Constellation Brands Gearing Up for GOP Border Tax

January 06, 2017


The U.S. distributor of Corona beer is already planning ways to avoid raising prices if Congress boosts the tax bill on the company’s Mexican imports as part of a broader tax overhaul, said company chief executive Rob Sands.

[VIPAL MONGA and JENNIFER MALONEY | January 5, 2017 |Wall Street Journal]

Republicans, who are set to take full control of the U.S. government later this month, are proposing to eliminate tax deductions on imports, while exempting exports. Known as a “border adjustment,”the proposal could result in higher taxes for the automotive and retail industries, according to an analysis by Ernst & Young LLP. 

Constellation Brands Inc.would consider buying more natural gas and packaging materials from the U.S., which would offset the proposal’s potential impact on imports like its Mexican beverage, according to comments company executives made during a post-earnings conference call Thursday.

Company executives said they had met with House Speaker Paul Ryan (R.,Wis), Sen. Charles Schumer (D.,N.Y.) and other legislators, who haven’t yet crafted legislation. Constellation finance chief David Klein said it is possible that, under the House Republicans’ proposal, companies wouldn’t be able to deduct costs incurred abroad against their U.S. corporate taxes, creating an incentive to make as much in the U.S. as possible.

The border-adjusted tax proposal has caused finance chiefs and tax directors across the country to examine their supply chains to see how they would fare. Some companies, including retailers and refiners, have been fighting the plan. Others, including Constellation, are looking for ways to make it work for them.

Constellation could adjust its supply chain to eventually shift the majority of its costs back into the U.S., said Mr. Sands, who stressed that for now the plans are hypothetical. The company buys natural gas in Mexico to produce glass there. Instead it could buy natural gas from the U.S. and ship it to Mexico, allowing for higher deductions. Constellation could also eventually source some packaging from the U.S., Mr. Klein said.

“We wouldn’t just totally disrupt the supply chain over the long run if it’s not necessary, but we do have quite a bit of flexibility in what we can do,” Mr. Sands said, during the conference call.

Mr. Sands, added, however, that the GOP’s plan to lower overall tax rates could offset the border adjustment.

But there is a limit to how much they can shift to the U.S., he added. “As you know, our imported Mexican brands can only be authentically produced in Mexico and sold in the U.S.”

The company still expects that any price increases on its Mexican beers would remain in the 1% to 2% a year range, based on a pricing algorithm. Mr. Sands reiterated he expects earnings growth of more than 10% over the next three years, after accounting for the impact of policy changes.

A spokeswoman declined to offer additional details on the company’s contingency plans.

Constellation paid $5.3 billion in 2013 to acquire the U.S. distribution rights for Corona, several other Mexican beers and a Mexican brewery, making it the third-largest beer seller in the U.S. with five of the top 15 most popular imports.

Concerns that President-elect Donald Trump will tighten cross-border trade prompted Constellation stock to drop 15% between October and December. Mr. Sands Thursday called the stock “undervalued” at current levels. The stock fell 7% on Thursday, to $146.75.

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