173

18

Glossary

177

19

Independent Expert’s Report

181

 

 

 

Annexure 1 - Constellation Consolidated Financial Statements

301

 

 

 

Annexure 2 - Summary of Material ASX disclosures by BRL Hardy

361

 

 

 

Annexure 3 - ASIC relief and ASX waivers

365

 

 

 

Corporate Directory

Inside back cover

 

iii



 

Important Dates for BRL Shareholders and Option Holders

 

18 March 2003

 

Proxy forms for the Share Scheme Meeting, the General Meeting and the Option Scheme Meeting must be received no later than 10.30 am (for the Share Scheme Meeting and the General Meeting) and 11.00 am (for the Option Scheme Meeting) (Adelaide time)

 

 

 

18 March 2003

 

Eligibility to vote at the Share Scheme Meeting, the Option Scheme Meeting and the General Meeting determined at 10.00 pm (Adelaide time)

 

 

 

20 March 2003

 

Share Scheme Meeting to be held at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia at 10.00 am (Adelaide time)

 

 

 

20 March 2003

 

General Meeting to be held at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia at 10.30 am (Adelaide time) or as soon thereafter as the Share Scheme Meeting is concluded or adjourned

 

 

 

20 March 2003

 

Option Scheme Meeting to be held at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia at 11.00 am (Adelaide time) or as soon thereafter as the General Meeting is concluded or adjourned

 

 

 

26 March 2003

 

Announce to the ASX the Constellation VWAP and the Scrip Exchange Ratio

 

 

 

27 March 2003

 

Publish notice of Constellation VWAP and Scrip Exchange Ratio

 

 

 

27 March 2003

 

Court hearing for approval of the Share Scheme and the Option Scheme

 

 

 

27 March 2003

 

Effective Date of the Share Scheme and the Option Scheme

 

 

 

27 March 2003

 

Last day of trading in BRL Shares

 

 

 

4 April 2003

 

Election as to form of consideration for BRL Shareholders must be received no later than 5.00pm (Adelaide time)

 

 

 

4 April 2003

 

Record Date

 

 

 

7 April 2003

 

Announce to the ASX details of scale back (if any) and allocation of consideration between cash and scrip

 

 

 

7 April 2003

 

Commencement of trading in Constellation CDIs on a deferred settlement basis on the ASX

 

 

 

9 April 2003

 

Implementation Date

 

 

 

No later than

 

Despatch of holding statements and cheques to BRL

16 April 2003

 

Shareholders and Option Holders (as the case may be).

 

 

 

 

 

This Scheme Booklet is dated 10 February 2003

 

 

 

 

 

All dates following the date of the Share Scheme Meeting, the General Meeting and the Option Scheme Meeting are indicative only and, among other things, are subject to all necessary approvals from the Supreme Court of South Australia, the ASX and other regulatory authorities. Any changes to the above timetable will be notified on BRL Hardy’s website www.brlhardy.com.au.

 

1



 

Letter from the Chairman of BRL Hardy Limited

10 February 2003

 

 

Dear Shareholder and Option holder,

 

On 17 January 2003 your Board announced the proposal to merge BRL Hardy with Constellation Brands, our partner in the successful US based Pacific Wine Partners joint venture, since mid 2001.

 

The merger will result in the creation of a leading international wine and beverages company, with strong market positions in the key markets of Australia, North America and the United Kingdom.

 

Under the merger proposal, BRL Hardy shareholders can choose to receive the following forms of consideration in exchange for their BRL Hardy shares:

 

•      cash of $10.50 per share;

•      Constellation Scrip; or

•      a combination of cash and Constellation Scrip.

 

Details of the precise number of Constellation Scrip that BRL Hardy shareholders can elect to receive under the merger proposal are set out in this Scheme Booklet.

 

The merger consideration represents a premium of 37% to BRL Hardy’s closing share price on the day prior to announcement that the parties were in merger discussions and a 52% premium to the volume weighted average price of BRL Hardy shares for the two months up to that date.

 

Under the proposal, BRL Hardy option holders will receive cash consideration for the cancellation of their BRL Hardy options.

 

After considering the proposal in detail, the Directors of BRL Hardy have formed the view that the proposal is in the best interests of shareholders and in the best interests of option holders as a whole. Accordingly, the Directors of BRL Hardy unanimously recommend that, in the absence of a higher offer, BRL Hardy shareholders and option holders vote in favour of the proposal.

 

The reasons behind the Directors’ recommendation are set out in the Scheme Booklet. The Board has appointed an independent expert, Deloitte Corporate Finance, to review the proposal. The independent expert concluded that, in the absence of a higher offer, the merger proposal is in the best interests of shareholders and in the best interests of option holders as a whole.

 

The merger will be implemented via Schemes of Arrangement and requires the approval of BRL Hardy shareholders and option holders and the Supreme Court of South Australia. The Schemes of Arrangement will be considered at meetings of BRL Hardy shareholders and BRL Hardy option holders to be held at The Auditorium, Adelaide Town Hall, King William Street Adelaide, South Australia, on 20 March 2003.

 

Each director of BRL Hardy intends to vote all BRL Hardy shares and BRL Hardy options controlled by that director in favour of the relevant resolutions.

 

This Scheme Booklet which follows sets out the full details of the merger proposal. I encourage you to read it carefully and to vote on the important resolutions to be considered at the Meetings.

 

If you have any queries about the merger proposal, please call the BRL Hardy toll free information line on 1300 666 724.

 

Yours sincerely,

 

/s/ John Pendrigh

 

 

John Pendrigh AM

Chairman

 

 

Head Office Adelaide
Reynell Road
Reynella 5161
South Australia

Telephone
(08) 8392 2222
Int. +61 8 8392 2222

Facsimile
(08) 8392 2200
Int. +61 8 8392 2122

 

 

 

 

I.J. Pendrigh AM,
Chairman

 

 

 

2



 

 

Letter from the Chairman of Constellation

 

Constellation Brands, Inc.
300 Willowbrook Office Park
Fairport, New York 14450
Phone 585-218-3600
Fax 585-218-3601

10 February 2003

 

 

Dear Shareholder and Option Holder

 

Proposed Merger of BRL Hardy and Constellation

 

On 17 January 2003, the respective boards of directors of BRL Hardy and Constellation announced their intention to merge through Schemes of Arrangement.

 

If approved, the merger will create the world’s largest wine company by sales. The merger will provide the ability to capture growth for both companies at a faster rate in growing New World wine markets. The merger will enhance Constellation’s position as a leading global diversified beverage alcohol company.

 

Constellation is offering for BRL shares either cash of $10.50 per BRL share, or a number of Constellation shares, determined based on the volume weighted average Constellation share price and the US$/A$ exchange rate during a price setting period before the merger becomes effective. The Constellation shares will also be listed on the Australian Stock Exchange in the form of CHESS Depositary interests (“CDIs”) for those shareholders wishing to trade their holdings on the Australian market. Full details of the offer are set out in this Scheme Booklet.

 

By accepting Constellation shares as consideration in this merger, you can also participate in the benefits of combining two highly successful growth companies, and the exciting future of the world’s leading wine company. Following the merger:

 

             Constellation will benefit from the bringing together of two complementary businesses that share a common growth orientation and operating philosophies.

 

             Constellation will enhance its revenue growth potential in the UK, Europe and other strategic international markets.

 

             Constellation will gain significant scale, with more than US$3.2 billion in group sales, of which wine sales will represent US$1.7 billion.

 

             In wine, Constellation will emerge with the number 1 position by volume in the United Kingdom, with 8 of the top 20 off-premise brands. Constellation will also hold the number 1 position by volume in Australia, and will strengthen its number 2 position by volume in the United States.

 

             Constellation will continue to benefit from a broad portfolio across categories, with strong businesses in imported beer and spirits in the United States and as the number one independent drinks wholesaler in the UK.

 

             Constellation’s aggregated portfolio will have an even broader range of products and a greater geographic reach.

 

We are extremely excited about the opportunity to merge our two companies and to build on the successful partnership which started with the establishment of the Pacific Wine Partners joint venture in 2001.

 

For BRL shareholders electing to accept consideration in full, or part, through Constellation shares, we look forward to welcoming you as a shareholder in Constellation.

 

Yours sincerely,

 

 

/s/ Richard Sands

 

 

Richard Sands

Chairman of the Board and Chief Executive Officer
Constellation Brands, Inc.

 

 

 

 

 

 

Richard Sands

Chairman of the Board and Chief Executive Officer Constellation Brands, Inc.

 

3



 

The Merger at a glance

 

at a glance

 

This summary provides an overview of the Merger proposal. You should read this Scheme Booklet in full before making any voting decisions.

 

 

 

Background

 

On 17 January 2003, BRL Hardy announced a proposal to merge with Constellation, BRL Hardy’s U.S. joint venture partner, by way of schemes of arrangement. The merged group will be the world’s largest wine company by sales, and will enjoy strong positions in the United States, Europe and Australia.

 

Merger Consideration

 

Under the Merger proposal, BRL Shareholders can elect to receive in exchange for their BRL Shares, either:

 

    Cash Consideration, being $10.50 per BRL Share;

 

    Scrip Consideration, being a number of Constellation Shares or Constellation CDIs per BRL Share determined as set out in Section 1.2 of this Scheme Booklet; or

 

    a combination of Cash Consideration and Scrip Consideration.

 

Option Holders will receive cash as set out in Section 8.3 of this Scheme Booklet, in exchange for the cancellation of their Options.

 

If the total number of Constellation Shares which Constellation would otherwise be required to issue to satisfy Elections from BRL Hardy Shareholders for Scrip Consideration exceeds 15,000,000 shares, then the number of Constellation Shares each such BRL Shareholder is entitled to receive will be scaled back on a pro rata basis and such BRL Shareholders will receive Cash Consideration with respect to such BRL Shares subjected to such scale-back. For further details refer to Section 1.2.

 

Implementation and Timetable

 

The Share Scheme is to be implemented by a scheme of arrangement, which will be voted on by BRL Shareholders at a meeting to be held at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia on 20 March 2003, commencing at 10.00 am.

 

The Option Scheme is to be implemented by a scheme of arrangement, which will be voted on by Option Holders at a meeting to be held at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia on 20 March 2003 commencing at 11.00 am or at such later time as the General Meeting concludes or is adjourned.

 

Each Scheme also requires Court approval, which is expected to be sought on 27 March 2003 if the Schemes are approved by BRL Shareholders and Option Holders.

 

Trading on the ASX

 

If the Merger proposal is implemented, Constellation will cause Constellation CDIs representing Constellation Shares to be listed for trading on the ASX. Constellation CDIs are expected to commence trading on the ASX on a deferred settlement basis on 7 April 2003.

 

4



 

The Merger - Your Questions Answered

 

This section provides summary answers to some basic questions that BRL Shareholders may have. It should be read in conjunction with the whole Scheme Booklet. Option Holders should refer to Sections 8 and 9 for a summary of the Option Scheme which should also be read in conjunction with the entire Scheme Booklet.

 

Q & A

 

Questions about the Merger consideration

 

Q1

What will I receive if the Merger is approved?

 

A

You are being offered the following choice of consideration in exchange for your BRL Shares:

    Cash Consideration, being $10.50 per BRL Share;

 

    Scrip Consideration, being a number of Constellation Shares or Constellation CDIs per BRL Share determined as set out in Section 1.2 of this Scheme Booklet; or

 

    a combination of Cash Consideration and Scrip Consideration.

 

 

Q2

When do I have to make an Election?

 

A

You will need to make an Election on your Election Form which must be returned to the BRL Share Registry before 5.00pm (Adelaide time) on 4 April 2003.

 

 

Q3

What form of consideration will I receive if I do not make an Election?

 

A

If you do not make an Election you will be paid Cash Consideration for your BRL Shares.

 

 

Q4

If I elect to receive Scrip Consideration, does this mean that I will receive Constellation Shares?

 

A

If you make an Election to receive Scrip Consideration and your address on the Register is in Australia, Hong Kong, New Zealand, Singapore or the United Kingdom you will receive Constellation CDIs traded in Australia on the ASX.

 

If you make an Election to receive Scrip Consideration and your address on the Register is in the United States, you will receive Constellation Shares traded on the NYSE.

 

If you make an Election to receive Scrip Consideration and your address on the Register is in any other country, you will not be entitled to receive any Scrip Consideration and you will instead receive in cash the proceeds of sale of the Constellation Shares which you elected to receive (less any applicable brokerage, taxes and any other costs of sale).

 

5



 

Q5

What is a Constellation CDI?

 

A

Constellation CDIs are CHESS Depositary Interests (“CDIs”) in Constellation Shares. CDIs are beneficial interests in securities traded on the ASX under the electronic transfer and settlement system operated by the ASX. CDIs are issued to enable the electronic transfer and settlement on the ASX of shares issued by foreign companies such as Constellation. CDI holders receive all the economic benefits of actual ownership of the underlying shares.

 

 

Q6

How many Constellation Shares does one Constellation CDI represent?

 

A

It is currently expected that the ratio of Constellation CDIs to underlying Constellation Shares will be 10 to 1. For example, if you elect to receive Scrip Consideration and you are otherwise entitled to receive 100 Constellation Shares for your BRL Shares you will receive 1,000 Constellation CDIs. This ratio will, however, be subject to the ASX’s approval upon the listing of Constellation CDIs.

 

 

Q7

If I receive Constellation CDIs, can I trade them other than on the ASX?

 

A

If you wish, you can trade the underlying Constellation Shares which your Constellation CDIs represent on the NYSE. To do this, you must first convert the Constellation CDIs into shares simply by notifying Constellation’s Australian share registry who will arrange for the Constellation CDIs to be converted into the underlying Constellation Shares.

 

 

Q8

Is there a limit on the amount of Scrip Consideration I can receive?

 

A

The maximum number of shares Constellation will issue to BRL Shareholders who elect to receive Scrip Consideration under the Share Scheme is 15,000,000 Constellation Shares (referred to in this Scheme Booklet as the “Scrip Consideration Cap”).

 

Accordingly, if you elect to receive Scrip Consideration for all or a specified number of your BRL Shares and the total number of Constellation Shares which would be required to be issued to satisfy this and all other Elections for Scrip Consideration exceeds the Scrip Consideration Cap, the number of Constellation Shares you are entitled to receive will be scaled back on a pro rata basis and you will receive Cash Consideration with respect to such scaled back BRL Shares.

 

This is illustrated by the example below:

 

Suppose you elect to receive Scrip Consideration for your total holding of 1,000 BRL Shares and the total number of Constellation Shares which would be required to be issued to satisfy all Elections for Scrip Consideration in full was 18,750,000, the scale back provisions would apply.

 

The number of BRL Shares for which you would receive Scrip Consideration would be calculated as 15,000,000 ÷ 18,750,000 x 1,000 = 800 BRL Shares. You would receive Cash Consideration for the remaining 200 BRL Shares.

 

For further details see Section 1.2.

 

 

Q9

What happens if the Constellation CDIs cannot be traded on the ASX?

 

A

In the event that the Constellation CDIs are not listed by ASX, then all consideration payable under the Share Scheme will be paid in the form of Cash Consideration. Constellation has no reason to believe that the Constellation CDIs will not be listed by ASX.

 

6



 

Q10

If I elect to receive Scrip Consideration, can I expect to receive cash dividends declared from Constellation?

 

A

While you will be entitled to receive any dividends declared by Constellation in the future, you should note that:

 

    Constellation has not paid a cash dividend since its initial public offering in 1973;

 

    Constellation currently has a policy of not paying cash dividends but instead retaining all of its earnings to finance the development and expansion of its business;

 

    Constellation does not currently intend to change its dividend policy; and

 

    Constellation’s existing and new senior credit facilities and bridging facility and its indentures for its senior notes and senior subordinated notes limit the payment of cash dividends (see Section 3.6(c) for more details).

 

If Constellation does pay dividends in the future, they will not be franked for Australian tax purposes.

 

 

Q11

How will fractional shares be treated?

 

A

If, pursuant to the Merger, you become entitled to a fraction of a Constellation Share, the number of Constellation Shares to which you are entitled will be rounded down to the next lowest whole number, and you will receive cash in lieu of all fractional shares to which you are entitled. For further details see clause 5.7 of the Share Scheme at Section 13.

 

 

Q12

Will I have to pay brokerage fees or stamp duty?

 

A

You will not have to pay brokerage or stamp duty in connection with the Merger.

 

Q13

When will I receive my consideration?

