Nation’s largest wine companies considered sellers of major assets

The influential Journal of Wine Economics warns Australian producers might only rebuild “a fraction’’ of the sales they enjoyed before punitive tariffs.

The brutal competition at the “affordable” end of the wine market is prompting much speculation about where the major shake-out in the sector will end up, with all three of the nation’s largest wine companies considered sellers of major assets.

And while progress towards a normalisation of the wine trade with China appears to be building momentum, the influential Journal of Wine Economics warns Australian producers might only rebuild “a fraction’’ of the sales they enjoyed before punitive tariffs all-but destroyed exports to China from late 2020.

This weakens the turnaround story for assets being packaged into deals, especially when coupled with a significant oversupply of wine.

The commodity end of the wine market, where producers are forced to compete with own-brand labels at the major retailers, have been dubbed “the killing fields” by one wine industry veteran, with margins under huge pressure if you’re able to get on the shelf at all.

Carlyle-owned Accolade Wines is understood to be very keen to keep selling down assets to chip away at its large debt pile, after offloading House of Arras and the Bay of Fires winery and cellar door earlier this year.

And Pernod Ricard Australia did nothing to hose down speculation it was looking to offload Jacob’s Creek when queried last month, putting out a statement saying it “notes the recent market rumours regarding its potential divestment of its wine activities in Australia and New Zealand’’.

“Pernod Ricard regularly assesses and evaluates its strategic opportunities and is continuously exploring options, including divestments or the streamlining of some or part of individual business units.’’

Casella Family Brands has been named by industry sources as a potential buyer of Jacob’s Creek, and the high volume, good quality brand would sit comfortably beside Casella’s other premium South Australian brands in Peter Lehmann and Brand’s Laira.

Over at Treasury Wine Estates Penfolds continues to be the main game, generating more earnings than Treasury Americas and Treasury Premium Brands combined, and growing strongly in FY23.

Treasury has been a seller of vineyards this year, and speculation is mounting once again that a split of Penfolds into its own vehicle separate to other brands such as 19 Crimes and Wolf Blass could be in the offing.

“I’m hearing they’re not happy with all of these other brands that they’ve got like Rosemount, so perhaps they’ll wrap them together into one company that they’ll sell off to private equity,’’ a source told Dataroom.

“At the low margin end if you bolted on Accolade with all of the lower-end Treasury wines all of a sudden you have significantly increased the volume and scale you have at that level.

“Accolade’s private equity owners are really shopping it around and probably looking at the next private equity company that will come in and take over.

“I’m hearing they need some of these sales to come through just to cover their interest bill.’’

Dataroom has previously reported that JPMorgan and Morgan Stanley are working for Pernod Ricard on its asset sale process, backing up after a 2019 run at a sale was shelved.

Pacific Equity Partners has been flagged as a possible buyer.

Four years ago, Pernod Ricard’s local business, which also includes New Zealand’s Brandacott Estate, was thought to be worth at least $700m or 13 times its earnings.

Meanwhile, small listed firm Australian Vintage has been undergoing a strategic review ongoing since mid-year which is yet to be finalised.

Australian Vintage shares are trading at 38c, near the lower end of their 12-month range, with revenue flat at $258.6m over the past financial year but net profit off 77 per cent to $4m.

The Tempus Two and Nepenthe owner has had success in the no and low alcohol segments, but credited “hyper-inflationary pressures” with putting an $18.4m dent in its results.

And while there are hopes the China wine market will reopen in coming months, with Chinese wine consumption itself on the slide, the industry is not pinning its hopes on a China-led revival.

Kym Anderson, writing in the Journal of Wine Economics, says China’s per capita wine consumption peaked in 2012, has fallen every year since 2017, and in 2022 was sitting at one third of its peak.

“With ministerial meetings being renewed between Australia and China in mid-2023, there is speculation as to whether China might soon remove its high tariff on Australian wine,’’ he says.

“Many imagine that if it did, that would see an immediate reduction in the excessive stocks of red wine that are accumulating in Australia as a consequence of that tariff and an eventual rebuilding of the country’s total wine exports.

“However, even if those punitive tariffs were to be removed this year, trade with China is likely to become only a fraction of what it was in the late 2010s, thanks to the recent shrinkage in the overall wine market in China – something that was exacerbated by Covid-19.”