US raider tightens grip on Treasury

PENFOLDS is set to become the latest home-grown success to fall into foreign hands, with parent Treasury Wine Estates engaging with US fund KKR.

AUSTRALIA’S top wine brand Penfolds is set to become the latest home-grown success to fall into foreign hands, with parent company Treasury Wine Estates engaging with US private equity fund KKR on a $3.4 billion takeover offer and at least one potential buyer considering a rival bid.

TWE has granted KKR and bid partner Rhone Capital, a ­private equity fund with offices in New York and London, access to its accounts for due diligence studies after the pair made an indicative offer for the company at $5.20 per share.

The offer is at the high end of what analysts suggested KKR could pay for TWE, and represents an 11 per cent premium to the $4.70-per-share offer KKR made in a stand-alone bid in April, which was rejected by TWE on the grounds that it did not reflect the fundamental value of the company.

However, investors said yesterday that the lack of approaches from any other potential buyers in the interim, as well as TWE’s ­announcement of a $260 million writedown on June 25, meant the board had little choice but to ­entertain the increased offer.

“If the board is giving it a look you would think they must be happy to accept that price — the question is whether anyone else comes in,” said one institutional investor who has recently held the stock.

“We think it’s a pretty good price, but these things have a habit of dragging people out of the woodwork.”

One analyst said buying interest was most likely to come from financial investors and Chinese food and wine groups looking to capitalise on surging Asian demand for red wine, rather than global wine companies such as Pernod Ricard and Constellation Brands.

“They wouldn’t be able to pay as much as the Chinese, and their shareholders wouldn’t have the patience for them to turn TWE around,” said the analyst, who ­declined to be named.

Rhone Capital has not previously invested in the Australian market, but is familiar with TWE chief Michael Clarke through its 18.3 per cent stake in surfwear group Quiksilver, where Mr Clarke is a director.

Market sources confirmed yesterday that a major European investment bank was working for another potential buyer of the business, which has long been ­rumoured to be on the radar of Chinese manufacturer Bright Food, owner of the Manassen Foods business in Australia.

“It makes sense that nobody would put their hand up until now, because until the board grants somebody due diligence it’s unclear what the reserve price is,” said one investment banker.

There were indications TWE wanted to portray the latest offer to shareholders as a generous one, describing it as representing a premium of 41 per cent to the $3.69 per share at which the stock closed on April 15, the day before the KKR approach.

However, TWE did not reveal KKR’s initial approach until May 20, saying it wanted to preserve confidentiality while engaged in preliminary discussions.

TWE shares closed at $4.07 on May 19, the day before the company revealed the KKR bid. Compared to that price, the new offer represents a premium of just 28 per cent, or just 15 per cent to the average share price of $4.51 over the past 12 months.

TWE shares yesterday closed up 20c at $5.15.

TWE was a takeover target even before it was spun out of former parent company Foster’s in 2011, with US private equity group Cerberus offering up to $2.7bn for the business in September 2010. But the company has become more vulnerable to predators since July last year when it announced a $160m writedown related to its US business, which cost former CEO David Dearie his job and prompted several class actions on behalf of shareholders over claims the company had not met its continuous disclosure obligations.

The situation worsened this year, with the company in February announcing a 38 per cent fall in earnings before interest and tax for the first half of the financial year, followed by a $260m writedown in June that brought total writedowns over the past 10 years to $3.3bn.

Mr Clarke has set out a turnaround strategy, including reorganising the company into separate divisions focused on high-end luxury wine and mass-market commercial wines, while flagging a major rationalisation of its “tail” of smaller and underperforming brands.

TWE is to release its annual results on August 21, when the company has forecast it will report earnings before interest and tax of between $190m and $210m, compared to $210.2m in the previous financial year.