 

A

Cheques in respect of any Cash Consideration due to you will be despatched to you within 5 Business Days after the Implementation Date.

 

Holding statements in respect of any Constellation CDIs due to you will be despatched within the same period although you will be entitled to trade the Constellation CDIs to which you are entitled before that time on a deferred settlement basis (see Section 7 for details about Constellation CDIs).

 

 

Q14

If the Merger is implemented will this be a taxable transaction for Australian tax purposes?

 

A

The exchange of your BRL Shares pursuant to this Merger may be a taxable transaction to you. However, Australian resident BRL Shareholders who receive Scrip Consideration pursuant to the Merger should be entitled to receive CGT rollover relief with respect to that Scrip Consideration.

 

BRL Shareholders who elect to receive cash or who receive cash due to a pro rata scale back (refer section 1.2(c)) may be eligible to apply a discount to any capital gain which arises on the transfer of BRL Shares pursuant to this Merger.

 

Further details of the tax implications of the transaction are set out in Section 10 of this Scheme Booklet. BRL Shareholders should seek their own independent professional advice in relation to the precise tax consequences in respect of their own particular circumstances.

 

7



 

Questions about voting

 

Q15

When and where will the Share Scheme Meeting be held?

 

A

The Share Scheme Meeting will be held on 20 March 2003 at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia, commencing at 10.00am

 

 

Q16

Am I entitled to vote?

 

A

If you are registered as a BRL Shareholder by the BRL Share Registry as at 10.00pm on 18 March 2003, you will be entitled to vote at the Share Scheme Meeting. You may vote in person at the meeting or by completing and lodging the proxy form accompanying this Scheme Booklet.

 

 

Q17

What is the opinion of the Independent Expert?

 

A

The Independent Expert has concluded that, in the absence of a higher offer, the Share Scheme is in the best interests of BRL Shareholders as a whole.

 

 

Q18

What voting majority is required to approve the Share Scheme proposal?

 

A

The voting majority to approve the Share Scheme requires votes in favour of the Share Scheme to be received from:

 

    a majority in number (more than 50%) of BRL Shareholders present and voting at the Share Scheme Meeting (in person, by proxy, by attorney or, in the case of corporate BRL Shareholders, by corporate representative); and

 

    BRL Shareholders who together hold at least 75% of the total number of BRL Shares voted at the Share Scheme Meeting.

 

Q19

Should I vote?

 

A

You do not have to vote. However, the BRL Board believes that the Share Scheme is important to all BRL Shareholders and urges you to read this Scheme Booklet carefully and vote in favour of the Share Scheme.

 

 

Q20

What happens if I do not vote, or if I vote against the Share Scheme proposal?

 

A

If you are a BRL Shareholder as at 10.00 pm on the Record Date and the Share Scheme proposal is implemented your BRL Shares will be transferred pursuant to the Share Scheme and you will be entitled to receive the Share Scheme Consideration notwithstanding that you did not vote or voted against the Share Scheme. You will also be entitled to make an election to receive Cash Consideration, Scrip Consideration or a combination thereof provided your Election is returned on or before 5.00pm (Adelaide time) on 4 April 2003.

 

 

Q21

When will the result of the meeting be known?

 

A

The result of the votes cast at the Share Scheme Meeting will be available shortly after the conclusion of the Share Scheme Meeting and will be announced to the ASX once available. The results will also be published on BRL Hardy’s website on the day following the Share Scheme Meeting.

 

You should be aware that the Share Scheme is subject to the approval of the Court, in exercising its supervisory jurisdiction. The Court hearing for approving the Share Scheme is expected to be held on 27 March 2003.

 

8



 

Other questions

 

 

Q22

What if the Share Scheme is not implemented on or before 30 April 2003?

 

A

If the Share Scheme is not implemented on or before 30 April 2003, either Constellation or BRL Hardy may terminate the Implementation Deed. If this occurs the Merger will not proceed.

 

 

Q23

What is the purpose of the General Meeting?

 

A

The General Meeting for BRL Shareholders is to consider and, if thought fit, to approve the financial assistance BRL Hardy is proposing to provide to Constellation in connection with the Share Scheme. The Directors believe that by agreeing to pay for the cancellation of the Options and the Non-Executive Options, and by agreeing to borrow funds from Constellation to do so and incurring an obligation to repay and to pay interest on the funds so borrowed, BRL Hardy is financially assisting Constellation to acquire BRL Shares under the Share Scheme. Such assistance will be in breach of the Corporations Act unless sanctioned by a special resolution of BRL Shareholders passed at a general meeting. For further details see Section 2.13.

 

 

Q24

If the Share Scheme is implemented will I receive a final dividend in respect of BRL Hardy’s financial period ended 31 December 2002?

 

A

It is a condition of the Implementation Deed that BRL Hardy does not declare or pay any dividend or make any other distribution of its profits, or assets. Therefore, if the Share Scheme is implemented, BRL Shareholders will not receive a final dividend in respect of the financial period ended 31 December 2002.

 

 

Q25

Have any major shareholders indicated their intentions?

 

A

The Responsible Entity of IWIF, the largest shareholder of BRLHardy, has resolved, subject to unit holder approval and to no higher offer being received, to vote in favour of the Share Scheme. Their decision is also subject to final details of the Merger being released.

 

 

Q26

Who can help answer my questions about the Merger?

 

A

If you have any questions about the Merger, or if you would like additional copies of this Scheme Booklet or the proxy form or the Election Form, please contact the BRL Hardy shareholder information line on:

 

1300 666 724 - Australia only; or

 

+61 292 407 513 - outside Australia,

 

or consult your legal, financial or other professional adviser without delay.

 

9



An introduction to Constellation

 

Constellation, headquartered in Fairport, New York, is principally engaged in the production and marketing of beverage alcohol brands in North America and the United Kingdom.

 

Constellation is listed on the New York Stock Exchange with a market capitalisation of approximately US$2.3 billion as at 31 January 2003.

 

With a broad portfolio of wine, spirits and imported beer, Constellation is the largest single-source supplier of these products in the United States. In the United Kingdom, Constellation is a leading producer and marketer of wine and of cider and a leading independent drinks wholesaler.

 

Since July 2001, Constellation and BRL Hardy have operated the Pacific Wine Partners joint venture, which produces and distributes wine in the U.S. and is the primary distributor for BRL Hardy products in the U.S. market.

 

Constellation’s businesses

 

Constellation has a broad portfolio, with leading brands sold in the United States, the United Kingdom and more than 70 other countries.

 

Constellation’s portfolio generates a balanced earnings stream, with growth in its Fine Wine, Imported Beer and UK Wholesale businesses supported by the more stable earnings and cash flow of the U.S. Spirits and Popular and Premium Wine businesses and the UK Branded business.

 

For the latest 12 months ended 30 November 2002, Constellation generated net sales revenue of approximately US$2.7 billion and earnings before interest, taxes, depreciation and amortisation, including equity income from joint ventures (“EBITDA”), of approximately US$472 million.

 

Net Sales (Latest 12 Months ended 30 November 2002)

EBITDA (Latest 12 Months ended 30 November 2002)

 

U.S. Imported Beer

 

             Constellation number 3 by volume

             Leading brands (Corona Extra, Negra Modelo, Peroni, St Pauli Girl)

             Strong growth

 

U.S. Wine

 

             Constellation number 2 by volume

             Strong position in Popular and Premium Wine

             Strong growth in Fine Wine

 

Pacific Wine Partners joint venture

 

             Blackstone number 3 brand over US$11 per 750ml bottle

             Distribution of BRL Hardy’s Australian and New Zealand products

             Strong growth

 

UK Brands and Wholesale

 

             Number 1 independent drinks wholesaler to the on-premise market

             Number 2 in cider by volume

             Stowells of Chelsea number 1 on-premise, number 3 off-premise

               Strong growth in table wine and wholesale

 

U.S. Spirits

 

             Constellation number 3 by volume

             Key brands in the U.S. and Canada

             Strong cashflow and returns

10



Constellation’s Financial Performance

 

Constellation has a strong track record of sales and earnings growth. The following graphs depict Constellation’s compound annual growth rates (“CAGR”) in net sales, EBITDA and earnings per share (“EPS”) for the four fiscal years in the period ended 28 February 2002 and the latest twelve months (“LTM”) ended 30 November 2002.

 

 

Notes:

    Constellation’s fiscal year ends on the last day of February

    Net Sales adjusted for EITF 01-09. See discussion of EITF01-09 in Section 3.4.

    EPS is on a diluted basis. See Constellation’s Consolidated Financial Statements included as Annexure 1 to this Scheme Booklet.

    EPS for 1999 and 2002 is before extraordinary item. See Constellation’s Consolidated Financial Statements.

    EPS adjusted for U.S. Statement of Financial Accounting Standards No.142 (“Goodwill and Other Intangible Assets”). See Notes to Constellation’s Consolidated Financial Statements.

EPS adjusted to give retroactive effect to the May 2001 and May 2002 two-for-one stock splits.

 

Constellation generated free cash flow (cash flow from operating activities less capital expenditures) of approximately US$161 million for the latest 12 months ended 30 November 2002 and approximately US$142 million for the fiscal year ended 28 February 2002.

 

Performance of Constellation Shares

 

Constellation’s share price has increased at an average rate of more than 20% per annum over the last ten years.

 

Source: Bloomberg

 

Note: Share price adjusted to give retroactive effect to the May 2001 and May 2002 two-for-one stock splits.

 

No assurance can be given that changes in Constellation’s share price historically is indicative of future changes in Constellation’s share price.

 

 

 

Prospects for the Merged Group

 

A merger of BRL Hardy and Constellation will bring together two complementary businesses that share common growth orientation and operating philosophy. In particular the merger:

 

is expected to improve long term growth trends

 

             Enhances Constellation’s revenue growth potential in the UK, Europe and other strategic international markets

 

Increases product breadth and geographic reach

 

             Addition of fast growing “New World” wines to Constellation’s portfolio

 

             Beer and spirits divisions maintain their strong market positions

 

Enhances scale, industry strength and competitiveness

 

             Create the world’s largest wine company by sales

 

             Total sales of US$3.2 billion, with wine group contributing US$1.7 billion in sales

 

             Number 1 in wine in the UK by volume with 8 of the top 20 off-premise brands

 

             Number 1 in wine in Australia by volume.

 

             Strengthened number 2 position by volume in wine in the US.

 

The above information about Constellation and the Prospects for the Merged Group should be read in conjunction with Section 3, Section 5, the Risk Factors in Section 6 and Constellation’s Consolidated Financial Statements and Notes included as Annexure 1.

 

11



 

Action Required of BRL Shareholders and Option Holders

 

1                 Please read this Scheme Booklet carefully.

 

If you do not understand it or are in any doubt as to the course of action you should follow, you should contact your legal, financial or other professional adviser immediately.

 

2                 How to Vote - BRL Shareholders and Option Holders

 

You may vote by attending the Share Scheme Meeting, General Meeting or Option Scheme Meeting (as applicable to you) in person or by completing a proxy form.

 

(i) Voting in person

 

To vote in person at the Share Scheme Meeting, you must attend the Share Scheme Meeting at 10.00 am on 20 March 2003 at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia.

 

To vote in person at the General Meeting, you must attend the General Meeting at 10.30 am on 20 March 2003 at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia or as soon thereafter as the Share Scheme Meeting is concluded or adjourned.

 

To vote in person at the Option Scheme Meeting, you must attend the Option Scheme Meeting at 11.00 am on 20 March 2003 at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia or as soon thereafter as the General Meeting is concluded or adjourned.

 

If you are a corporation, your authorised corporate representative may attend and vote at the relevant meeting.

 

You must disclose your name at the point of entry to the meeting. You will then be given a voting card and admitted to the meeting.

 

(ii)Voting by proxy

 

If you cannot attend the Share Scheme Meeting or otherwise wish to vote by proxy, you may appoint a proxy by completing the blue personalised proxy form accompanying this Scheme Booklet and returning it to the BRL Share Registry by 10.30 am (Adelaide time) on 18 March 2003, being 47.5 hours prior to the scheduled commencement of the meeting.

 

If you cannot attend the General Meeting or otherwise wish to vote by proxy, you may appoint a proxy by completing the blue personalised proxy form accompanying this Scheme Booklet and returning it to the BRL Share Registry by 10.30 am (Adelaide time) on 18 March 2003, being 48 hours prior to the scheduled commencement of the meeting.

 

The proxy forms for the Share Scheme Meeting and the General Meeting are on the same form.

 

If you cannot attend the Option Scheme Meeting or otherwise wish to vote by proxy, you may appoint a proxy by completing the green personalised proxy form accompanying this Scheme Booklet and returning it to the BRL Share Registry by 11.00 am (Adelaide time) on 18 March 2003, being 48 hours prior to the scheduled commencement of the meeting.

 

The proxy appointed by you must disclose his or her name at the point of entry to the meeting. They will then be given a voting card and admitted to the meeting.

 

Appointing a proxy will not preclude you from attending the meeting in person and voting at the meeting instead of your proxy.

 

(iii) Return of proxies

 

If you choose to vote by proxy, please return your proxy form to the BRL Share Registry by posting it in the reply paid envelope provided, delivering it to the relevant address below, or by faxing it to (08) 8236 2305 (within Australia) or +61 8 8236 2305 (international), but you will only be able to exercise your vote by proxy if it is received by 10.30 am (Adelaide time) on 18 March 2003 in respect of the Share Scheme Meeting and the General Meeting and by 11.00am (Adelaide time) on 18 March 2003 in respect of the Option Scheme Meeting.

 

By mail:

BRL Hardy Limited

C/- Computershare Investor Services Pty Ltd

GPO Box 242, Melbourne, Victoria 8060

 

By hand delivery:

BRL Hardy Limited

C/- Computershare Investor Services Pty Ltd

Level Five, 115 Grenfell Street, Adelaide SA 5000

 

or

 

BRL Hardy Limited

C/- Company Secretary

Reynell Road

Reynella SA 5161

 

12



 

3                   Election of form of Share Scheme Consideration

 

This Scheme Booklet is accompanied by an Election Form under which you may elect to receive Scrip Consideration or a combination of Scrip Consideration and Cash Consideration for your BRL Shares. If you wish to receive Cash Consideration for all your BRL Shares, you do not need to return your Election Form. If you do make an Election, you should note that:

 

(a)                             you may elect to receive Scrip Consideration in respect of all or a specified number of your BRL Shares;

 

(b)                            an Election to receive Scrip Consideration may be made by you by returning the Election Form before 5.00 pm on the Record Date;

 

(c)                             if you do not make an Election prior to 5.00 pm on the Record Date, you will be deemed to have elected to receive Cash Consideration in respect of all of your BRL Shares;

 

(d)                            if you elect to receive any part of the Share Scheme Consideration to which you are entitled in the form of Scrip Consideration, the number of Constellation Shares which you are entitled to receive may be subject to scaling back in accordance with the terms of the Share Scheme and as summarised in Section 1.2(c);

 

(e)                             if the Australian Listing Condition is not satisfied by 8.00 am on the Second Court Date then, in accordance with the terms of the Share Scheme, all Scheme Shareholders will receive Cash Consideration whether or not they have elected to receive Scrip Consideration.

 

If you wish to make an Election, you should return your Election Form to the BRL Share Registry by 5.00 pm (Adelaide time) on 4 April 2003. You may return your Election Form to the BRL Share Registry by posting it in the reply paid envelope provided, by delivering it to the relevant address below, or by faxing it to (08) 8236 2305 (within Australia) or +61 8 8236 2305 (international), but your Election will only be valid if it is received by 5.00pm (Adelaide time) on 4 April 2003.

 

By mail:

BRL Hardy Limited

C/- Computershare Investor Services Pty Ltd

GPO Box 242, Melbourne, Victoria 8060

 

By hand delivery:

BRL Hardy Limited

C/- Computershare Investor Services Pty Ltd

Level Five, 115 Grenfell Street, Adelaide SA 5000

 

or

 

BRL Hardy Limited

C/- Company Secretary

Reynell Road

Reynella SA 5161

 

13



 

Important Notices

 

 

 

Forward Looking Statements

 

This Scheme Booklet includes certain forward looking statements which have been based on Constellation’s current expectations about future events. The profile of the combined group, the stated intentions of Constellation in the event of a Merger of Constellation Australia with BRL Hardy and other information other than historical facts are among the forward looking statements contained in this document. These forward looking statements and the operations and financial performance of Constellation, BRL Hardy and the Merged Group are, however, subject to risks, uncertainties and assumptions that could cause actual events or results to differ materially from the expectations expressed or implied by such statements. These factors include, among other things, those risks identified in Section 6 (Risk Factors), Section 5.7 (Cautionary Statements Regarding Forward Looking Information) and other investment considerations, as well as other matters not yet known to BRL Hardy or Constellation or not currently considered material by BRL Hardy or Constellation. These statements speak only as at the date of this Scheme Booklet. Subject to the Corporations Act and the Listing Rules and any other applicable laws or regulations, BRL Hardy and Constellation disclaim any duty to update these statements other than with respect to information BRL Hardy or Constellation becomes aware of prior to the Scheme Meetings which is material to the making of a decision by:

 

                         a BRL Shareholder regarding whether or not to vote in favour of the Share Scheme; or

 

                         an Option Holder regarding whether or not to vote in favour of the Option Scheme.

