Treasury Wine Estates bets $754m on Diageo’s luxury US wine assets

TWE has bought beverage giant Diageo’s wine ­division for $754m to secure long-term supply of luxury American wine.

TWE Treasury Wine Estate CEO Michael Clarke

Treasury Wine Estates boss ­Michael Clarke will bet his reputation on finally purging the winemaker’s awful reputation for burning billions of dollars on failed acquisitions, after buying ­beverage giant Diageo’s wine ­division for $754 million to secure long-term supply of luxury American wine.

Investors who recall a string of calamities during the Foster’s years, as well as a rocky start to Treasury Wine’s life as a stand-alone company, have also been pleasantly surprised by a rare profit upgrade, with Mr Clarke unveiling an improved financial outlook.

Robust earnings in the first quarter of fiscal 2016, driven by strong sales out of Asia and ­margin accretion across the ­business, has encouraged Treasury Wine to raise its pre-tax guidance to $270m-$290m, against market consensus of $271m.

Vowing to avoid the “megalomania” of the past when Treasury Wine was owned by brewer ­Foster’s and spent $2.9 billion on US winery Beringer in 2000, and ­followed that up eight years later with the $3.7bn purchase of winemaker Southcorp, Mr Clarke said his deal was the right strategic fit and would be earnings accretive in its first year.

“The big difference is I have made sure strategically this was the right fit, otherwise I wasn’t going to go for it, and I don’t think that was always the case in the past (under Foster’s) where I think people had tried to be megalomaniacs by getting bigger for the sake of being big,’’ Mr Clarke told The Australian yesterday. The acquisition will drive annual cash synergies of at least $US25m ($34m) before 2020.

Acutely aware of the sins of the past, Mr Clarke beat the drum to investors yesterday, arguing his purchase of Diageo’s main wine assets was set at an earnings ­multiple of 7.9 times the businesses’ 2015 pre-tax earnings, but was even lower when considering other wine assets included in the acquisition. “People in the past paid pretty high multiples for those businesses, 16 times multiples, even higher, and this deal is effectively at a five times multiple and we are getting a bottling facility as well that I would have had to go and buy or build, so I am very happy,” he said.

Marking the biggest deal of his 19-month tenure as CEO of the world’s biggest listed winemaker, Mr Clarke said the purchase would ensure Treasury Wine had access to high-margin luxury wine well into 2020 and beyond.

The deal will be paid for via a fully underwritten two-for-15 renounceable entitlement offer priced at $5.60 a share to raise $486m, with the balance funded through debt. Shares in Treasury Wine were in a trading halt and last traded at $6.57.

Diageo Wine is a leading player in both the US luxury wine segment as well as the middle-priced sector, described within the industry as “masstige’’, being the owner of a collection of iconic wine brands based in California’s Napa Valley.

The key brands Treasury Wine will add to its portfolio will include Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt, with the Diageo US wine operation comprising roughly 4 million cases of wine for fiscal 2015. Such was ­Diageo’s eagerness to exit the wine category completely, and focus on its spirit and beer brands such as Smirnoff and Johnnie Walker, it also threw into the deal its Blossom Hill wine brand in Britain.

But Mr Clarke’s focus remains on luxury and masstige wine, hinting that Treasury Wine could be considering a demerger of its highly profitable premium wine business, led by brands Penfold’s and Wolf Blass, and its rump commercial wine portfolio. “It will make the commercial business a lot more attractive to someone outside the company.”

The Diageo deal was also “capital light’’ Mr Clarke said, a break from the past when the ­acquisition of Beringer and Southcorp brought billions of ­dollars worth of infrastructure and capital onto the balance sheet, with only 2 per cent of acreage actually owned by Diageo.

He said the key to the deal was securing consistent and quality supply of luxury US wine, which Mr Clarke believed he could easily sell both in the Americas as well as worldwide.

“I am very clear on our revenue synergies, I know that this wine is not only going to be sold in America where I can get full margin on it, I’m also going to sell it in other regions like Asia, and I will get even better margins on that there.”