Treasury Wine Estates eyes three-way split

Treasury Wine Estates is investigating a three-way split of its global operations, splintering more than $7bn in wine assets.

Treasury chief executive Tim Ford: the winemaker is reeling from heavy tariffs imposed by the Chinese government. Picture: Aaron Francis

Treasury Wine Estates is investigating a three-way split of its global operations to create a stand-alone US business, a premium winemaker called Treasury Premium Products and a commercial wine company, splintering more than $7bn in wine assets originally brought together under the old Foster’s Group.

The proposal, under examination at the most senior executive ranks of Treasury Wine, is yet to be finalised or signed off by the board of directors but is well advanced and a proposal could be unveiled when the winemaker releases its half-year results in next week.

In a response on Monday to The Australian’s story, Treasury Wine reiterated an announcement at its AGM in November that it had formally paused work on a potential demerger of Penfolds and said: “Further that it is not currently considering a demerger of any brands/businesses within its portfolio.”

However it added: “TWE is assessing internal operating models to deliver long term value through a separate focus across its brand portfolios. These assessments remain ongoing and TWE has no further announcements to make at this stage.”

Already key local Treasury Wine executives have been sounded out about their future with the winemaker that will involve them joining either the structurally separated luxury wine business or switching to the commercial side of the business.

It is believed Treasury Wine is also looking to appoint three new leaders that would each run the newly created winemakers, although how they would then report into the chief executive and the board is unclear.

If approved by the board and blessed by investors it would see the unravelling of more than 20 years of deals by former brewing powerhouse Foster’s that included the purchase of Beringer in the US and later Southcorp, which owned luxury brand Penfolds, and which was subsequently demerged from beer in 2011 to form Treasury Wine.

The impetus for the quickening pace of Treasury Wine now contemplating a structural separation as a precursor to a possible full demerger is unknown, but comes at a time when the winemaker faces the biggest challenge in its corporate history, triggered by punishing tariffs slapped on local winemakers by the Chinese government in November that will almost destroy Treasury’s most profitable export market.

As far back as when Treasury Wine was born in 2011, the idea of a demerger of its luxury wines and commercial wines — internally referred to as ‘lux-co’ and ‘comm-co’ — has been rattling around its Melbourne headquarters. In 2020 as the COVID-19 pandemic emerged, the outgoing Treasury Wine chief executive Michael Clarke unveiled a plan to demerge the flagship Penfolds brand from the rest of the company, leaving a rump of commercial wines, and giving both newly formed companies the chance to pursue their own strategic priorities.

Treasury Wine Estates is mulling a three way split which would see its premium Penfolds business housed in a new structure. Picture: Matt Turner

The crushing Chinese import tariffs of 169 per cent slapped on all Australian wines from November saw that demerger proposal paused as the company scrambled to react to the demolition of its China business, which was believed to be worth around $4bn and which contributed around 40 per cent of the group’s earnings.

However, under recently appointed chief executive Tim Ford the separation and demerger idea has been embraced with a new sense of life, as well as urgency, and now widened to investigate splitting Treasury Wine into three independent winemakers rather than simply demerging Penfolds.

A spokeswoman for Treasury Wine told The Australian the company was investigating its operational structure to maximise shareholder value.

“As previously advised, Treasury Wine has been actively assessing internal operating model and structure options to deliver value through a more defined separate focus across our brand portfolios and regional businesses as the platform for the next phase of growth.

“This builds on the work undertaken on the Penfolds demerger which was formally paused in November 2020.”

The next phase of growth for Treasury Wine looks bleak given in 2021 it will likely see its sales in China evaporate and other parts of the business hurt by the global pandemic.

The Penfolds demerger set in train by Mr Clarke was put on the backburner by the pandemic and later the imposition of harsh Chinese tariffs, but Mr Ford told The Australian in August when he issued the company’s full-year results he still saw value in the concept of a demerger.

“What has become clear is that there is value to be created out of separate focus between Penfolds and the rest of our portfolio,” he told The Australian at the time.

“However from a time-frame point view we are focusing (on making sure) … we work through the pandemic period and recover the business to the point we want to.’’

The three-way demerger, a step further than Mr Clarke’s plan, comes with the added bonus of creating a leading stand-alone US winemaker with assets spread across California’s Napa Valley and centred on the almost 150 year old Beringer winery.

Foster’s bought Beringer for $2.9bn in 2000 under then Foster’s boss Ted Kunkel, combining it with its Mildara Blass wine business to create the largest premium wine company in the world.

However, the big US dreams were never realised and subsequent Foster’s CEOs and boards were forced to swallow hundreds and millions of dollars in writedowns and impairments.

The US business has recovered in the last few years, although it did report a 37 per cent decline in pre-tax earnings to $147.3m for fiscal 2020 due to the pandemic, and could be an enticing acquisition for US private equity or other investors looking to grab the biggest winemaker in North America.

The prize in a potential three-way demerger would be the flagship luxury business based around Penfolds and a few other select premium labels, but with China now shut-out as a customer it does place a question mark over the value of the luxury arm. Penfolds comprises about 10 per cent of Treasury Wines’s volume but more than 50 per cent of group earnings.

Shares in Treasury closed on Friday at $9.97. They are up only 16 per cent from the depths of the market crash last March, compared to the broader ASX 200 which is up some 50 per cent.