 

For discussions of important risk factors, refer to Section 6 and Section 5.7 of this document.

 

BRL Hardy Results for the year ending 31 December 2002

 

BRL Hardy is required by the Listing Rules to release to ASX its financial results for the 12 months ending 31 December 2002 by no later than 14 March 2003. In order to ensure that BRL Shareholders have a reasonable opportunity to review these results prior to voting at the Scheme Meetings, BRL Hardy intends to ensure that these results are released to the ASX by no later than 11 March 2003. A copy of the results will also be made available on BRL Hardy’s website, www.brlhardy.com.au from the date of release onwards and will be made available for inspection from that date as referred to in Section 11.1.

 

Investment Decision

 

This Scheme Booklet does not take into account the individual investment objectives, financial situation and particular needs of each BRL Shareholder and Option Holder. You may wish to seek independent legal, financial and taxation advice before making a decision as to whether or not to vote in favour of the Share Scheme or the Option Scheme (as applicable to you) and, if you are a BRL Shareholder, whether Constellation Scrip is an appropriate investment for you.

 

You should read this Scheme Booklet in its entirety before making a decision as to how to vote on the resolutions to be considered at the Share Scheme Meeting and the Option Scheme Meeting and before making an Election pursuant to the Share Scheme.

 

The Corporations Act and the Corporations Rules 2000 of South Australia provide a procedure for BRL Shareholders and Option Holders to oppose the approval by the Court of the Share Scheme and the Option Scheme respectively. If you wish to oppose the approval of either of the Schemes at the Second Court Hearing you may do so by filing with the Court and serving on BRL Hardy a notice of appearance in the prescribed form together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on BRL Hardy at least one day before the date fixed for the Second Court Hearing. That date is currently scheduled to occur on 27 March 2003. Any change to this date will be announced through the ASX and notified on BRL Hardy’s website, www.brlhardy.com.au.

 

Responsibility for Information

 

The information contained in this Scheme Booklet (“BRL Information”) has been prepared by BRL Hardy and its advisers and is the responsibility of BRL Hardy, other than:

 

                       the information concerning Constellation contained in Section 3, Section 5, Section 6 and Section 7 and Sections 11.7, 11.8, 11.10, 11.11, and 11.14 of this Scheme Booklet, which has been prepared by Constellation and its advisers and is the responsibility of Constellation (“Constellation Information”);

 

                       the Independent Expert’s Report in relation to the Schemes contained in Section 19 of this Scheme Booklet, which has been prepared by Deloitte Corporate Finance Pty Limited, and Deloitte Corporate Finance Pty Limited takes responsibility for that Section;

 

14



 

                       the information about US law set out in these Important Notices and the information about the US taxation implications of the Schemes contained in Section 10 of this Scheme Booklet which has been prepared by McDermott, Will & Emery, and McDermott, Will & Emery takes responsibility for that information; and

 

                       the details of the Australian taxation implications of the Schemes contained in Section 10 of this Scheme Booklet, which has been prepared by Clayton Utz, and Clayton Utz takes responsibility for those portions of that Section.

 

Neither Constellation nor any of its directors, officers or advisers (other than as referred to above), assumes any responsibility for the accuracy or completeness of the BRL Information nor the details in Section 10. Likewise, neither BRL Hardy nor its directors, officers or advisers assumes any responsibility for the accuracy or completeness of the Constellation Information nor the details in Section 10.

 

ASIC, the Court and the ASX

 

A copy of this Scheme Booklet has been examined by ASIC. ASIC has been requested to provide a statement, in accordance with Section 411(17)(b) of the Corporations Act, that ASIC has no objection to the Schemes. If ASIC provides that statement, then it will be produced to the Court at the Court Hearing Time. Neither ASIC nor any of its officers takes any responsibility for the contents of this Scheme Booklet.

 

The Schemes have not been proposed by BRL Hardy or Constellation for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Act. Among the reasons for which the Schemes have been proposed are to facilitate:

 

(i)                  the offering of Constellation Shares subject to the Scrip Consideration Cap and the mechanism for the allocation of the Constellation Shares if the Scrip Consideration Cap is exceeded;

 

(ii)               the ability of Constellation to rely on an exemption under Section 3(a)(10) under the U.S. Securities Act from the requirement to register Constellation Shares to be issued under the Share Scheme under the U.S. Securities Act. This exemption would not be available if the transaction were structured other than as a court approved scheme of arrangement; and

 

(iii)            the cancellation of the Options in accordance with the Option Scheme.

 

If the Supreme Court of South Australia approves the Share Scheme, its approval will constitute the basis for the Constellation Shares to be issued without the need for registration under the U.S. Securities Act, in reliance on the exemption from the registration requirements provided by Section 3(a)(10) of the U.S. Securities Act. The Court does not take any responsibility for the contents of the Explanatory Statement included in this Scheme Booklet.

 

A copy of this Scheme Booklet has been lodged with the ASX. Neither the ASX nor any of its officers takes any responsibility for the contents of this Scheme Booklet.

 

Notice to U.S. Persons

 

The Constellation Shares to be issued pursuant to the Share Scheme have not been, and will not be, registered under the U.S. Securities Act or the securities laws of any other jurisdiction. The Constellation Shares issued pursuant to the Share Scheme will be issued in reliance on the exemption from the registration requirements of the U.S. Securities Act provided in Section 3(a)(10) of the U.S. Securities Act based on the approval of the Share Scheme by the Court.

 

If the Court approves the Share Scheme, its approval will constitute the basis for the Constellation Shares to be issued without registration under the U.S. Securities Act, in reliance on the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) of the U.S. Securities Act.

 

The transaction is subject to the disclosure requirements of Australia. This document has been prepared in accordance with Australian requirements and style, which differ from the requirements and style in the United States for disclosure documents prepared for business combination transactions. Financial information included in this document has been prepared in accordance with Australian accounting standards (unless otherwise indicated) and may not be comparable to the financial statements prepared in accordance with U.S. accounting standards.

 

For BRL Shareholders who are subject to United States taxation, the exchange of BRL Shares will be fully taxable for United States tax purposes regardless of whether such holder receives the Scrip Consideration or the Cash Consideration. Each such holder is strongly urged to review the description of the tax consequences to the BRL Shareholders who are subject to United States taxation which is set forth in Section 10.2 of this Scheme Booklet and to consult their United States tax advisor as to the United States tax consequences of the transaction.

 

Resale of Constellation Shares under U.S. Federal Securities Laws

 

If at the time the Share Scheme is submitted to a vote of BRL Shareholders, you are an “affiliate” of BRL Hardy or Constellation, then under Rule 145 of the U.S. Securities Act you may not offer or sell or otherwise dispose of the Constellation Shares or Constellation CDIs issued to you under the Share Scheme in the United States or to U.S. Persons unless that offer or sale or other disposition has been registered under the U.S. Securities Act or is made in conformity with Rule 145 under the U.S. Securities Act or pursuant to any other applicable exemption from the registration requirements of the U.S. Securities Act.  For these purposes, an “affiliate” includes the directors, executive officers and controlling stockholders of BRL Hardy or Constellation.

 

Notice to other persons outside Australia

 

The transaction is subject to the disclosure requirements of Australia. This document has been prepared in accordance with Australian requirements and style, and differs from the requirements and style in jurisdictions outside Australia for disclosure documents prepared for business combination transactions and offerings of securities. Financial information included in this document has been prepared in accordance with Australian or US accounting standards and may not be comparable to the financial statements prepared in accordance with the accounting standards in jurisdictions outside Australia or the United States.

 

15



 

Explanatory Statement

 

This Explanatory Statement has been prepared pursuant to section 412(1) of the Corporations Act to explain the effect of the Schemes and the Resolution and includes all information that is material to the making of a decision by:

 

                       a BRL Shareholder about how to vote in respect of the Share Scheme;

 

                       a BRL Shareholder about how to vote in respect of the Resolution; and

 

                       an Option Holder about how to vote in respect of the Option Scheme.

 

The Share Scheme and the Option Scheme are set out in Section 13 and Section 15 of this Scheme Booklet respectively. The Resolution is set out in the Notice of General Meeting at Section 17 and explained in Section 2.13.

 

16



 

Key Features Of Share Scheme and Considerations for BRL Shareholders

 

Section  1

 

17



 

1              Key Features Of Scheme and Considerations for BRL Shareholders

 

This Section should be read in conjunction with the remainder of this Scheme Booklet.

 

1.1          Overview

 

On 17 January 2003, BRL Hardy and Constellation announced a proposal to merge. Under the proposal:

 

                       Constellation Australia, an indirect wholly owned subsidiary of Constellation, will acquire all of the BRL Shares by way of scheme of arrangement; and

 

                       all of the Options will be cancelled by way of scheme of arrangement.

 

The Share Scheme is subject to a number of conditions including:

 

                       approval of the Share Scheme by BRL Shareholders; and

 

                       approval of the Share Scheme by the Court.

 

The other conditions to the Share Scheme are discussed in Section 1.9 and are set out in full in the copy of the Implementation Deed which is set out in Section 12.

 

If the Share Scheme is implemented, BRL Hardy will become an indirect wholly owned subsidiary of Constellation and will be de-listed from the ASX.

 

The Option Scheme is subject to a number of conditions including:

 

                       approval of the Share Scheme, by the Court;

 

                       approval of the Resolution, by the requisite majority of BRL Shareholders; and

 

                       approval of the Option Scheme, by the Court.

 

1.2          What you will receive

 

(a)     Overview

 

Under the Share Scheme, you are able to choose to receive the following consideration alternatives for your BRL Shares:

 

                       Cash Consideration of $10.50 per BRL Share;

 

                       Scrip Consideration, being a number of Constellation Shares or Constellation CDIs per BRL Share; or

 

                       a combination of Cash Consideration and Scrip Consideration.

 

To make your choice you should tick the appropriate box on the Election Form. If you elect to receive a combination of Cash Consideration and Scrip Consideration, you will need to specify the number of your BRL Shares in respect of which you wish to receive Scrip Consideration. You should also note the restrictions set out in paragraphs (c), (d), (e) and (f) below.

 

(b)     Scrip Exchange Ratio

 

If you elect to receive Scrip Consideration in respect of all or a specified number of your BRL Shares, the number of Constellation Shares that you will be entitled to receive (subject to paragraphs (c), (d), (e) and (f)) for each of those BRL Shares (“Scrip Exchange Ratio”) will depend upon two variables, being the Constellation VWAP and the Exchange Rate.

 

The Constellation VWAP is an average share price of Constellation Shares traded on the NYSE over the ten day trading period ending prior to the Second Court Date. The Exchange Rate is an average US$/A$ exchange rate quoted by Bloomberg for the New York market over the same period. The actual Constellation VWAP and Exchange Rate will be announced by BRL Hardy to the ASX and posted on BRL Hardy’s website at the conclusion of the ten day trading period.

 

The Scrip Exchange Ratio will be determined as follows:

 

If the Constellation VWAP is:

 

Scrip Exchange Ratio - For each BRL
Share you will be entitled to receive:

above US$27.50

 

the fraction of a Constellation Share which equals a value of $10.50 based on an assumed price per Constellation Share of US$27.50 converted at the Exchange Rate

 

 

 

from US$22.50 to
US$27.50 (inclusive)

 

the fraction of a Constellation Share which equals a value of $10.50 based on the actual Constellation VWAP converted at the Exchange Rate

 

 

 

below US$22.50

 

the fraction of a Constellation Share which equals a value of $10.50 based on an assumed price per Constellation Share of US$22.50 converted at the Exchange Rate

 

Set out below is a “Ready Reckoner” which illustrates the application of the above method of calculating the Scrip Exchange Ratio.

 

The Ready Reckoner shows the fraction of a Constellation Share which would be issued based on each Constellation VWAP listed in the first column at each of the Exchange Rates listed in the top row.

 

Scrip Consideration - Ready Reckoner

(The Scrip Exchange Ratio or fraction of a Constellation Share you will be entitled to receive for each BRL Share held, is shown in gold)

 

 

 

Constellation VWAP (US$

 

 

US$/A$ Exchange Rate

 

 

 

0.5600

 

0.5800

 

0.6000

 

0.6200

 

22.50 or less

 

0.2613

 

0.2707

 

0.2800

 

0.2893

 

23.00

 

0.2557

 

0.2648

 

0.2739

 

0.2830

 

24.00

 

0.2450

 

0.2538

 

0.2625

 

0.2713

 

25.00

 

0.2352

 

0.2436

 

0.2520

 

0.2604

 

26.00

 

0.2262

 

0.2342

 

0.2423

 

0.2504

 

27.00

 

0.2178

 

0.2256

 

0.2333

 

0.2411

 

27.50 or higher

 

0.2138

 

0.2215

 

0.2291

 

0.2367

 

 

The following are some examples shown in the Ready Reckoner:

 

                       if the Constellation VWAP is US$22.50 or lower and the Exchange Rate is $0.58, then the Scrip Exchange Ratio will be 0.2707

 

18



 

Constellation Shares for every one BRL Hardy share held;

 

                       if the Constellation VWAP is exactly US$25.00 and the Exchange Rate is $0.60, then the Scrip Exchange Ratio will be 0.2520 Constellation Shares for every one BRL Hardy share held;

 

                       if the Constellation VWAP is US$27.50 or higher and the Exchange Rate is $0.62, then the Scrip Exchange Ratio will be 0.2367 Constellation Shares for every one BRL Hardy share held.

 

Your entitlement to Constellation Shares as determined above will be issued to you in the form of Constellation CDIs if your address on the Register is in Australia, Hong Kong, New Zealand, Singapore or the United Kingdom as at 10.00 pm on the Record Date. If so, you will be issued Constellation CDIs at the ratio of 10 Constellation CDIs for every one Constellation Share to which you are entitled (subject to confirmation by the ASX). Further details of Constellation CDIs are set out in Section 7.2.

 

If your address on the Register is in the United States as at 10.00pm on the Record Date, you will receive Constellation Shares.

 

(c)     Scale back

 

The maximum number of shares Constellation will issue to BRL Shareholders who elect to receive Scrip Consideration under the Share Scheme is 15,000,000 Constellation Shares (referred to in this Scheme Booklet as the “Scrip Consideration Cap”).

 

If the total number of Constellation Shares (“Total Scrip Election”) which Constellation would otherwise be required to issue to satisfy Elections from BRL Shareholders for Scrip Consideration exceeds the Scrip Consideration Cap, then the number of BRL Hardy Shares with respect to which Elections to receive Scrip Consideration will be satisfied will be scaled back on a pro rata basis. The pro rata scale-back applicable to each BRL Shareholder will be determined by multiplying the number of BRL Shares in respect of which such BRL Shareholder made an Election to receive Scrip Consideration by the ratio of the Scrip Consideration Cap to the Total Scrip Election.

 

This is illustrated by the example below:

 

Suppose you elect to receive Scrip Consideration for your total holding of 1,000 BRL Shares and the Total Scrip Election was 18.75 million, the scale back provisions would apply.

 

The number of BRL Shares for which you would receive Scrip Consideration would be calculated as 15,000,000 ÷ 18,750,000 x 1,000 = 800 BRL Shares. You would receive Cash Consideration for the remaining 200 BRL Shares.

 

(d)     Fractional Entitlements

 

Entitlements to less than whole numbers of Constellation Shares will be rounded down to the nearest whole number and fractional entitlements will be paid in the form of cash (for further details see clause 5.7 of the Share Scheme in Section 13).

 

(e)     Foreign Scheme Shareholders

 

BRL Shareholders whose address in the Register as at 10.00 pm on the Record Date is a place outside Australia, Hong Kong, New Zealand, Singapore, the United Kingdom and the United States will be treated as Foreign Scheme Shareholders for the purpose of the Share Scheme.

