Is Penfolds demerger a self-serving tipple into the market?

While a Penfolds split has been on the agenda for some years now the market will wonder whether the loss of the star division will rob the rest of the company of its main draw card. Picture: Supplied

The obvious question which nobody answered on Wednesday was whether TWE rushed its Penfolds demerger news into the market ahead of a potential bid for the company.

As with many things when TWE boss Michael Clarke is involved, scepticism is invited and the obvious response is with Clarke going in July he wants to keep the stock price buoyant ahead of his departure.

The Penfolds announcement was rushed even though insiders say it’s a done deal.

The division accounts for just 10 per cent of TWE’s volume but around 65 per cent of earnings.

Bank America thinks on its own it could value by the market as much as $12bn against the present market value for TWE at $7.6bn.

Those sort of imbalances invite private equity interest.

JP Morgan analyst Shaun Cousins noted the company went out of its way to downplay earnings estimates for both China and the US, the former being a previous star performer.

Once again, it’s better to go into any bid with “realistic” market estimates.

The cynical response says Wednesday’s briefing was all about keeping the stock price up ahead of Clarke’s departure.

Treasury Wine CEO Michael Clarke. Picture: Stefan Postles

But we should give chair Paul Rayner more credit than that because even though the Penfolds demerger will take some time, he is not about to trot it out the day before Easter just to satisfy Clarke’s ego.

The outgoing chief has done a stellar job at the company given the stock price was well below $4 when he started six years ago. It is a vastly different company today and the Penfolds demerger would be a fitting farewell.

Clarke is a past master at talking up the stock price but consecutive downgrades and management changes dented that ability.

While a Penfolds split has been on the agenda for some years now the market will wonder whether the loss of the star division will rob the rest of the company of its main draw card and hence potentially doom its operating performance.

Suffice it to say the company will downplay that risk and new boss Tim Ford will play up more work on supply chain management and ridding the company of low-end wines as part of the reorganisation.

Treasury Wine Estates’ Tim Ford. Picture: Rachael Dere

BA had already cut earnings estimates for this year to $403m, below the $420m reported last year and 2021 earnings are said to be closer to $470m than the $565m previously forecast.

These reflect the impact of the virus on China and the US.

TWE chair Rayner now has his cards on the table and made clear he wants to do the Penfolds split without letting a private equity player take the glory.

Ironically, Clarke was appointed to TWE as the company was rejecting a $4.70 a share bid from KKR when the market price was $3.70 a share.

The starting price on any bid would now be closer to $13.50 a share and either way mooted corporate action and confirmation of a Penfolds demerger will help keep a floor under TWE’s stock, which closed up 0.5 per cent on Wednesday at $10.61 a share.