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Monday 22 September 2014

Treasury, tough decisions, and bid battles

11th August, 2014 by Ron Emler

With offers for Treasury Wine Estates now coming thick and fast, Ron Emler looks at the reasons behind the recent flurry, and wonders what the bidders and the beleaguered wine group could have in store.

treasure-chest

Could the wine group live up to its name and be hiding some hidden treasure in its balance sheets?

When KKR’s bid for Treasury Wine Estates, Australia’s biggest wine group, was rebuffed in April, observers thought that was the end of the matter. But the US private equity giant – in concert with a second private investment group, Rhone Capital – has come back with an improved offer of £1.9bn.

And with news today that another unnamed bidder has stepped up to the mark to make an offer, what we have now is the breeding ground for a bidding war.

Both of the new bids are at AUS$5.20 per share, a 40.9% premium to Treasury’s share price on the day of the April offer.

But since April, Treasury’s shares have gone up steadily to around AUS$5. That reflects the feeling among investors that the group, at long last, may be about to turn the corner.

Chief Executive Michael Clarke, who only moved into the hot seat in March, has set his strategy for reviving the company. This includes heavy cost cutting, considerable investment behind brands such as Rosemount and Lindemans at the same time as differentiating them from mass market lines and internally separating out high end brands such as Penfolds.

That programme looks much the same as a new owner might impose following Treasury’s appalling record in 2013. It wrote down AUS$160m of excess stock in the USA, including destroying six million bottles of out-of-date wine. It also took an impairment charge of AUS$260m in an attempt to draw a line under its troubles. That is the subject of an ongoing class action.

With the balance sheet looking less fragile, there is brighter news on the trading front. Exports to China are picking up and are expected to grow strongly as the burgeoning middle class look to enjoy a better lifestyle without falling foul of the anti-extravagance regime that has beset spirits producers.

So some believe the second of KKR’s bids was timed to benefit its backers just as Treasury starts to pull itself off the floor.

Treasury's Beringer is suited for potential new owners looking to expand into the US

Treasury’s Beringer brand is suited for potential new owners looking to expand into the US

But while Clarke has ruled out selling off assets such as Beringer in the US, KKR and its unnamed rival might well seek to do so. Treasury’s plum asset is Penfolds, which generates almost 75% of the group’s profits and which has larger stocks of maturing wines to bring to the market over the next few years.

However, Beringer could be attractive to either Pernod Ricard or Constellations Brands, both of whom want to bolster their presence in the US wine market.

Neither would have finance problems if it was at the right price and while Paris has played down rumours of such an interest in recent months because Beringer “was not for sale”, the French group has not fully closed the door on the opportunity.

And, as the latest bid signifies, it remains open to others to rival KKR’s offer. While Treasury has agreed to open its books to the US buyout specialist, it has not done so exclusively. Indeed, Clarke wants due diligence to be completed within four to six weeks so that Treasury’s shareholders and workers are not too distracted from implementing his own recovery plan and moving the business forward.

If either bidder is satisfied with the numbers and does make a formal offer, Treasury’s shareholders will have to decide between its cash today or the delayed prospects of Clarke’s plans. Many have had a rough ride.

For the past decade Treasury in its guises as first Southcorp, then a division of Fosters and now as an independent company, has lurched from one disaster to another.

The new Foster's Group logo, left, beside the old logo

The new Foster’s Group logo, left, beside the old logo

Southcorp had been suffering from the long-running glut of Australian wine when it was bought by Fosters for £2bn back in 2005. The brewer had bought Beringer in the US for £1.7bn four years earlier. The plan was to combine wine and beer into joint marketing and sales operations.

That was fraught with problems that were heightened as the wine arm sailed into a perfect storm.

In an attempt to shift stock as the world slumped into recession, it slashed prices, hit already fragile profits and undermined the international market for Australian wine. At the same time the Australian dollar climbed on the back of natural resources thus making wine exports pricier. Returns suffered and Beringer’s contribution headed further south because its wines remained too expensive for US pockets.

Fosters continued to mismanage its wines, so much so that the much more profitable beer division was hamstrung by the mounting losses and itself became a takeover target, finally falling in 2013.

But before then Fosters opted to split into two separately listed companies. Even then it didn’t get the most out of the newly renamed Treasury for its shareholders. In September 2010 a US turnaround house, Cerberus Capital Management, offered £1.66bn for the wine company, but Fosters rejected the bid saying Treasury was worth £2.3bn. When Treasury eventually listed on the Sydney stock market, it was valued at £1.5bn.

So if, and it remains a significant if, either KKR and Rhone (which once bid unsuccessfully for Liverpool FC) or the nameless “global private equity firm” behind today’s bid proceed with their offer, Treasury’s shareholders have a finely balanced decision to make. After such a chequered history, do they grab the money with a sigh of relief, or do they hang on for Clarke’s plans to, perhaps, push the shares and dividends higher?

Or will others, such as China’s Bright Food Group, enter the equation with yet another rival bid and seek to put Penfolds in new hands for the sixth time since 1976?

As ever, nothing is simple at Treasury.

UPDATE 12/09/2014: The second bidder has now been named asTPG Capital, a  private investment firm based in Texas, US. 

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