 

If a Foreign Scheme Shareholder makes an Election to receive Scrip Consideration for all or a specified number of their BRL Shares then the Constellation Shares which would otherwise be required to be issued to the Foreign Scheme Shareholder will be issued to a nominee appointed by Constellation.  Constellation will cause the nominee to offer these Constellation Shares on the NYSE at such price and on such terms as the nominee shall determine and to remit to Constellation the proceeds of sale.  Constellation will then account to the Foreign Scheme Shareholders for the proceeds received after deduction of any applicable brokerage, taxes and other costs of sale.  Foreign Scheme Shareholders will receive the proceeds in U.S. dollars.  For further details see clause 5.6 of the Share Scheme in Section 13.

 

(f)                 Failure to satisfy Australian Listing Conditions

 

If the Australian Listing Condition is not satisfied by 8.00 am on the Second Court Date then, in accordance with the terms of the Share Scheme, all Scheme Shareholders will receive Cash Consideration whether or not they have elected to receive Scrip Consideration.  Constellation has no reason to believe that the Constellation CDIs will not be listed by ASX.

 

(g)              Failure to elect

 

If an Election is not made by a BRL Shareholder prior to 5.00 pm on the Record Date, then that BRL Shareholder will be deemed to have elected to receive Cash Consideration in respect of all its BRL Shares.

 

(h)              Settlement date

 

Settlement of the Share Scheme Consideration, whether in Cash Consideration or Scrip Consideration, will be made within 5 Business Days after the Implementation Date.

 

Cash Consideration will be paid by cheque drawn in Australian dollars.

 

The full terms relating to the payment of the Share Scheme Consideration are contained in the Share Scheme set out in Section 13 and the Deed Poll set out in Section 14. Further information concerning Constellation CDIs and the rights attaching to the underlying Constellation Shares is set out in Section 7.

 

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1.3                               Directors’ Recommendation

 

Your Directors believe that the proposed Merger is in the best interests of BRL Shareholders and your Directors unanimously recommend that, in the absence of a higher offer, you vote in favour of the Share Scheme. The reasons for your Directors’ recommendation are outlined below.

 

All Directors who hold BRL Shares intend to vote in favour of the Share Scheme.

 

Details of the interests of Directors are provided in Section 11.4.

 

1.4                               Reasons to vote in favour of the Share Scheme

 

(a)               Substantial premium to recent BRL Hardy share price

 

                       The $10.50 value of the Share Scheme Consideration represents a substantial premium to the price at which BRL Shares traded prior to the announcement that the parties were in discussions with respect to the Merger:

 

                      A 37% premium to the closing share price of BRL Shares on 13 January 2003, the last day immediately prior to the announcement that the parties were in discussions with respect to the Merger; and

 

                      A 52% premium to the volume weighted average share price of BRL Shares over the two months immediately prior to 13 January 2003.

 

 

(b)               Independent Expert Opinion

 

Deloitte Corporate Finance Pty Limited was appointed by BRL Hardy to prepare an Independent Expert’s Report in relation to the Schemes. It has concluded that, in the absence of a higher offer, the Share Scheme is in the best interests of BRL Shareholders as a whole. In reaching this conclusion, the Independent Expert has also made the following statements:

 

“the Cash Consideration represents a significant premium over and above the recent share market price of BRL Shares” (page 88 of the Independent Expert’s Report).

 

“the Cash Consideration is within our estimated fair market value range of a BRL Share on a control basis” (page 88 of the Independent Expert’s Report).

 

The Independent Expert has estimated the fair market value of a BRL Share to be in the range of $9.76 to $10.77 inclusive of a premium for control.

 

The Independent Expert’s Report is set out in full in Section 19.

 

(c)               If the Merger is not approved, there is a risk that BRL Hardy’s share price will fall

 

                       BRL Hardy’s share price rose following the announcement of discussions with respect to the proposed Merger with Constellation. On 13 January 2003, the day prior to this announcement, the closing price of BRL Shares was $7.67. As at 7 February 2003 the BRL Hardy share price closed at $10.33.

 

                       Your Directors believe there is a risk that the BRL Hardy share price will fall if the Merger is not approved.

 

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1.5                               Assessing the Choice of Consideration

 

Whilst your Directors unanimously recommend that, in the absence of a higher offer, you vote in favour of the Share Scheme, they make no recommendation as to the form of Share Scheme Consideration that you should elect to receive. In making your Election, you should take into account the factors outlined below and your own personal tax position and other circumstances. If in doubt you should consult your legal, financial or other professional adviser.

 

(a)              Factors relating to Cash Consideration

 

(i)                  Benefits

 

Receiving Cash Consideration will provide BRL Shareholders with the benefit of certainty of the value of the consideration received. In other words, BRL Shareholders who elect to receive Cash Consideration will receive $10.50 per BRL Share held as at the Record Date.

 

(ii)               Other Considerations

 

Receiving Cash Consideration could trigger an immediate CGT liability for some BRL Shareholders which could otherwise be deferred. Further details of the tax implications of the Share Scheme are set out in Section 10.

 

(b)              Factors relating to Scrip Consideration

 

(i)                  Benefits

 

Receiving Scrip Consideration will provide you with the following benefits:

 

                      Exposure to Constellation - BRL Shareholders will gain exposure to the assets, operations and growth prospects of Constellation, the largest single-source supplier of wine, spirits and imported beer in the United States.

 

                      Continuing participation in the future of the Merged Group - BRL Shareholders who receive Scrip Consideration will not only retain exposure to the assets, operations and growth prospects of BRL Hardy, but will also be able to participate in:

 

                       the creation of the world’s largest wine company by sales; and

 

                       the synergies between Constellation and BRL Hardy which are expected to be realised as a result of the Merger.

 

Details of the profile of Constellation and the expected profile of the Merged Group are set out in Sections 3 and 5, respectively.

 

                      CGT rollover relief - the Share Scheme is expected to satisfy the general requirements of the CGT scrip for scrip rollover provision of the Income Tax Assessment Act. As a result, CGT rollover relief should be available to Australian resident BRL Shareholders who receive Scrip Consideration (but not in respect of any proportion of their holding for which they receive Cash Consideration, including as a result of their Election or the pro rata scale back referred to in Section 1.2(c) or if the Australian Listing Conditions is not satisfied). Further details of the tax implications of the Merger are set out in Section 10.

 

                      ASX listing - BRL Shareholders who receive Constellation CDIs will be able to trade their Constellation CDIs on the ASX.

 

(ii)               Risks

 

You should be aware of the following risks if you are considering electing to receive Scrip Consideration:

 

                      The increased level of gearing that BRL Shareholders will be exposed to should they receive Scrip Consideration (for further information see Sections 5 and 6).

 

                      For BRL Shareholders who receive Constellation CDIs, Constellation CDIs are likely to have lower liquidity on the ASX as compared with the existing liquidity of BRL Shares on the ASX and Constellation Shares on the NYSE. However, Constellation CDIs can be converted into Constellation Shares and traded on the NYSE (for further information see Section 7.2(d)).

 

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(iii)            Other considerations

 

You should also consider the following if you are considering electing to receive Scrip Consideration:

 

                      Value of your consideration will fluctuate -Unlike the Cash Consideration, the value of the Scrip Consideration that BRL Shareholders will receive will fluctuate with movements in the price of Constellation Shares or Constellation CDIs. It follows that the value of the Scrip Consideration issued to BRL Shareholders could when issued, be lower or higher than the value it would have had as at the date of this Scheme Booklet.

 

                      Dividend policy - BRL Hardy has historically paid fully franked dividends to its shareholders on a regular basis. In contrast, Constellation has a policy of not paying dividends to Constellation Shareholders but reinvesting earnings in the growth of the business and Constellation’s existing and new senior credit facilities and bridging facility and its indentures for its senior notes and senior subordinated notes limit the payment of cash dividends (see Section 3.6(c) for more details). As a result, BRL Shareholders who receive Scrip Consideration are likely to experience a cessation in payment of dividends. If Constellation does pay dividends in the future, they will not be franked for Australian tax purposes and are likely to be subject to US withholding tax.

 

                      Different business profile - BRL Shareholders who receive Scrip Consideration will be exposed to a different mix of businesses than they are currently exposed to through their shareholdings in BRL Hardy. In particular, whereas BRL Hardy is a pure wine business, Constellation’s business encompasses production and marketing of wine, spirits and beer. This means that the risk and return characteristics of their investment will be different from that which is currently the case.

 

                      Rights attaching to Constellation Shares -BRL Shareholders who receive Scrip Consideration will receive an entitlement to Constellation Shares. Constellation also has Constellation B Shares on issue which carry different rights from Constellation Shares (in particular, Constellation B Shares carry enhanced voting rights and enhanced rights to elect directors). A summary of Constellation’s share capital and the differences between Constellation Shares and Constellation B Shares is set out in Sections 7.3 and 7.4.

 

                      Controlling shareholder group - Unlike BRL Hardy, Constellation has a controlling shareholder group (the Sands family). For further details, refer to Section 7.6.

 

                      Diluted percentage holding - BRL Shareholders who receive Scrip Consideration in exchange for BRL Shares will receive a smaller percentage holding in Constellation than the percentage holding in BRL Hardy represented by the BRL Shares they exchange.

 

(iv)           Performance of Constellation Shares

 

The table below shows the following prices for Constellation Shares on the NYSE:

 

                      Closing price on 7 February 2003 (latest recorded sale price before the Scheme Booklet was lodged for registration with ASIC);

 

                      Highest and lowest recorded sale prices during the period 7 November 2002 to 7 February 2003;

 

                      Closing price on 16 January 2003 (latest recorded sale price prior to announcement of the Merger); and

 

                      Closing price on 10 January 2003 (latest recorded sale price prior to announcement that the parties were in discussions with respect to the Merger).

 

Date

 

Constellation Share
Price (US$)

 

Closing price 7 February 2003

 

$

24.50

 

Highest recorded sale price (22 January 2003)

 

$

26.26

 

Lowest recorded sale price (6 January 2003)

 

$

22.30

 

Closing price 16 January 2003

 

$

24.77

 

Closing price 10 January 2003

 

$

24.95

 

Source: Bloomberg

 

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The chart below shows the closing price of Constellation Shares on the NYSE from 23 October 2002 to 23 January 2003.

 

 

Source: Bloomberg

 

No assurance can be given that changes in Constellation’s share price historically is indicative of future changes in Constellation’s share price. Exchange rate movements may affect the value and/or the price of, and income (if any) from, Constellation Scrip.

 

Further information on historical share prices for Constellation Shares is set out in section 3.6.

 

1.6                               Relevant Considerations Against the Share Scheme

 

(a)              BRL Shareholders will no longer control BRL Hardy

 

BRL Shareholders will no longer be able to hold a direct interest in BRL Hardy and will no longer collectively control BRL Hardy.

 

(b)              Forms of Share Scheme Consideration may not be attractive

 

The forms of Share Scheme Consideration may not be attractive to you as a result of the risks and other considerations set out in Section 1.5(a)(ii) and Section 1.5(b)(ii) and (iii).

 

(c)              Loss of Dividends / Franking Credits

 

BRL Hardy has historically paid fully franked dividends on a regular basis. BRL Shareholders will no longer be entitled to receive these dividends after implementation of the Merger. Further, it is a condition of the Implementation Deed that BRL Hardy does not declare or pay any dividend or make any other distribution of its profits or assets.

 

Therefore, if the Share Scheme is implemented, BRL Shareholders will not receive a final dividend in respect of the financial period ended 31 December 2002.

 

As Constellation has a policy of not paying dividends and Constellation’s existing and new senior credit facilities and Bridging Facility and its indentures for its senior notes and senior subordinated notes limit the payment of cash dividends (see Section 3.6(c) for more details), BRL Shareholders who receive Scrip Consideration are likely to experience a cessation in payment of dividends.

 

(d)              CGT consequences

 

The Share Scheme is expected to satisfy the general requirements of the CGT scrip for scrip rollover provisions of the Income Tax Assessment Act. As a result, CGT rollover relief should be available to Australian resident BRL Shareholders who receive Scrip Consideration (but not in respect of any proportion of their holding for which they receive Cash Consideration, including as a result of their Election or the pro rata scale back referred to in Section 1.2(c)) or if the Australian Listing Condition is not satisfied. Further details of the tax implications of the Merger are set out in Section 10.

 

If the Share Scheme does not proceed, there are no CGT consequences for BRL Shareholders while they continue to hold their BRL Shares, until they choose to dispose of those BRL Shares at which time a CGT taxable event may occur.

 

If the Share Scheme does proceed and CGT is payable, BRL Shareholders resident in Australia may be eligible to elect to apply a discount to any capital gain which arises on the transfer of their BRL Shares pursuant to the Share Scheme. Further information is contained in Section 10 of this Scheme Booklet.

 

Holders of BRL Shares should seek their own independent professional advice in relation to the precise tax consequences in respect of their own particular circumstances.

 

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1.7                               Other Relevant Considerations

 

(a)              Implications of Voting “No”

 

If you vote “No”, that does not mean that the Share Scheme will not be implemented. If the Share Scheme is approved by the necessary majority of BRL Shareholders and by the Court, you will be treated in the same manner as all other BRL Shareholders as at the Record Date and, accordingly, your BRL Shares will be transferred to Constellation Australia and, unless you have made an Election to receive Scrip Consideration, you will receive the Cash Consideration even though you may have voted against the Share Scheme.

 

(b)              No Solicitation and transaction compensation arrangements

 

Certain arrangements have been entered into between Constellation and BRL Hardy in relation to no solicitation and transaction compensation. Summaries of the relevant agreements are set out in Section 11.12.

 

(c)              IWIF’s Intentions

 

The Responsible Entity of IWIF, the largest shareholder of BRLHardy, announced to the ASX on 6 February 2003, that it has resolved, subject to unitholder approval, to vote in favour of the Share Scheme. Their decision is also subject to no higher offer being received and final details of the Merger being released.

 

1.8                               Implications of Failure to Approve the Merger

 

(a)              No Payment of Consideration

 

Your Directors have recommended that BRL Shareholders approve the Share Scheme for the reasons set out earlier in this Section, in particular the value considerations outlined in Section 1.4(a).

 

Further, as mentioned in Section 1.4(c) above, your Directors believe there is a risk that the BRL Hardy share price will fall if the Share Scheme is not approved.

 

(b)              Continued ASX Listing and Intention for Ongoing Operations

 

If the Share Scheme does not proceed, BRL Hardy will remain listed on the ASX and it would be the BRL Board’s intention to continue operating in line with its previously stated objectives. In these circumstances, BRL Shareholders who retain their shares will continue to share in any benefits and risks in relation to BRL Hardy’s ongoing business.

 

1.9                               Conditions

 

The obligations of BRL Hardy and Constellation under the Implementation Deed, which relate to implementation of the Schemes, are conditional upon the Conditions contained in clause 4 of the Implementation Deed being satisfied or waived. A copy of the Implementation Deed appears in Section 12 of this Scheme Booklet.

 

As at the date of this Scheme Booklet:

 

(a)              all of the US Listing Conditions have been satisfied; and

 

(b)             none of the other Conditions has been satisfied or waived.

 

24



 

Share Scheme Implementation and Financial Assistance

 

 

 

Section 2

 

25



2.             Share Scheme Implementation and Financial Assistance

 

2.1                               Overall effect of the Share Scheme

 

The Share Scheme, if implemented, will result in Constellation acquiring, by a transfer of shares, all Scheme Shares held by BRL Shareholders as at the Record Date.

 

The effect of the Share Scheme will be that BRL Hardy will become an indirect wholly owned subsidiary of Constellation and will be delisted from the ASX.

 

The explanation below does not deal with taxation effects or consequences of the Share Scheme, further details of which are set out in Section 10 of this Scheme Booklet.

 

2.2                               Classes of members affected by the Share Scheme

 

BRL Hardy only has one class of shares on issue -ordinary shares. There is only one class of ordinary shareholders who will be affected by the Share Scheme, namely BRL Shareholders.

 

The effect of the Share Scheme on BRL Shareholders is that each BRL Shareholder will cease to be a holder of, or have any interest in, BRL Shares in return for receiving the Share Scheme Consideration.

 

2.3                               Steps in implementing the Share Scheme

 

(a)              On 17 January 2003, Constellation and BRL Hardy entered into the Implementation Deed in relation to the Share Scheme (and the Option Scheme) under which BRL Hardy agreed to propose the Share Scheme. A copy of the Implementation Deed is included in Section 12 and a copy of the Share Scheme is included in Section 13.

