* Constellation will retain 20 pct interest in business
* Will get cash proceeds of $230 million
* CHAMP sees global wine industry near cyclical low (Adds comments from interview with CHAMP)
By Martinne Geller and Victoria Thieberger
NEW YORK/MELBOURNE, Dec 23 (Reuters) - Constellation Brands Inc , the world's No. 1 winemaker, will sell most of its operations in Australia, Britain and South Africa to focus on its most profitable brands and shore up its balance sheet.
Australia's CHAMP Private Equity, a private equity fund based in Sydney, will pay A$230 million ($230 million) for 80 percent of Constellation's businesses in the three countries.
The deal, which sent Constellation shares up 1.5 percent, is the first in a flurry of expected mergers among wine and spirits makers, which are expected to follow the same path as their largely consolidated brewer peers.
Constellation said on Thursday it will retain a 20 percent interest in the businesses, whose brands include Hardys in Australia, Fish Hoek in South Africa and Stowells in the United Kingdom, and would also keep its brands in New Zealand, South America and continental Europe.
CHAMP said the deal comes near the cyclical low for the wine industry, and it sees strong upside for the Constellation business.
"At CHAMP we have dealt with these sorts of situations previously when most people are heading for the exit door and sometimes that's the wrong door," CHAMP Executive Chairman Bill Ferris told Reuters in a telephone interview.
"It is somewhere towards a cyclical low in this global wine sector, and the timing therefore may be sensible," Ferris added.
CHAMP's purchase of the maker of Australia's Hardy's, Leasingham and Fox Ridge wines comes when the world's top global winemakers are seeking to shed assets.
Constellation rival Brown-Forman Corp
CHALLENGING TIMES
Constellation Chief Executive Rob Sands said that despite a large-scale operation and quality wines, the businesses still faced challenging market conditions and were not consistent with the company's new strategy of improving margins by focusing on its premium labels such as Robert Mondavi, Ravenswood and Clos du Bois.
"The divestiture of these operations comes as no surprise as management has indicated their focus on the most profitable, prominent core brands," said UBS analyst Kaumil Gajrawala. Constellation also owns Svedka vodka and sells Corona beer through a joint venture with Mexico's Grupo Modelo .
Many wine businesses have been struggling as a glut of grapes flooded the market and depressed prices. Swings in supply and demand have often plagued Australia, where a drought in recent years put a cap on an earlier glut.
Aside from the difficulty of growing grapes and the dependency on weather, the hundreds of brands on the market make it hard for wine makers to increase their profits by raising prices, a strategy often used by beer and spirits makers. A surge in the popularity of cocktails in recent years has also boosted sales of drinks like vodka and whiskey.
In the most recent quarter, Constellation reported an operating loss of $3 million in the Australia and Europe wine segment. Higher taxes on alcoholic beverages and consolidation of distributors in Britain have also weighed on results in recent quarters.
The transaction with CHAMP values the entire business at A$290 million and includes virtually all of Constellation's Australian, UK and South African brands, wineries and vineyards, as well as its 50 percent stake in UK wholesaler Matthew Clark.
Constellation expects the deal to close by the end of January and will use the proceeds to pay down debt. It expects the deal to be neutral to earnings for fiscal 2011 and neutral to slightly dilutive for fiscal 2012.
Constellation was advised by Rothschild, which is also advising Brown-Forman.
CHAMP recently closed its third buyout fund at A$1.5 billion and currently has investments in Manassen Foods, Healthcare Australia and Golding Contractors.
Constellation shares closed up 33 cents at $22.31 on the New York Stock Exchange. They touched a 52-week high of $22.42 on Dec. 16. (A$1=$1) (Additional reporting by Paritosh Bansal; Editing by John Wallace and Lincoln Feast)