Constellation Brands is in advanced talks to sell its some of its low-end wine brands to E. & J. Gallo Winery, people familiar with the situation tell CNBC.
Constellation, which also sells Corona and Modelo beers, had hoped its wine business would fetch $3 billion. However, the sale is expected to be around $2 billion or less, said one of the people. Talks, however, are still ongoing and could fall apart. Among the points being discussed are which brands will be part of the sale.
Constellation put its U.S. wine business, which includes brands like Clos du Bois, Mark West, Arbor Mist, up for sale last year as part of its push to move further into cannabis. Constellation is the third largest beer company in the United States, behind Anheuser-Busch and MillerCoors. In November, it closed a $4 billion investment in the Canadian marijuana company Canopy Growth.
Sales of non-premium wine have slowed, as millennials focus increasingly on health and alternative indulgences like cannabis. When millennials do drink, they increasingly turn to premium wine or other drinks like spirits and craft beer. In the year leading up to this past November, sales of wines below $9 at retail dropped by 9 percent, according a closely watched report by Silicon Valley Bank.
"Millennials aren't engaging with wine as hoped. They lack financial capacity, currently prefer premium spirits and craft beers, and have been slow getting into careers," the report noted.
In January, Constellation acknowledged to analysts the company has been "challenged by the lower end of [its wine] business, which in totality has been flat or down."
By contrast, its beer business has shown growth, with its Modelo brand over the past five years turning in compound annual growth of more than 20 percent.
Constellation's premium wine lines, which are priced at more than $11 per bottle, are still performing well. Those brands include Kim Crawford, Meiomi and Prisoner. New products like Meiomi Rose and Svedka Blue Raspberry are "exceeding our expectations," said Bill Newlands, who became CEO on March 1, in a recent earning call.
For privately held Gallo, the largest exporter of California wines, the deal could add to its scale
Shares of Constellation, which have a market value of $32 billion, are down 25 percent over the past year.
The people asked not to be named because the information is confidential. Both Constellation and Gallo declined to comment, citing company policies not to comment on rumors or speculation.