 

(b)             On 6 February 2003, Constellation executed the Deed Poll pursuant to which Constellation agreed, subject to the Share Scheme becoming Effective, to procure that Constellation Australia provide to each Scheme Shareholder the Share Scheme Consideration to which such Scheme Shareholder is entitled under the terms of the Share Scheme. A copy of the Deed Poll is included in Section 14.

 

(c)              On 10 February 2003 the Court ordered that BRL Hardy convene a scheme meeting of BRL Shareholders at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia on 20 March 2003 commencing at 10.00 am (Adelaide time), for the purposes of approving the Share Scheme.

 

(d)             BRL Hardy will apply to the Court for an order approving the Share Scheme if:

 

                         the Share Scheme is approved by the requisite majority of BRL Shareholders voting at the Share Scheme Meeting; and

 

                         all other conditions to the Share Scheme refered to in clause 2.1 of the Share Scheme have been satisfied or waived.

 

(e)              If the Court order referred to in paragraph (d) above is obtained, then BRL Hardy will lodge with ASIC an office copy of the Court order under section 411 of the Corporations Act approving the Share Scheme.

 

(f)                If the Share Scheme becomes Effective, then on the Implementation Date, all of the Scheme Shares will be transferred to Constellation Australia without the need for any further act by any Scheme Shareholder by BRL procuring the delivery of a transfer or transfers in respect of all of the Scheme Shares to the ASX Settlement and Transfer Corporation Pty Limited by a broker nominated in writing by Constellation Australia to effect a valid transfer of the Scheme Shares to Constellation Australia under section 1074D of the Corporations Act, or, if such procedure is not available for any reason, by:

 

                         BRL Hardy delivering to Constellation Australia a duly completed and executed share transfer form or forms to transfer all of the Scheme Shares to Constellation Australia;

 

                         Constellation Australia executing and delivering to BRL Hardy the share transfer form or forms; and

 

                         BRL Hardy entering the name of Constellation Australia in the Register as the holder of all of the Scheme Shares.

 

(g)             If the Share Scheme becomes Effective then within 5 days after the Implementation Date Constellation Australia will pay to Scheme Shareholders the Share Scheme Consideration.

 

(h)             The Share Scheme will lapse and be of no further force or effect if the Implementation Deed is terminated.

 

2.4                               Termination of the Implementation Deed

 

The Share Scheme is conditional upon the Implementation Deed not having been terminated as at the Court Hearing Time.

 

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The Implementation Deed may be terminated:

 

(a)              if certain of the Conditions are not capable of being satisfied, or are not reasonably capable of being satisfied, and have not previously been waived;

 

(b)             by Constellation giving notice to BRL Hardy in writing if:

 

(i)                  BRL Hardy is in material breach in any respect of its obligations under the No Solicitation Agreement at any time before the Second Court Date;

 

(ii)               BRL Hardy is in material breach of its obligations under clause 8.1 of the Implementation Deed at any time before the Second Court Date and has not rectified that breach within 5 Business Days after it is given notice by Constellation requiring that breach to be rectified; or

 

(iii)            a majority of the BRL Board:

 

A.               withdraws or changes the recommendation of the Merger given by the BRL Board in accordance with the terms of the Implementation Deed; or

 

B.                 recommends or supports, or enters into any agreement, arrangement or understanding to recommend or support a Third Party Proposal;

 

(c)               by BRL Hardy giving notice to Constellation in writing if Constellation is in material breach of its obligations under clause 8.2 of the Implementation Deed at any time before the Second Court Date and has not rectified that breach within 5 Business Days after it is given notice by BRL Hardy requiring that breach to be rectified;

 

(d)              by either Constellation or BRL Hardy giving notice to the other in writing if:

 

(i)                 the Implementation Date shall not have occurred on or prior to the 30 April 2003;

 

(ii)              at the Scheme Meeting relating to the Share Scheme or any adjournment or postponement thereof, the Share Scheme is not approved by the necessary majority of the BRL Shareholders; or

 

(iii)           any court or Governmental Authority has issued any order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Merger, or has refused to do anything necessary to permit the Merger, and such order, decree, ruling or other action shall have become final and not appealable.

 

2.5                               Court ordered meeting of BRL Shareholders

 

On 10 February 2003, the Court ordered that a meeting of BRL Shareholders be convened to consider the Share Scheme. This meeting is to be held on 20 March 2003 at The Auditorium, Adelaide Town Hall, King William Street, Adelaide, South Australia, Australia commencing at 10.00 am (Adelaide time).

 

The notice convening this meeting is set out in Section 16 of this Scheme Booklet.

 

Each BRL Shareholder who is registered on the Register at 10.00 pm (Adelaide time) on 18 March 2003 is entitled to attend and vote, in person or by proxy or attorney or, in the case of a corporation which is a shareholder, by its representative appointed in accordance with the Corporations Act, at the Share Scheme Meeting.

 

For actions to be taken by BRL Shareholders who propose to attend and vote at the Share Scheme Meeting or to appoint a proxy to attend and vote on the shareholder’s behalf, see page 12 above.

 

2.6                               Voting majority required

 

The voting majority to approve the Share Scheme requires votes in favour of the Share Scheme to be received from:

 

(a)              a majority in number (more than 50%) of BRL Shareholders present and voting at the Share Scheme Meeting (in person, by proxy, by attorney or, in the case of corporate BRL Shareholders, by corporate representative); and

 

(b) BRL Shareholders who together hold at least 75% of the total number of BRL Shares voted at the Share Scheme Meeting.

 

2.7                               Opposing the Share Scheme

 

The Corporations Act and the Corporations Rules 2000 of South Australia provide a procedure for BRL Shareholders to oppose the approval by the Court of the Share Scheme. If you are a BRL Shareholder and

 

27



 

wish to oppose the approval of the Share Scheme at the Second Court Hearing you may do so by filing with the Court and serving on BRL Hardy a notice of appearance in the prescribed form together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on BRL Hardy at least one day before the date fixed for the Second Court Hearing. That date is currently scheduled to occur on 27 March 2003. Any change to this date will be announced through the ASX and notified on BRL Hardy’s website, www.brlhardy.com.au.

 

If a BRL Shareholder does not object in accordance with these procedures, such holder may not have a right to appear at the Second Court Hearing, although the Court in its discretion could, and likely would, permit such a holder to state objections to the Court if the holder made a personal appearance at the Second Court Hearing.

 

If there is an objection to the Share Scheme, and in such event the Second Court Hearing is continued or adjourned, then the date of the continued or adjourned hearing will be announced through the ASX and on BRL Hardy’s website.

 

2.8          Effective Date

 

The Share Scheme will become Effective on the date when an office copy of the order of the Court approving the Share Scheme is lodged with ASIC or such earlier date as the Court determines and specifies in the Court order.

 

BRL Hardy will notify the ASX upon the Share Scheme becoming Effective.

 

Once the Share Scheme becomes Effective, BRL Hardy and Constellation will become bound to implement and Constellation will procure that Constellation Australia implements the Share Scheme in accordance with its terms.

 

2.9          Determination of persons entitled to Share Scheme Consideration

 

(a)              Dealings on or prior to Record Date

 

For the purpose of establishing who are Scheme Shareholders, dealings in BRL Shares will be recognised provided that:

 

(i)                  in the case of dealings of the type to be effected using CHESS, the transferee is registered in the Register as a holder of the relevant BRL Shares by 10.00 pm on the Record Date; and

 

(ii)               in all other cases, registrable transfers or transmission applications in respect of those dealings are received at or before 10.00 pm on the Record Date at the place where the Register is kept.

 

BRL Hardy must register transfers or transmission applications of the type referred to in paragraph (a)(ii) by 10.00 pm on the Record Date. BRL Hardy will not accept for registration or recognise for any purpose any transmission application or transfer in respect of BRL Shares received after 10.00 pm on the Record Date (other than a transfer of BRL Shares to Constellation Australia in the course of implementing the Share Scheme).

 

(b)              Dealings after Record Date

 

For the purpose of determining entitlements to the Share Scheme Consideration, BRL Hardy will, until the Share Scheme Consideration has been paid and issued in accordance with the Share Scheme, maintain the Register in accordance with the provisions of clause 7 of the Share Scheme and the Register in this form will solely determine entitlements to the Share Scheme Consideration. As from 10.00 pm on the Record Date, each entry current on the Register relating to Scheme Shares will cease to be of any effect other than as evidence of entitlement to the Share Scheme Consideration in respect of the Scheme Shares relating to that entry.

 

All certificates and statements of holding for Scheme Shares shall from 10.00 pm on the Record Date cease to have any effect as documents of title in respect of such Scheme Shares other than for the purpose of registering dealings in the Scheme Shares as referred to in Section 2.9(a).

 

(c)              Provision of Information

 

BRL Hardy must give to Constellation, no less than one Business Day prior to the Implementation Date, details of the names, registered addresses and holdings of Scheme Shares of every Scheme Shareholder as shown in the Share Register at 10.00 pm on the Record Date, such details to be provided in such form as Constellation may reasonably require.

 

28



 

2.10                        Provision of Share Scheme Consideration

 

Within 5 Business Days after the Implementation Date, cheques payable to Scheme Shareholders in respect of Cash Consideration, stock certificates in respect of Constellation Shares issued as Scrip Consideration and holding statements in respect of Constellation CDIs issued as Scrip Consideration (as the case may be) will be sent by prepaid post to each Scheme Shareholder at the person’s address as shown on the Register.

 

In the case of joint holdings, any cheques payable to Scheme Shareholders and any stock certificates or holding statements will be forwarded to the address which stands first on the Register.

 

2.11                        Suspension of trading of BRL Shares

 

If the Court approves the Share Scheme, BRL Hardy will notify the ASX of the Court approval on the day of the Court hearing to approve the Share Scheme. It is expected that suspension of trading on the ASX in BRL Shares will occur from the close of business on that day.

 

If the Share Scheme becomes Effective, Constellation will cause BRL Hardy to apply for termination of official quotation of BRL Shares on the first Business Day after the Implementation Date.

 

2.12                        Stamp duty

 

No stamp duty is payable on the transfer of shares in a listed company.

 

2.13                        Financial assistance

 

(a)              General Meeting

 

BRL Hardy has convened a General Meeting to be held at The Auditorium, Adelaide Town Hall, King Williams Street, Adelaide, South Australia, Australia on 20 March 2003 commencing at 10.30 am (Adelaide time), or as soon after that time as the Share Scheme Meeting has concluded or is adjourned, for the purpose of passing the Resolution.

 

The notice convening this meeting is set out in Section 17 of this Scheme Booklet.

 

For actions to be taken by BRL Shareholders who propose to attend and vote at the General Meeting or to appoint a proxy to vote on their behalf, see page 12 above.

 

(b)              Corporations Act provisions

 

Section 260A(1) of the Corporations Act relevantly provides that a company may financially assist a person to acquire shares in that company if the assistance is approved by shareholders by a special resolution passed at a general meeting of the company with no votes being cast in favour of the resolution by the person acquiring the shares or by their associates, or by a resolution agreed to at a general meeting, by all ordinary shareholders.

 

Section 260B(4) of the Corporations Act requires that a notice convening a general meeting of members to consider a resolution to approve the giving of financial assistance to a person to acquire shares in a company must include a statement setting out all the information known to the company that is material to the decision on how to vote on the resolution.

 

(c)              Particulars of financial assistance

 

Options issued to the employees of BRL Hardy under its Employee Option Plan and NonExecutive Options issued to non-executive directors under the Non-Executive Option Plan give the holders of those options the right to acquire BRL Shares at future points in time at a certain exercise price. These options therefore represent a contingent right to own BRL Shares in the future.

 

On 17 January 2003, Constellation and BRL Hardy entered into the Implementation Deed in relation to the Merger and under which Constellation and BRL Hardy agreed that:

 

(i)                  BRL Hardy will propose the Option Scheme, which if implemented will result in the cancellation of all Options in return for the payment by BRL Hardy of the Option Scheme Consideration;

 

(ii)               BRL Hardy will within one month from the date of the Implementation Deed, make an offer to each holder of Non-Executive Options to cancel the Non-Executive Options held by that person in consideration for the payment by BRL Hardy of $2.42 per Non-Executive Option cancelled;

 

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(iii)            subject to the Option Scheme becoming Effective, Constellation Australia will make available to BRL Hardy a credit facility on arms length commercial terms to enable BRL Hardy to fund the Option Scheme Consideration and the consideration payable to each holder of Non-Executive Options for the cancellation of those Non-Executive Options.

 

All of these arrangements are conditional upon the Share Scheme becoming effective which would then result in all of the BRL Shares being transferred to Constellation Australia. Furthermore, the cancellation of the Options and the Non-Executive Options will ensure that there are no outstanding rights for the issue of new shares in BRL Hardy. Accordingly the Directors believe that, by entering into these arrangements, BRL Hardy is financially assisting Constellation Australia to acquire BRL Shares under the Share Scheme.

 

The Directors believe that the provision of the proposed financial assistance will be of benefit to the Company because it will assist in the implementation of the Merger which the Directors and the Independent Expert believe, in the absence of a higher offer, is in the best interest of BRL Shareholders. Futhermore, the credit facility summarised in paragraph (iii) above (referred to in this Scheme Booklet as the “Option Cancellation Loan”, is being provided to BRL Hardy on the basis that it will be converted to capital in BRL Hardy by Constellation Australia shortly after the Schemes have been implemented. The Directors believe that such loan arrangement will not be prejudicial to creditors of BRL Hardy. Accordingly, the Directors have proposed that the provision of such financial assistance by BRL Hardy be approved by BRL Shareholders in accordance with section 260B of the Corporations Act. If the Resolution is not passed by the requisite majority of BRL Shareholders then the Option Scheme will not take effect.

 

The Directors of BRL Hardy have unanimously recommended that BRL Shareholders approve the Resolution. All Directors who hold BRL Shares intend to vote in favour of the Resolution.

 

(d)              Voting on the resolution to approve the financial assistance

 

The resolution to approve the financial assistance is a special resolution which must be carried by a majority of 75% of the votes cast on the resolution by BRL Shareholders present at the General Meeting in person or by proxy.  Constellation and any person who is an associate of Constellation may not vote on the resolution.

 

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Information about Constellation

 

 

Section 3

 

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3.             Information about Constellation

 

3.1          Introduction to Constellation and available information

 

Constellation is principally engaged in the production and marketing of beverage alcohol brands in North America and the United Kingdom. With a broad portfolio of wine, spirits and imported beer, Constellation is the largest single-source supplier of these products in the United States. In the United Kingdom, Constellation is a leading producer and marketer of wine and of cider and a leading independent drinks wholesaler.

 

Leading brands in Constellation’s portfolio include: Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Corona Extra, Modelo Especial, St. Pauli Girl, Almaden, Arbor Mist, Talus, Vendange, Alice White, Black Velvet, Fleischmann’s, Schenley, Ten High, Stowells of Chelsea and Blackthorn.

 

Constellation’s products are distributed by more than 1,000 wholesale distributors in North America. In the United Kingdom, Constellation distributes its branded products and those of other companies to more than 16,500 customers. Constellation operates 29 production facilities throughout the world. In addition to producing and marketing its own brands, Constellation also purchases products for resale from other producers.

 

Constellation’s two classes of common stock are listed on the New York Stock Exchange. As of 31 January 2003, Constellation had 78,583,491 Constellation Shares (symbol: STZ) and 12,077,090 Constellation B Shares (symbol: STZ.B) outstanding (excluding treasury shares) and a total market capitalisation of approximately US$2.3 billion (based on a closing price of its Constellation Shares and Constellation B Shares of US$ 25.07 and US$ 24.45, respectively, on the New York Stock Exchange on 31 January 2003).

 

Information in this Section 3 concerning Constellation has been derived in part from the following sources:

 

                      Annual Report on Form 10-K of Constellation for the fiscal year ended 28 February 2002 as filed with the U.S. SEC;

 

                      Quarterly Report on Form 10-Q of Constellation for the fiscal quarter ended 30 November 2002, as filed with the U.S. SEC; and

 

                      Constellation’s proxy statement for its annual meeting of stockholders held on 23 July 2002.

 

If you would like to receive a copy of any of these documents, please contact the BRL Hardy shareholder information line on 1300 666 724 and you will be sent copies free of charge (other than with respect to exhibits).

