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Sunday, 26 June 2016

Better in the cellar

Aussie bid battle questions wine's standalone case

Wine may age better in the cellar than on the stock market. A bid battle for Australia’s Treasury Wine Estates – the only big listed producer – has called into question the case for standalone wine companies. The maker of Penfolds could be better-managed but a fragmented market and low brand loyalty also suggests the fruit of the vine may not be suitable for public company treatment.

Treasury Wine has opened its books to two bidders, both of which have submitted non-binding bids worth A$3.4 billion ($3.1 billion). KKR has teamed up with Rhone Capital while Reuters reports that TPG Capital is behind a rival offer. If the deal goes ahead, it will end the company’s short life as a listed company after brewer Foster’s spun it off in 2011. All the other major wine producers are part of bigger beverage groups like U.S.-based Constellation Brands, France’s Pernod Ricard, and spirits giant Diageo.

Private equity owners may be able to extract some value from Treasury Wine simply by running it better. The company’s operating margin in 2013 was almost half that of the (mostly) wine and spirits division of Constellation Brands. Poor inventory controls at its U.S. operations led to big writedowns a year ago. It has also spent too little on marketing its premium products.

It should be easier to address Treasury Wine’s problems out of the public eye. New chief executive, Michael Clarke, has promised to focus separately on the luxury and premium segment, but that might undermine Treasury Wine’s low-end mass-market business. The bigger problem, however, is that – despite its appeal as a beverage - wine remains a capital intensive, cyclical industry. Even regular mid-market consumers are less loyal to particular brands than with other alcoholic drinks, like beer.

The KKR consortium is planning to shrink Treasury Wine and may then pursue a U.S. listing of the remaining business focused on up-market brands, a source told Reuters. Pulling that off will depend on aggressive marketing. The buyout group’s successful investment in South Korea’s Oriental Brewery proved it can revive a lack-lustre drinks brand. Persuading stock market investors to buy into a pure-play listed winemaker would be equally impressive.

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Australia’s Treasury Wine Estates on Aug. 11 said that it had received a second non-binding takeover approach from a private equity investor valuing the company at A$3.38 billion ($3.1 billion).

The maker of Penfolds granted due diligence to the unnamed investor, reported by Reuters to be U.S. buyout firm TPG Capital Management.

Treasury Wine opened its books on Aug. 4 to a consortium of U.S. private equity groups KKR and Rhone Capital, after they made a non-binding offer of A$5.20 per share.

The KKR-led consortium will seek to shrink the business and consider a U.S. listing for a revamped wine company focused on upmarket labels, a source told Reuters.

Treasury Wine rejected an earlier approach worth A$4.70 per share from KKR on April 16.

Shares in Treasury Wine were trading at A$5.23 on Aug. 12 by noon in Australia. The company is due to release full-year results on Aug. 21.


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