Treasury Wine Estates (TWE) is expanding its already substantial US business by acquiring most of the wine operations of beverages giant Diageo for $754 million, and will pay for the purchase with a 2-for-15 rights issue to raise $486 million.
The acquisition will be partially funded by the fully underwritten accelerated renounceable entitle offer at an offer price of $5.60 share, well under the $6.57 the shares were trading at on Tuesday, before the deal was announced first thing yesterday.
The new issue price is also well above the $5.20 a share that private equity wanted to buy Treasury for in early 2014 – a good indication of how far the company has come under the CEO Michael Clarke and the new look management team and board in the past 19 months.
And the acquisition might see a further change at Treasury with Mr Clarke hinting at a likely split of the company into a luxury wine business led by Penfolds, Wolf Blass and Wynns, and a separate one focused on lower-end commercial wine brands which may be sold off. But no timeframe was given and it remains a futiure option and no more.
Treasury will outlay $754 million in cash for the Diageo wine business in the US-based Chateau and Estate Wines, and UK-based Percy Fox, and will also assume $66 million in capitalised leases from the business. All up Treasury will control 100 wine labels.
It was only last week that Treasury revealed plans to cut a further $30 million in costs from the next couple of years and gave a strong hint of a looming profit upgrade, thanks to solid sales growth in Asia. Yesterday we saw that upgrade thanks to growth in Asia. Symbolically, the company is due to launch its flagship Penfolds Grange wine in Shanghai next Monday.
Treasury owns brands including Penfolds, Wolf Blass and Rosemount in Australia and will add Diageo’s US brands including Sterling Vineyards, Beaulieu Vineyards, Acacia, Provenance and Hewitt. It has a dozen labels in the US including Beringer Vineyards, Greg Norman Estates, Etude, Sledgehammer, Meridian and Stags leap.
And the big-selling lower-end commercial wine brand, Blossom Hill, which is the No.1 selling brand in the UK, selling around 5 million cases of wine each year.
TWE 1Y – Treasury Wine to buy Diageo UK, US wines
Mr Clarke said in a statement yesterday that Treasury has picked up the Diageo business at a good multiple of 7.9 times earnings for the wine business for 2014-15.
But some analysts and investors with long memories will be wary about the purchase of the US brands (especially Blossom Hill) after the poor performance of the company’s previous foray into the US in the Beringer Wines purchase when Treasury was part of the old Fosters grog group under then CEO Ted Kunkel.
Foster’s Group paid a a whacking $3 billion 15 years ago for the Beringer wine business in California and over the years it has been a major drain on returns and has been at the centre of large write-downs.
Treasury was split off from Foster’s into a stand-alone wine company in May 2011 and has had troubles with poor management, especially in the US, unsold wine stocks and indifferent marketing.
But since Mr Clarke arrived more than a year ago he has stabilised the company, cut costs and management, revamped the brands into a collection of major labels and minor and tried (mostly unsuccessfully) to rationalise wineries and brands).
Mr Clarke says the acquisition will deliver more grunt to Treasury’s plans to become a bigger player in the higher-end luxury wine market in the US.
“The acquisition will transform our US business into a larger player of scale in the high-growth US market for luxury and lower cost, premium wines," Mr Clarke said in the statement.
The acquisition came as Treasury also announced a profit upgrade because of strong sales in the first few months of the new financial year. It now expects earnings before interest, tax and the SGARA accounting standard to be between $270 million to $290 million for 2015-16.
Mr Clarke says the Diageo acquisition should deliver annual cash synergies of $34 million before 2019-2020.
Diageo had been looking to sell its wine business because it was small in comparison to its much bigger spirits and beer operations, which sell brands including Johnnie Walker, Guinness Beer, Gordon’s Gin, Bailey’s Liquor, Smirnoff Vodka and Captain Morgan rum. The wine division represented only 4% of Diageo’s total sales revenue. Diageo’s major Australian business is Bundabderg rum.
The US brands produce about 4 million cases of wine annually.