 

Constellation reports and other information filed with the U.S. SEC may be inspected without charge at the office of the U.S. SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, periodic reports, registration statements and certain other filings made by Constellation with the U.S. SEC through its Electronic Data Gathering, Analysis and Retrieval system are publicly available through the U.S. SEC’s website located at http://www.sec.gov.

 

If you become a holder of Constellation Shares (or Constellation CDIs), Constellation will furnish to you the same information that it currently furnishes to Constellation shareholders, including annual reports to shareholders that include annual consolidated financial statements and proxy statements and related materials for annual and special meetings of shareholders.

 

3.2                               Historical Development of Constellation

 

Constellation is a Delaware corporation incorporated on 4 December 1972, as the successor to a business founded in 1945. Since the founding of Constellation’s business in 1945 as a producer and marketer of wine products, the business has grown through a combination of internal growth and acquisitions. Internal growth has been driven by leveraging Constellation’s existing portfolio of leading brands, developing new products, new packaging and line extensions, and focusing on the faster growing sectors of the beverage alcohol industry. Since 1991, Constellation has completed a number of major acquisitions that have broadened its portfolio and increased market share, net sales and cash flow. In the past five years Constellation has acquired Ravenswood Winery, Inc., certain assets of Corus Brands, Inc. and the Turner Road Vintners Assets (as defined in Section 3.5(b) below) in 2001, Forth Wines Limited (“Forth Wines”) in 2000, Franciscan Vineyards, Inc. (“Franciscan Estates”), Simi Winery, Inc. (“Simi”) and the Black Velvet Assets (as defined in Section 3.5(b) below) in 1999, and Matthew Clark plc (“Matthew Clark”) in 1998.

 

On 31 July 2001, Constellation and BRL Hardy completed the formation of Pacific Wine Partners, a joint venture owned equally by Constellation and BRL Hardy. On 16 October 2001, Constellation announced that Pacific Wine Partners completed the purchase of certain assets of Blackstone Winery, including the Blackstone brand.

 

The investment in Pacific Wine Partners is accounted for using the equity method. Accordingly, the results of operations of Pacific Wine Partners since 31 July 2001 have been included in the equity in earnings of joint venture line in the consolidated statements of income of Constellation. Leading brands in the Pacific Wine Partners portfolio include Banrock Station as well as Blackstone.

 

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3.3                               Constellation Operations

 

(a)              Constellation operations described by segment and region

 

Constellation operates primarily in the beverage alcohol industry in North America and the United Kingdom. Constellation reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items).

 

Popular and Premium Wine

 

The Popular and Premium Wine segment produces, bottles, imports and markets wine and brandy in the United States. It is the second largest supplier of wine in the United States, distributes 18 of the top 100 wine brands in the United States and exports wine to approximately 60 countries from the United States. This segment sells table wine, dessert wine, sparkling wine and brandy. Its leading brands include Alice White, Almaden, Arbor Mist, Covey Run, Dunnewood, Estate Cellars, Inglenook, Manischewitz, Marcus James, Paul Masson, Talus, Taylor, Vendange, Vina Santa Carolina, Cook’s, J. Roget, Richards Wild Irish Rose, and Paul Masson Grande Amber Brandy. Most of its wine is marketed in the US$3.00 to US$7.00 per 750 ml bottle price range.

 

As a related part of its U.S. wine business, the Popular and Premium Wine segment is a leading grape juice concentrate producer in the United States. Grape juice concentrate competes with other domestically produced and imported fruit-based concentrates. Its other wine-related products and services include bulk wine, cooking wine, grape juice and St. Regis Inglenook, a leading de-alcoholized line of wine in the United States.

 

Imported Beer and Spirits

 

The Imported Beer and Spirits segment imports and markets a diversified line of beer and produces, bottles, imports and markets a diversified line of distilled spirits. It is the third largest marketer of imported beer in the United States and distributes six of the top 25 imported beer brands in the United States: Corona Extra, Modelo Especial, Corona Light, Pacifico, St. Pauli Girl, and Negra Modelo. Corona Extra is the best selling imported beer in the United States. Its other imported beer brands include Tsingtao from China, Peroni from Italy and Double Diamond and Tetley’s English Ale from the United Kingdom.

 

The Imported Beer and Spirits segment is the third largest supplier of distilled spirits in the United States and exports distilled spirits to approximately 25 countries from the United States. Its principal distilled spirits brands include Black Velvet, Fleischmann’s, Mr. Boston, Canadian LTD, Chi-Chi’s prepared cocktails, Ten High, Montezuma, Barton, Monte Alban and Inver House. Substantially all of this segment’s distilled spirits unit volume consists of products marketed in the value and mid-premium priced category. The Imported Beer and Spirits segment also sells distilled spirits in bulk and provides contract production and bottling services for third parties.

 

U.K. Brands and Wholesale

 

The U.K. Brands and Wholesale segment is a leading producer and marketer of wine, cider and bottled water. In addition, it is the leading independent on-premise drinks wholesaler throughout the United Kingdom. This segment also exports its branded products to approximately 45 countries from the United Kingdom.

 

The U.K. Brands and Wholesale segment’s Stowells of Chelsea brand is the best selling branded table wine in the on-premise market and the third best selling in the off-premise market in the United Kingdom. This segment is the largest supplier of branded wine to the on-premise trade and a leading supplier to the off-premise trade in the United Kingdom. It maintains a leading market share position in fortified British wine through its QC and Stone’s brand names and a strong market position in the wine style drinks category through Babycham, Country Manor and Arbor Mist.

 

The U.K. Brands and Wholesale segment is the second largest producer and marketer of cider in the United Kingdom. This segment distributes its cider brands in both the on-premise and off-premise markets. Its leading cider brands include Blackthorn, the number two cider brand in the United Kingdom, Gaymer’s Olde English, Diamond White and K. It also produces and markets Strathmore bottled water in the United Kingdom.

 

The U.K. Brands and Wholesale segment is the leading independent beverage wholesaler to the on-premise trade in the United Kingdom and has one of the largest customer bases in the United Kingdom, with more than 16,000 on-premise accounts. Its wholesaling business involves the distribution of branded wine, distilled spirits, cider, beer and soft drinks. While these products are primarily produced by third parties, they also include the U.K. Brands and Wholesale segment’s branded wine, cider and water products.

 

Fine Wine

 

The Fine Wine segment participates in the super-premium and ultra-premium wine market. The Fine Wine segment includes Estancia, Ravenswood, Franciscan Oakville Estate, Simi, Veramonte, Mt. Veeder and Quintessa wines. The portfolio of fine wines is supported by the segment’s winery and vineyard holdings in California and Chile. These brands are marketed by a dedicated sales force, primarily focusing on high-end restaurants and fine

 

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wine shops. The Fine Wine segment also exports its products to approximately 25 countries from the United States.

 

(b)              Marketing and distribution

 

North America

 

Constellation’s products are distributed and sold throughout North America through over 1,000 wholesalers, as well as through state and provincial alcoholic beverage control agencies. The Popular and Premium Wine, Imported Beer and Spirits and Fine Wine segments employ full-time, in-house marketing, sales and customer service organizations to develop and service their sales to wholesalers and state agencies.

 

Constellation believes that the organisation of its sales force into separate segments positions it to maintain a high degree of focus on each of its principal product categories. However, where appropriate, Constellation leverages its sales and marketing skills across the organisation, particularly in national accounts.

 

Constellation’s marketing strategy places primary emphasis upon promotional programs directed at its broad national distribution network, and at the retailers served by that network. Constellation has extensive marketing programs for its brands including promotional programs on both a national basis and regional basis in accordance with the strength of the brands, point-of-sale materials, consumer media advertising, event sponsorship, market research, trade advertising and public relations.

 

United Kingdom

 

Constellation’s U.K.-produced branded products are distributed throughout the United Kingdom by the U.K. Brands and Wholesale segment. The products are packaged at one of three production facilities. Shipments of cider and wine are then made to the U.K. Brands and Wholesale segment’s national distribution centre for branded products. All branded products are then distributed to either the on-premise or off-premise markets with some of the sales to on-premise customers made through the U.K. Brands and Wholesale segment’s wholesale business.

 

This segment’s wholesale products are distributed through 11 depots located throughout the United Kingdom. On-premise distribution channels include hotels, restaurants, pubs, wine bars and clubs. The off-premise distribution channels include grocers, convenience retail and cash-and-carry outlets.

 

The U.K. Brands and Wholesale segment employs full-time, in-house marketing and sales organizations that separately target or service the off-premise customers and the on-premise market in the United Kingdom for the U.K. Brands and Wholesale segment’s branded products and the customers of its wholesale business.

 

(c)              Trademarks and distribution agreements

 

Trademarks are an important aspect of Constellation’s business. Constellation sells its products under a number of trademarks, most of which Constellation owns. Throughout its segments, Constellation also has various licenses and distribution agreements, for the production and/or sale of its products, as well as for the sale of products of third parties. These licenses and distribution agreements have varying terms and durations. Agreements include, among others, a long-term license agreement with Hiram Walker & Sons, Inc., which expires in 2116, for the Ten High, Crystal Palace, Northern Light and Imperial Spirits brands; and a long-term license agreement with the B. Manischewitz Company, which expires in 2042, for the Manischewitz brand of kosher wine.

 

All of Constellation’s imported beer products are marketed and sold pursuant to exclusive distribution agreements with the suppliers of these products. These agreements have terms that vary and prohibit Constellation from importing other beer from other producers from the same country. Constellation’s agreement to distribute Corona Extra and other Mexican beer brands exclusively throughout 25 primarily western U.S. states expires in December 2006 and, subject to compliance with certain performance criteria, continued retention of certain Constellation personnel and other terms under the agreement, will be automatically renewed for additional terms of five years. Changes in control of Constellation or of its subsidiaries involved in importing the Mexican beer brands, changes in the position of the Chief Executive Officer of Barton Beers, Ltd., including by death or disability, or the termination of the employment of the President of Barton Incorporated, may be a basis for the supplier, unless it consents to such changes, to terminate the agreement. The supplier’s consent to such changes may not be unreasonably withheld. Constellation’s agreement for the importation of St. Pauli Girl expires in December 2007. Prior to their expiration, these agreements may be terminated if Constellation fails to meet certain performance criteria.

 

Constellation believes it is currently in compliance with its material imported beer distribution agreements. From time to time, Constellation has failed, and may in the future fail, to satisfy certain performance criteria in its distribution agreements. Although there can be no assurance that Constellation’s beer distribution agreements will be renewed, given Constellation’s long-term relationships with its suppliers, Constellation expects that such agreements will be renewed prior to their expiration and does not believe that these agreements will be terminated.

 

(d)              Production

 

In the United States, Constellation’s wine is produced from several varieties of wine grapes grown principally in California. The grapes are crushed at Constellation’s wineries and stored as wine, grape juice or concentrate. Such grape products may be made into wine for sale under Constellation’s brand names, sold to other companies for resale under their own labels, or shipped to customers in the form of juice, juice concentrate, unfinished wine, high-proof grape spirits or brandy.

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Most of Constellation’s wine is bottled and sold within 18 months after the grape crush. Constellation’s inventories of wine, grape juice and concentrate are usually at their highest levels in November and December immediately after the crush of each year’s grape harvest, and are substantially reduced prior to the subsequent year’s crush.

 

The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed by Constellation are primarily produced and aged by Constellation at its distillery in Bardstown, Kentucky. Following the Black Velvet Assets acquisition, the majority of Constellation’s Canadian whisky requirements are produced and aged at its Canadian distilleries in Lethbridge, Alberta, and Valleyfield, Quebec.

 

At its Albany, Georgia, facility, Constellation produces all of the neutral grain spirits and whiskeys it uses in the production of vodka, gin and blended whiskey it sells to customers in the state of Georgia. Constellation’s requirements of scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the production of gin and vodka for sale outside of Georgia, and other spirits products, are purchased from various suppliers.

 

Constellation operates three facilities in the United Kingdom that produce, bottle and package cider, wine and water. To produce Stowells of Chelsea, wine is imported in bulk from various countries such as Australia, Chile, Germany, France, Spain, South Africa and the United States, which is then packaged at Constellation’s facility at Bristol and distributed under the Stowells of Chelsea brand name. The Bristol facility also produces fortified British wine and wine style drinks.

 

All cider production takes place at Constellation’s facility at Shepton Mallet, where apples of many different varieties are purchased from U.K. growers and crushed. This juice, along with European-sourced concentrate, is then fermented into cider, blended and then packaged. The Strathmore brand of bottled water (which is available in still, sparkling, and flavoured varieties) is sourced and bottled in Forfar, Scotland.

 

Constellation operates one winery in Chile that crushes, vinifies, cellars and bottles wine.

 

(e)              Sources and availability of raw materials

 

The principal components in the production of Constellation’s branded beverage alcohol products are packaging materials (primarily glass) and agricultural products, such as grapes and grain. Constellation utilizes glass and polyethylene terephthalate (“pet”) bottles and other materials such as caps, corks, capsules, labels and cardboard cartons in the bottling and packaging of its products.

 

Glass bottle costs are one of the largest components of Constellation’s cost of product sold. The glass bottle industry is highly concentrated with only a small number of producers. Constellation has traditionally obtained, and continues to obtain, its glass requirements from a limited number of producers.

 

Constellation has not experienced difficulty in satisfying its requirements with respect to any of the foregoing and considers its sources of supply to be adequate. However, the inability of any of Constellation’s glass bottle suppliers to satisfy Constellation’s requirements could adversely affect Constellation’s operations.

 

Most of Constellation’s annual grape requirements are satisfied by purchases from each year’s harvest which normally begins in August and runs through October. Constellation believes that it has adequate sources of grape supplies to meet its sales expectations. However, in the event demand for certain wine products exceeds expectations, Constellation could experience shortages.

 

Constellation purchases grapes from approximately 800 independent growers, principally in the San Joaquin Valley and Central and North Coast regions of California. Constellation enters into written purchase agreements with a majority of these growers on a year-to-year basis.

 

Constellation currently owns or leases approximately 6,500 acres of land and vineyards, either fully bearing or under development, in California, New York and Chile. This acreage supplies only a small percentage of Constellation’s total needs. Constellation continues to consider the purchase or lease of additional vineyards, and additional land for vineyard plantings, to supplement its grape supply.

 

The distilled spirits manufactured by Constellation require various agricultural products, neutral grain spirits and bulk spirits. Constellation fulfils its requirements through purchases from various sources through contractual arrangements and through purchases on the open market. Constellation believes that adequate supplies of the aforementioned products are available at the present time.

 

In the United Kingdom, Constellation manufactures wine and cider from materials that are purchased either on a contracted basis or on the open market. In particular, supplies of cider apples are sourced through long-term supply arrangements with owners of apple orchards. There are adequate supplies of the various raw materials at this particular time.

 

(f)                Government regulation

 

Constellation’s operations in the United States are subject to extensive federal and state regulation. These regulations cover, among other matters, sales promotion, advertising and public relations, labelling and packaging, changes in officers or directors, ownership or control, distribution methods and relationships, and requirements regarding brand registration and the posting of prices and price changes.

 

All of Constellation’s operations and facilities are also subject to federal, state, foreign and local environmental laws and regulations and Constellation is required to obtain permits and licenses to operate its facilities.

 

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In the United Kingdom, Constellation has secured a Customs and Excise License to carry on its excise trade. Licenses are required for all premises where wine is produced. Constellation also holds a license to act as an excise warehouse operator.

 

In Canada, Constellation’s operations are also subject to extensive federal and provincial regulation. These regulations cover, among other matters, advertising and public relations, labelling and packaging, environmental matters and customs and duty requirements. Constellation is also required to obtain licenses and permits to operate its facilities.

 

(g)             Competition

 

The beverage alcohol industry is highly competitive. Constellation competes on the basis of quality, price, brand recognition and distribution. Constellation’s beverage alcohol products compete with other alcoholic and nonalcoholic beverages for consumer purchases, as well as shelf space in retail stores, a presence in restaurants and marketing focus by Constellation’s wholesalers.

 

Constellation competes with numerous multinational producers and distributors of beverage alcohol products, some of which may have greater resources than Constellation. In the United States, the Popular and Premium Wine segment’s principal competitors include E & J Gallo Winery and The Wine Group.

 

The Imported Beer and Spirits segment’s principal competitors include Heineken USA, Molson Breweries USA, Labatt’s USA, Guinness Bass Import Company, Brown-Forman Beverages, Jim Beam Brands and Heaven Hill Distilleries, Inc.

