Nearly two years after a deal was first announced, E. & J. Gallo’s mega-acquisition of 30 wine brands including Ravenswood, Mark West, Manischewitz and Clos du Bois from Constellation Brands is finally going through — though it doesn’t quite look like what the two companies initially planned.
The Federal Trade Commission objected to the original, $1.7 billion deal on the grounds that it would “substantially lessen competition in the United States” for six product categories, because the two companies control so much of the wine market.
They subsequently amended the agreement, bringing the transaction cost down to about $810 million, according to Constellation. They had to exclude sparkling wines and brandy, plus a winemaking facility, from the new deal. In a separate transaction that was initiated in 2020, Constellation is selling Gallo its Nobilo Sauvignon Blanc brand from New Zealand for $130 million.
Even in its more modest form, however, the deal still represents one of the most significant wine acquisitions in modern history. Constellation — the country’s third-largest wine producer, based in upstate New York — is essentially offloading inexpensive brands, mostly priced at $11 per bottle and under, as it attempts to focus its efforts on the premium price segment of the market, which has been steadily growing in recent years. As part of that strategy, Constellation purchased the California wine brands Booker Vineyard, Kerr Cellars (from golfer Christie Kerr) and Empathy Wines in 2020.
Meanwhile, for Gallo — the country’s largest wine producer, based in Modesto — the acquisition of brands including Arbor Mist, Black Box, Estancia, Franciscan and Hogue allows it to continue establishing dominance in the lower-price tiers, where it already performs strongly with Barefoot, Boone’s Farm and other wines.
“Research shows that most consumers enter the wine category through the under $11 category,” said Lon Gallagher, spokesperson for Gallo. “While we continue to invest in our premium and luxury wine businesses, we see a tremendous opportunity with this acquisition to bring new consumers into the wine category.” Gallo’s 2019 purchase of Pahlmeyer, a Napa winery whose wines sell for $100 and more, shows that it isn’t shying away from the higher-end wine market either.
The FTC wanted to ensure that the two companies would remain competitive with each other. To that end, it is requiring that Constellation retain its sparkling wine Cook’s for at least four years in order to compete with André, Gallo’s low-priced sparkling wine. Constellation had hoped to sell Gallo its J. Roget sparkling wine brand, but the FTC has said that Constellation must keep it for at least four years in order to compete with Gallo for the share of on-premise sparkling wine sales at places like restaurants, casinos and hotels.
Similarly, the FTC did not permit the brandy to pass from Constellation to Gallo, which has been developing a major presence in the domestic brandy market. (Among Gallo’s big moves lately was the purchase of Germain-Robin in 2017.) Instead, Constellation will sell Paul Masson to Sazerac Co. The FTC has also asked Gallo to divest two low-priced dessert wines — Sheffield Cellars and Fairbanks — to Precept Brands.
Gallo and Constellation are also the country’s two largest producers of high-color concentrates, a grape-based syrup used widely by wineries to adjust the color and flavor of wines. Constellation must now sell its concentrate business to the only other producer of concentrate in the U.S., Vie-Del Co.