Canandaigua Brands Outlk to Stable from Pos by S&P.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 11/4/98-- Standard & Poor's today revised its ratings outlook for Canandaigua Brands Inc. to stable from positive, following the company's announcement of its intention to purchase Matthew Clark plc, a U.K.-based producer, distributor and wholesaler of alcoholic and bottled water beverages, through a debt-financed tender offer valued at about $500 million, including the assumption of debt.

At the same time, Standard & Poor's has affirmed Canandaigua's double-'B' corporate credit rating and single-'B'-plus subordinated debt rating.

About $195 million of rated debt is affected.

Ratings reflect Canandaigua's strong cash generation from a diverse portfolio of alcoholic beverage products, offset, in part, by the company's acquisitive growth strategy in recent years and the competitive nature of its markets. The Fairport, N.Y.-based company is the second-largest U.S. producer of wines, third-largest marketer of imported beer and fourth-largest supplier of distilled spirits in the U.S. The addition of Matthew Clark's three primary business lines -- cider, wine and alcoholic beverage wholesaling -- will broaden Canandaigua's business lines and existing product portfolio, as well as significantly increase the company's international revenue base.

In fiscal 1998, Canandaigua reported volume increases in all three product lines, most notably in the beer segment as a result of strong Mexican import performance, which is expected to continue. Although volatile grape costs will always be a factor in the company's business risk position, Canandaigua has demonstrated the ability in recent periods to fully absorb grape cost increases by raising wine prices. A strong calendar 1997 harvest has reduced grape costs, a trend which is likely to continue over the near term. Although the U.K. cider business is a mature and competitive market, Canandaigua's wine business will be modestly enhanced by the addition of Matthew Clark's strong presence in the growing U.K. boxed wine market with its number one Stowells of Chelsea brand. Canandaigua also expects continued growth from Matthew Clark's wholesale segment, which serves as the only national independent alcoholic beverage wholesaler in the U.K. Although this business is low margin, growth rates have been very strong in recent periods as the industry continues to consolidate.

Pro forma for the acquisition, leverage is high for the rating, with Standard & Poor's estimate of unadjusted debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of almost 4 times (x), as compared to about 2.8x in fiscal 1998. Standard & Poor's estimates that unadjusted pro forma EBITDA coverage of interest will decline to the low 3.0x area from about 4.6x in fiscal 1998. However, Standard & Poor's expects Canandaigua's strong free cash generation will be applied to debt reduction going forward, which should lead to improved credit measures over the next 18 months. Standard & Poor's does not expect any substantial share repurchases or additional sizable acquisitions over the near term.

OUTLOOK: STABLE

Standard & Poor's expects that Canandaigua will apply excess cash flow to debt reduction over the next 18 months in order to improve credit measures to those more in line with the rating category. -- CreditWire