 

The Fine Wine segment’s principal competitors include Beringer Blass, Robert Mondavi, and Kendall-Jackson.

 

In the United Kingdom, the U.K. Brands and Wholesale segment’s principal competitors include H.P. Bulmer, Halewood Vintners, Waverley Vintners and Volvic. In connection with its wholesale business, the U.K. Brands and Wholesale segment distributes the branded wine of third parties that compete directly against its own wine brands.

 

(h)             Properties

 

Constellation’s four business operating segments currently operates wineries, distilling plants, bottling plants, and cider and water producing facilities, most of which include warehousing and distribution facilities on the premises. Constellation also operates separate distribution centres under the U.K. Brands and Wholesale segment’s wholesaling business.

 

Constellation believes that its facilities, taken as a whole, are in good condition and working order and have adequate capacity to meet its needs for the foreseeable future. Constellation’s corporate headquarters are located in offices leased in Fairport, New York.

 

Popular and Premium Wine

 

The Popular and Premium Wine segment maintains its headquarters in owned and leased offices in Canandaigua, New York. It operates three wineries in New York, located in Canandaigua, Naples and Batavia, six wineries in California, located in Madera, Lodi, Escalon, Fresno and Ukiah, two wineries in Washington, located in Woodinville and Sunnyside, and one winery in Caldwell, Idaho. All of these wineries are owned, except for the wineries in Batavia (New York), Caldwell (Idaho) and Woodinville (Washington), which are leased.

 

This segment considers its principal wineries to be the Mission Bell winery in Madera (California) and the Canandaigua winery in Canandaigua (New York). The Mission Bell winery crushes grapes, produces, bottles and distributes wine and produces grape juice concentrate. The Canandaigua winery crushes grapes and produces, bottles and distributes wine.

 

This segment currently owns or leases approximately 2,800 acres of vineyards, either fully bearing or under development, in California and New York.

 

Imported Beer and Spirits

 

The Imported Beer and Spirits segment maintains its headquarters in leased offices in Chicago, Illinois. It owns and operates four distilling plants, two in the United States and two in Canada. The two distilling plants in the United States are located in Bardstown, Kentucky and Albany, Georgia. The two distilling plants in Canada, which were acquired in connection with the Black Velvet Acquisition, are located in Valleyfield, Quebec and Lethbridge, Alberta.

 

This segment considers its principal distilling plants to be the facilities located in Bardstown (Kentucky), Valleyfield (Quebec) and Lethbridge (Alberta). The Bardstown facility distills, bottles and warehouses distilled spirits products for Constellation and, on a contractual basis, for other industry members. The two Canadian facilities distill, bottle and store Canadian whisky for the segment, and distill and/or bottle and store Canadian whisky, vodka, rum, gin and liqueurs for third parties.

 

In the United States, the Imported Beer and Spirits segment also operates three bottling plants, located in Georgia, Kentucky and California. The facilities located in Atlanta, Georgia and Owensboro, Kentucky are owned, while the facility in Carson, California is operated and leased through an arrangement involving an ongoing management contract.

 

This segment considers the bottling plant located in Owensboro (Kentucky) to be one of its principal facilities. The Owensboro facility bottles and warehouses distilled spirits products for the segment and is also utilized for contract bottling.

 

U.K. Brands and Wholesale

 

The U.K. Brands and Wholesale segment maintains its headquarters in owned offices in Bristol, England. It currently owns and operates two facilities in England, located in Bristol and Shepton Mallet and one facility

 

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in Scotland, located in Forfar. This segment considers all three facilities to be its principal facilities. The Bristol facility produces, bottles and packages wine; the Shepton Mallet facility produces, bottles and packages cider; and the Forfar facility produces, bottles and packages water products. The U.K. Brands and Wholesale segment also owns another facility in Taunton, England, which it plans to sell since the operations have been consolidated into the Shepton Mallet facility.

 

The U.K. Brands and Wholesale segment operates a National Distribution Centre, located at a leased facility in Severnside, England to distribute its products that are produced at the Bristol and Shepton Mallet facilities. To support its wholesaling business, this segment operates 11 distribution centres located throughout the United Kingdom, 10 of which are leased. These 11 distribution centres are used to distribute products produced by third parties, as well as by Constellation. This segment has been and will continue consolidating the operations of its wholesaling distribution centres.

 

Fine Wine

 

The Fine Wine segment maintains its headquarters in offices owned in Rutherford, California. Through this segment, Constellation owns and operates six wineries in the United States, one of which is on land that is leased, and, through a majority owned subsidiary, operates one winery in Chile. All six wineries in the United States are located in the state of California, in Rutherford, Healdsburg, Monterey County, Napa County and two in Sonoma County. The winery in Chile is located in the Casablanca Valley.

 

This segment considers its principal wineries to be one of its wineries in Sonoma County (California) and its wineries located in Rutherford (California), Healdsburg (California), Monterey County (California), and the Casablanca Valley (Chile). The winery in Monterey County crushes, vinifies and cellars wine. The other principal wineries crush grapes, vinify, cellar and bottle wine.

 

This segment also owns and leases approximately 2,700 plantable acres of vineyards in California and approximately 1,000 plantable acres of vineyards in Chile.

 

(i)     Employees

 

Constellation had approximately 3,200 full-time employees in the United States at the end of November 2002, of which approximately 830 were covered by collective bargaining agreements. Additional workers may be employed by Constellation during the grape crushing season.

 

Constellation had approximately 1,930 full-time employees in the United Kingdom at the end of November 2002, of which approximately 500 were covered by collective bargaining agreements. Additional workers may be employed during the peak season.

 

Constellation had approximately 210 full-time employees in Canada at the end of November 2002, of which approximately 150 were covered by collective bargaining agreements.

 

Constellation considers its employee relations generally to be good.

 

(j)     Legal Proceedings

 

Constellation and its subsidiaries are subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of its management such liability will not have a material adverse effect on Constellation’s financial condition, results of operations or cash flows.

 

3.4                               Selected Financial Data

 

The following table sets forth Constellation’s selected financial data as of and for each of the nine month periods ended 30 November 2002 and 2001, and as of the end of and for each of the five fiscal years in the period ended 28 February 2002.

 

The income statement data for the three fiscal years in the period ended 28 February 2002, and the balance sheet data as of 28 February 2002 and 2001, have been derived from Constellation’s audited historical financial statements included in Annexure 1 to this Scheme Booklet, which financial statements were audited by Arthur Andersen LLP.  In May 2002, Constellation terminated its relationship with Arthur Andersen LLP and retained KPMG LLP as its independent public accountants.  The balance sheet data as of 29 February 2000, and the income statement data and the balance sheet data as of and for the fiscal years ended 28 February 1999 and 1998, have also been derived from Constellation’s audited historical financial statements.  The income statement data and the balance sheet data as of and for the nine month periods ended 30 November 2002 and 2001 have been derived from Constellation’s unaudited historical financial statements, portions of which are included in Annexure 1 to this Scheme Booklet.

 

Beginning 1 March 2002, Constellation adopted U.S. Emerging Issues Task Force (“EITF”) Issue No. 01-09 (“EITF No. 01-09”), “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor’s Products).” As a result, since 1 March 2002 Constellation has classified certain promotional expenditures paid to distributors, retailers or consumers as a reduction of revenue and non-cash consideration as an increase to cost of product sold. Constellation previously reported these expenses as selling, general and administrative expenses.

 

This reclassification, which does not affect operating income or net income, is reflected in the financial information for the nine months ended 30 November 2002 presented in the following table and in Constellation’s interim consolidated financial statements for such period. In addition, the financial information for the nine months ended 30 November 2001 presented in the following table and in such interim consolidated financial statements has been reclassified to comply with this guidance.

 

37



Financial information for periods ended 28 February 2002 and previously will be reclassified to comply with this guidance commencing with Constellation’s Annual Report on Form 10-K for the year ended 28 February 2003 to be filed with the U.S. SEC by 29 May 2003. The reclassification for such prior periods, which is not reflected in the following table, will result in the following adjustments to Constellation’s reported results. For the fiscal years ended 28 February 2002, 28 February 2001, 29 February 2000, 28 February 1999 and 28 February 1998, net sales will be reduced by US$213.7 million, US$170.7 million, US$178.7 million, US$114.8 million and US$68.3 million, respectively, cost of product sold will increase by US$10.1 million, US$7.8 million, and US$8.8 million, US$2.0 million and US$0.0 million, respectively, and selling, general and administrative expenses will decrease by US$223.8 million, US$184.0 million, US$191.3 million, US$112.7 million and US$68.3 million, respectively.

 

In the opinion of Constellation’s management, the unaudited data includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for such periods. Interim results for the nine-month periods ended 30 November 2002 and 2001, are not necessarily indicative of results that can be expected in future periods. It is important that you read the selected financial data presented below in conjunction with the historical financial statements.

 

 

 

For the Nine Months
Ended 30 November

 

For the Fiscal Years Ended

 

 

 

2002

 

2001

 

28 Feb.
2002

 

28 Feb.
2001

 

29 Feb.
2000

 

28 Feb.
1999

 

28 Feb.
1998

 

 

 

(in US$ and thousands, except per share data)

 

Consolidated Statement of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross sales

 

2,729,219

 

2,616,477

 

3,633,958

 

3,154,294

 

3,088,699

 

1,984,801

 

1,632,357

 

Less - excise taxes

 

(650,641

)

(627,064

)

(813,455

)

(757,609

)

(748,230

)

(487,458

)

(419,569

)

Net sales

 

2,078,578

 

1,989,413

 

2,820,503

 

2,396,685

 

2,340,469

 

1,497,343

 

1,212,788

 

Cost of product sold

 

(1,495,096

)

(1,457,124

)

(1,901,462

)

(1,639,230

)

(1,618,009

)

(1,049,309

)

(869,038

)

Gross profit

 

583,482

 

532,289

 

919,041

 

757,455

 

722,460

 

448,034

 

343,750

 

Selling, general and administrative expenses

 

(263,847

)

(264,542

)

(576,560

)

(486,587

)

(481,909

)

(299,526

)

(231,680

)

Nonrecurring charges

 

 

 

 

 

(5,510

)

(2,616

)

 

Operating income

 

319,635

 

267,747

 

342,481

 

270,868

 

235,041

 

145,892

 

112,070

 

Equity in earnings of joint venture

 

10,093

 

1,028

 

1,667

 

 

 

 

 

Interest expense, net

 

(80,494

)

(86,408

)

(114,189

)

(108,631

)

(106,082

)

(41,462

)

(32,189

)

Income before income taxes and extraordinary item

 

249,234

 

182,367

 

229,959

 

162,237

 

128,959

 

104,430

 

79,881

 

Provision for income taxes

 

(97,949

)

(72,947

)

(91,984

)

(64,895

)

(51,584

)

(42,521

)

(32,751

)

Income before extraordinary item

 

151,285

 

109,420

 

137,975

 

97,342

 

77,375

 

61,909

 

47,130

 

Extraordinary item, net of income taxes

 

 

 

(1,554

)

 

 

(11,437

)

 

Net income

 

151,285

 

109,420

 

136,421

 

97,342

 

77,375

 

50,472

 

47,130

 

Earnings per common share(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

1.69

 

1.29

 

1.62

 

1.33

 

1.07

 

0.85

 

0.63

 

Extraordinary item

 

 

 

(0.02

)

 

 

(0.16

)

 

Earnings per common share - basic

 

1.69

 

1.29

 

1.60

 

1.33

 

1.07

 

0.69

 

0.63

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

1.63

 

1.26

 

1.57

 

1.30

 

1.05

 

0.82

 

0.62

 

Extraordinary item

 

 

 

(0.02

)

 

 

(0.15

)

 

Earnings per common share - diluted

 

1.63

 

1.26

 

1.55

 

1.30

 

1.05

 

0.67

 

0.62

 

 

38



 

 

 

For the Nine Months
Ended 30 November

 

For the Fiscal Years Ended

 

 

 

2002

 

2001

 

28 Feb.
2002

 

28 Feb.
2001

 

29 Feb.
2000

 

28 Feb.
1999

 

28 Feb.
1998

 

 

 

(in US$ and thousands, except per share data)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash investments

 

29,936

 

9,454

 

8,961

 

145,672

 

34,308

 

27,645

 

1,232

 

Accounts receivable, net

 

479,662

 

473,835

 

383,922

 

314,262

 

291,108

 

260,433

 

142,615

 

Inventories, net

 

880,149

 

831,889

 

777,586

 

670,018

 

615,700

 

508,571

 

411,424

 

Prepaid expenses and other current assets

 

76,165

 

72,175

 

60,779

 

61,037

 

54,881

 

59,090

 

26,463

 

Total current assets

 

1,465,912

 

1,387,353

 

1,231,248

 

1,190,989

 

995,997

 

855,739

 

581,734

 

Property, plant and equipment, net

 

599,153

 

561,667

 

578,764

 

548,614

 

542,971

 

428,803

 

244,035

 

Goodwill, intangible assets (net), and other assets

 

1,275,338

 

1,178,471

 

1,259,373

 

772,566

 

809,823

 

509,234

 

264,786

 

Total assets

 

3,340,403

 

3,127,491

 

3,069,385

 

2,512,169

 

2,348,791

 

1,793,776

 

1,090,555

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

5,198

 

159,493

 

54,775

 

4,184

 

28,134

 

87,728

 

91,900

 

Current maturities of long-term debt

 

83,338

 

80,039

 

81,609

 

54,176

 

52,653

 

6,005

 

24,118

 

Accounts payable

 

217,715

 

217,550

 

153,433

 

114,793

 

122,213

 

122,746

 

52,055

 

Accrued excise taxes

 

52,615

 

49,977

 

60,238

 

55,954

 

30,446

 

49,342

 

17,498

 

Other accrued expenses and liabilities

 

352,583

 

290,482

 

245,155

 

198,053

 

204,771

 

149,451

 

104,896

 

Total current liabilities

 

711,449

 

797,541

 

595,210

 

427,160

 

438,217

 

415,272

 

290,467

 

Long term debt, less current maturities

 

1,265,574

 

1,259,088

 

1,293,183

 

1,307,437

 

1,237,135

 

831,689

 

309,218

 

Deferred income taxes

 

151,293

 

131,953

 

163,146

 

131,974

 

116,447

 

88,179

 

59,237

 

Other liabilities

 

64,171

 

33,628

 

62,110

 

29,330

 

36,152

 

23,364

 

6,206

 

Total stockholders’ equity

 

1,147,916

 

905,281

 

955,736

 

616,268

 

520,840

 

435,272

 

425,427

 

Total liabilities and stockholders’ equity

 

3,340,403

 

3,127,491

 

3,069,385

 

2,512,169

 

2,348,791

 

1,793,776

 

1,090,555

 

 


(1)  During each of May 2002 and May 2001 Constellation effected two-for-one stock splits of both Constellation Shares and Constellation B Shares.  All share and per share amounts have been retroactively restated to give effect to the common stock splits.

 

3.5                               Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

(a)     Introduction

 

Constellation is a leader in the production and marketing of beverage alcohol brands in North America and the United Kingdom. As the second largest supplier of wine, the second largest marketer of imported beer and the third largest supplier of distilled spirits, Constellation is the largest single-source supplier of these products in the United States. In the United Kingdom, Constellation is a leading producer and marketer of wine and cider and a leading independent drinks wholesaler.

 

Constellation reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider, and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items).

 

The following discussion and analysis summarises the significant factors affecting (i) consolidated results of operations of Constellation for the nine months ended 30 November 2002 (“Nine Months Ended 30 November 2002”), compared to the nine months ended 30 November 2001 (“Nine Months Ended 30 November 2001”), (ii) consolidated results of operations of Constellation for the year ended 28 February 2002 (“Fiscal 2002”), compared to the year ended 28 February 2001 (“Fiscal 2001”), and (iii) aspects of Constellation’s financial liquidity and capital resources as at 30 November 2002, for the Nine Months Ended 30 November 2002 and for Fiscal 2002. This discussion and analysis should be read in conjunction with Constellation’s Consolidated Financial Statements and notes thereto included in this Scheme Booklet as Annexure 1 herein.

 

As further discussed in the notes to Constellation’s Consolidated Financial Statements and under the heading “Accounting Pronouncements” below in this Section 3, Constellation adopted SFAS No. 142 and EITF No. 01-09 on 1 March 2002.

 

During April 2002, the Board of Directors of Constellation approved a two-for-one stock split of both Constellation Shares and Constellation B Shares, which was distributed in the form of a stock dividend on 13 May 2002, to stockholders of record on 30 April 2002. All share and per share amounts have been retroactively restated to give effect to the common stock split.

 

39



 

 

(b)     Recent Acquisitions and Joint Venture with BRL Hardy

 

Acquisition of Ravenswood Winery

 

On 2 July 2001, Constellation acquired all of the outstanding capital stock of Ravenswood Winery, Inc. (the “Ravenswood Acquisition”), a leading premium wine producer based in Sonoma, California. On 30 June 2002, Ravenswood Winery, Inc. was merged into Franciscan Estates (a direct wholly owned subsidiary of Constellation). The Ravenswood business produces, markets and sells super-premium and ultra-premium California wine primarily under the Ravenswood brand name. The vast majority of wine the Ravenswood business produces and sells is red wine, including the number one super-premium Zinfandel in the United States. The results of operations of the Ravenswood business are reported in the Fine Wine segment and have been included in the consolidated results of operations of Constellation since the date of acquisition.

 

Acquisition of the Corus Assets

 

On 26 March 2001, in an asset acquisition, Constellation acquired certain wine brands, wineries, working capital (primarily inventories), and other related assets from Corus Brands, Inc. (the “Corus Assets”). In this acquisition, Constellation acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. In connection with the transaction, Constellation also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The results of operations of the Corus Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of Constellation since the date of acquisition.

 

Acquisition of the Turner Road Vintners Assets

 

On 5 March 2001, in an asset acquisition, Constellation acquired several well-known premium wine brands, including Vendange, Nathanson Creek, Heritage, and Talus, working capital (primarily inventories), two wineries in California, and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners Group (the “Turner Road Vintners Assets”). The results of operations of the Turner Road Vintners Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of Constellation since the date of acquisition.

 

Acquisition of Forth Wines

 

On 27 October 2000, Constellation acquired all of the issued Ordinary Shares and Preference Shares of Forth Wines Limited (“Forth Wines”). The results of operations of Forth Wines are reported in the U.K. Brands and Wholesale segment and have been included in the consolidated results of operations of Constellation since the date of acquisition.

 

Acquisitions of Franciscan Estates and Simi

 

On 4 June 1999, Constellation purchased all of the outstanding capital stock of Franciscan Estates and, in related transactions, purchased vineyards, equipment and other vineyard related assets located in Northern California (collectively the “Franciscan Acquisition”). Also on 4 June 1999, Constellation purchased all of the outstanding capital stock of Simi. (The acquisition of the capital stock of Simi is hereafter referred to as the “Simi Acquisition”.)

 

The Simi Acquisition included the Simi winery (located in Healdsburg, California), equipment, vineyards, inventory and worldwide ownership of the Simi brand name. The results of operations from the Franciscan and Simi Acquisitions (collectively, “Franciscan”) are reported together in the Fine Wine segment and have been included in the consolidated results of operation of Constellation since the date of acquisition. On 29 February 2000, Simi was merged into Franciscan Estates.

 

Acquisition of the Black Velvet Assets

 

On 9 April 1999, in an asset acquisition, Constellation acquired several well-known Canadian whisky brands, including Black Velvet, production facilities located in Alberta and Quebec, Canada, case goods and bulk whisky inventories and other related assets from affiliates of Diageo plc (collectively, the “Black Velvet Assets”). In connection with the transaction, Constellation also entered into multi-year agreements with affiliates of Diageo plc to provide packaging and distilling services for various brands retained by the Diageo plc affiliates. The results of operations from the Black Velvet Assets are reported in the Imported Beer and Spirits segment and have been included in the consolidated results of operations of Constellation since the date of acquisition.

 

Pacific Wine Partners

 

On 31 July 2001, Constellation and BRL Hardy completed the formation of Pacific Wine Partners LLC (“PWP”), a joint venture owned equally by Constellation and BRL Hardy. On 16 October 2001, Constellation announced that PWP completed the purchase of certain assets of Blackstone Winery, including the Blackstone brand and the Codera wine business in Sonoma County. The investment in PWP is accounted for using the equity method.

Accordingly, the results of operations of PWP since 31 July 2001 have been included in the equity in earnings of joint venture line in the Consolidated Statements of Income of Constellation.

 

(c)     Results of Operations

 

(i)     Nine Months Ended 30 November 2002 Compared To Nine Months Ended 30 November 2001

 

Net Sales

 

The following table sets forth the net sales (in thousands of U.S. dollars) by operating segment of Constellation for Nine Months Ended 30 November 2002 and Nine Months Ended 30 November 2001.

 

40



 

Nine Months Ended 30 November 2002 Compared to Nine Months Ended

30 November 2001

 

Net Sales

 

 

 

Nine Months Ended
30 November 2002

 

Nine Months Ended
30 November 2001

 

%Increase/
(Decrease)

 

Popular & Premium Wine:

 

 

 

 

 

 

 

Branded:

 

 

 

 

 

 

 

External customers

 

510,882

 

520,627

 

(1.8

)%

Intersegment

 

7,601

 

7,532

 

0.9

%

Total Branded

 

518,483

 

528,159

 

(1.8

)%

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

External customers

 

33,924

 

46,240

 

(26.6

)%

Intersegment

 

8,881

 

10,413

 

(14.7

)%

Total Other

 

42,805

 

56,653

 

(24.4

)%

Popular and Premium Wine net sales

 

561,288

 

584,812

 

(4.0

)%

 

 

 

 

 

 

 

 

Imported Beer and Spirits:

 

 

 

 

 

 

 

Imported Beer

 

615,098

 

570,178

 

7.9

%

Spirits

 

219,381

 

214,430

 

2.3

%

Imported Beer and Spirits net sales

 

834,479

 

784,608

 

6.4

%

 

 

 

 

 

 

 

 

U.K. Brands & Wholesale:

 

 

 

 

 

 

 

Branded:

 

 

 

 

 

 

 

External customers

 

179,563

 

177,037

 

1.4

%

Intersegment

 

151

 

481

 

(68.6

)%

Total Branded

 

179,714

 

177,518

 

1.2

%

Wholesale

 

408,795

 

366,312

 

11.6

%

U.K. Brands and Wholesale net sales

 

588,509

 

543,830

 

8.2

%

 

 

 

 

 

 

 

 

Fine Wine:

 

 

 

 

 

 

 

External customers

 

110,935

 

94,589

 

17.3

%

Intersegment

 

1,092

 

516

 

111.6

%

Fine Wine net sales

 

112,027

 

95,105

 

17.8

%

 

 

 

 

 

 

 

 

Corporate Operations and Other

 

 

 

N/A

 

Intersegment eliminations

 

(17,725

)

(18,942

)

(6.4

)%

Consolidated Net Sales

 

2,078,578

 

1,989,413

 

4.5

%

 

Net sales for Nine Months Ended 30 November 2002 increased to US$2,078.6 million from US$1,989.4 million for Nine Months Ended 30 November 2001, an increase of US$89.2 million, or 4.5%. Excluding a favourable foreign currency impact of US$29.9 million, net sales increased US$59.3 million, or 3.0%, primarily from increased sales of imported beer. Also contributing to the sales growth were increases in U.K. wholesale, fine wine and spirits sales offset by lower bulk wine, grape juice concentrate, branded wine and U.K. branded sales.

 

Popular and Premium Wine

 

Net sales for the Popular and Premium Wine segment for Nine Months Ended 30 November 2002 decreased to US$561.3 million from US$584.8 million for Nine Months Ended 30 November 2001, a decrease of US$23.5 million, or (4.0)%. Other sales declined US$13.8 million, or (24.4)%, on lower bulk wine and grape juice concentrate sales. Branded sales declined US$9.7 million, or (1.8)%, on lower volume. Volumes were negatively impacted, primarily in the second quarter of Constellation’s fiscal year, as a result of increased promotional spending in the industry, which Constellation did not participate in heavily.

 

Imported Beer and Spirits

 

Net sales for the Imported Beer and Spirits segment for Nine Months Ended 30 November 2002 increased to US$834.5 million from US$784.6 million for Nine Months Ended 30 November 2001, an increase of US$49.9 million, or 6.4%. This increase resulted primarily from a US$44.9 million increase in imported beer sales. The growth in imported beer sales is primarily due to a price increase on Constellation’s Mexican beer portfolio, which took effect in the first quarter of fiscal 2003, and increased volume. Spirits sales increased US$5.0 million resulting primarily from bulk whiskey sales growth partially offset by slightly lower branded sales.

 

U.K. Brands and Wholesale

 

Net sales for the U.K. Brands and Wholesale segment for Nine Months Ended 30 November 2002 increased to US$588.5 million from US$543.8 million for Nine Months Ended 30 November 2001, an increase of US$44.7 million, or 8.2%. Excluding a favourable foreign currency impact of US$29.9 million, net sales increased US$14.8 million, or 2.7%. This increase resulted primarily from a 6.0% increase in wholesale sales due to the addition of new accounts and increased average delivery sizes, partially offset by a 4.0% decline in branded sales as a decrease in cider sales was partially offset by increases in wine sales.

 

Fine Wine

 

Net sales for the Fine Wine segment for Nine Months Ended 30 November 2002 increased to US$112.0 million from US$95.1 million for Nine Months Ended 30 November 2001, an increase of US$16.9 million, or 17.8%. This increase resulted primarily from an additional four months of sales of the brands acquired in the Ravenswood Acquisition, completed in July 2001, as well as growth primarily in the Simi brand. Excluding the additional four months of sales of US$14.1 million of the acquired brands, Fine Wine net sales increased US$2.8 million, or 3.0%, due to higher sales volumes led by Simi and Ravenswood, partially offset by higher promotional activity and a shift towards lower priced brands.

 

Gross Profit

 

Constellation’s gross profit increased to US$583.5 million for Nine Months Ended 30 November 2002 from US$532.3 million for Nine Months Ended 30 November 2001, an increase of US$51.2 million, or 9.6%. The dollar increase in gross profit resulted from higher imported beer sales, the additional four months of sales of the brands acquired in the Ravenswood Acquisition (completed in July 2001), a favourable mix of sales towards higher margin products, particularly popular and premium wine and tequila, lower average wine and spirits costs, and a favourable foreign currency impact. These increases were partially offset by higher average imported beer costs and lower concentrate and bulk wine sales. As a result of the foregoing, gross profit as a percent of net sales

 

41



increased to 28.1% for Nine Months Ended 30 November 2002 from 26.8% for Nine Months Ended 30 November 2001.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased to US$263.8 million for Nine Months Ended 30 November 2002 from US$264.5 million for Nine Months Ended 30 November 2001, a decrease of US$0.7 million, or (0.3)%. Constellation adopted SFAS No. 142 on 1 March 2002 and accordingly, stopped amortizing goodwill and other indefinite lived intangible assets. Excluding US$19.4 million of amortization expense from Nine Months Ended 30 November 2001, Constellation’s selling, general and administrative expenses increased US$18.7 million, or 7.6%. This increase resulted primarily from increased personnel costs to support Constellation’s growth and higher selling costs to support the growth in the U.K. wholesale business. Selling, general and administrative expenses as a percent of net sales decreased to 12.7% for Nine Months Ended 30 November 2002 as compared to 13.3% for Nine Months Ended 30 November 2001. Excluding amortization expense in Nine Months Ended 30 November 2001, selling, general and administrative expenses as a percent of net sales increased to 12.7% for Nine Months Ended 30 November 2002 as compared to 12.3% for Nine Months Ended 30 November 2001. This increase was primarily due to (i) the percent increase in general and administrative expenses growing at a faster rate than the percent change in the Corporate Operations and Other, Popular and Premium Wine and U.K. Brands and Wholesale segments’ net sales, and (ii) the percent increase in the U.K. Brands and Wholesale segment’s selling costs being greater than the percent increase in the U.K. Brands and Wholesale segment’s net sales.

 

Operating Income

 

The following table sets forth the operating income/(loss) (in thousands of U.S. dollars) by operating segment of Constellation for Nine Months Ended 30 November 2002 and Nine Months Ended 30 November 2001.

 

Nine Months Ended 30 November 2002

 

Compared to Nine Months Ended 30 November 2001

 

Operating Income/(Loss)

 

 

 

Nine Months Ended
30 November 2002

 

Nine Months Ended
30 November 2001

 

%Increase

 

Popular & Premium Wine

 

79,808

 

75,706

 

5.4

%

 

 

 

 

 

 

 

 

Imported Beer & Spirits

 

175,548

 

143,234

 

22.6

%

 

 

 

 

 

 

 

 

U.K. Brands & Wholesale

 

46,418

 

40,157

 

15.6

%

 

 

 

 

 

 

 

 

Fine Wine

 

40,286

 

28,315

 

42.3

%

 

 

 

 

 

 

 

 

Corporate Operations and Other

 

(22,425

)

(19,665

)

14.0

%

Consolidated Operating Income

 

319,635

 

267,747

 

19.4

%

 

As a result of the above factors, consolidated operating income increased to US$319.6 million for Nine Months Ended 30 November 2002 from US$267.7 million for Nine Months Ended 30 November 2001, an increase of US$51.9 million, or 19.4%. Excluding amortization expense for Nine Months Ended 30 November 2001, operating income for Popular and Premium Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine would have been US$81.3 million, US$149.4 million, US$44.6 million and US$31.5 million, respectively. Further, consolidated operating income would have been US$287.1 million.

 

Interest Expense, Net

 

Net interest expense decreased to US$80.5 million for Nine Months Ended 30 November 2002 from US$86.4 million for Nine Months Ended 30 November 2001, a decrease of US$5.9 million, or (6.8)%. The decrease resulted from both a decrease in the average interest rate and a decrease in the average borrowings for the period.

 

Net Income

 

As a result of the above factors, net income increased to US$151.3 million for Nine Months Ended 30 November 2002 from US$109.4 million for Nine Months Ended 30 November 2001, an increase of US$41.9 million, or 38.3%. Excluding amortization expense and the associated income tax benefit for Nine Months Ended 30 November 2001, net income increased US$28.2 million, or 22.9%.

 

(ii)    Fiscal 2002 Compared To Fiscal 2001

 

Net Sales

 

The following table sets forth the net sales (in thousands of U.S. dollars) by operating segment of Constellation for Fiscal 2002 and Fiscal 2001.

 

42



 

Fiscal 2002 Compared to Fiscal 2001

 

Net Sales

 

 

 

2002

 

2001

 

%Increase
(Decrease)

 

Popular & Premium Wine:

 

 

 

 

 

 

 

Branded:

 

 

 

 

 

 

 

External customers

 

781,662

 

603,948

 

29.4

%

Intersegment

 

9,669

 

6,451

 

49.9

%

Total Branded

 

791,331

 

610,399

 

29.6

%

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

External customers

 

57,718

 

64,799

 

(10.9

)%

Intersegment

 

13,751

 

16,562

 

(17.0

)%

Total Other

 

71,469

 

81,361

 

(12.2

)%

 

 

 

 

 

 

 

 

Popular & Premium Wine net sales

 

862,800

 

691,760

 

24.7

%

 

 

 

 

 

 

 

 

Imported Beer & Spirits:

 

 

 

 

 

 

 

Beer

 

758,800

 

659,371

 

15.1

%

Spirits

 

288,568

 

285,743

 

1.0

%

 

 

 

 

 

 

 

 

Imported Beer & Spirits net sales

 

1,047,368

 

945,114

 

10.8

%

 

 

 

 

 

 

 

 

U.K. Brands & Wholesale:

 

 

 

 

 

 

 

Branded:

 

 

 

 

 

 

 

External customers

 

296,770

 

285,717

 

3.9

%

Intersegment

 

574

 

1,193

 

(51.9

)%

Total Branded

 

297,344

 

286,910

 

3.6

%

Wholesale

 

495,549

 

404,209

 

22.6

%

 

 

 

 

 

 

 

 

U.K. Brands & Wholesale net sales

 

792,893

 

691,119

 

14.7

%

 

 

 

 

 

 

 

 

Fine Wine:

 

 

 

 

 

 

 

External customers

 

141,436

 

92,898

 

52.2

%

Intersegment

 

753

 

217

 

247.0

%

 

 

 

 

 

 

 

 

Fine Wine net sales

 

142,189

 

93,115

 

52.7

%

 

 

 

 

 

 

 

 

Corporate Operations & Other

 

 

 

N/A

 

 

 

 

 

 

 

 

 

Intersegment eliminations

 

(24,747

)

(24,423

)

1.3

%