Australian wine company Evans & Tate has suffered acutely as grape oversupply and weak exports have combined to hit the Australian wine industry hard. David Robertson reports on the company's woes and assesses the particular pressure that such mid-sized wineries are under in the current crisis.

Like many of Australia's premier wine makers, Evans & Tate has taken a battering in recent months as the full extent of the company's grape oversupply problem has become apparent.

The West Australian- based winery, which makes the E&T Margaret River, Redbrook, Cranswick and Barramundi labels, faces a daunting future with a market capitalisation hovering around A$40m but debts of over A$100m.
In June, the winery's banker, ANZ, "recommended" that the company hire a division of the insolvency specialists KordaMentha. Then, last month, ANZ linked a A$10m credit extension to the departure of chief executive Franklin Tate from day-to-day management.

Franklin Tate, whose parents founded the winery, will continue as non-executive chairman and brand ambassador, but being forced out of the top job by his bankers must have been an enormous blow to this respected member of Australia's wine community - and his departure demonstrates just how far the Tate family's company has fallen.

E&T started its rapid growth in the late-90s with the company borrowing heavily to increase its capacity. It bought wineries and moved from its base on the Swan River in West Australia to a new facility in the Margaret River region. Between 2002 and 2004, the company increased its stock of wine from A$34m in value to A$81m. The decision to seek a A$26m stockmarket listing in 1999 confirmed E&T as one of Australia's most important wine producers.

But in recent years the Australian wine market has been struggling with flat, or limited, growth in exports and a surge in grape production that has left many wineries with far too much product and nobody to sell it to.

E&T initially seemed to have dodged this problem. Last year, Franklin Tate told investors that he could look back on 2004 "with a significant feeling of pride".
The half-year results announced in February also seemed to contain good news with record profits of A$3.7m and an increase in the dividend. Further good news appeared in May with an announcement to the stock exchange headlined: "Wine Group Outperforms Industry."

But, despite this outward optimism, the company was already in trouble.
KordaMentha's 333 Performance Management division was hired in June to help E&T restructure and the winemaker was forced to announce inventory write downs of A$8m to A$10m - nearly 10% of stock. E&T also revealed it was writing off A$4.3m goodwill from the takeover of Oakridge Vineyards in 2001. This was followed by the ousting of Franklin Tate from the chief executive's job in July.

Last week, E&T had more bad news. After crunching the numbers, the company realised that its inventory write down would cost substantially more than initially thought: A$16.5m. Its share price fell to 33c - far off its peak last year of A$1.20.
John Hopkins, E&T lead director following the departure of Franklin Tate, explained this latest setback: "Having made that announcement about the inventory write-downs in June we signalled to the market that we were about to sell a huge amount of stock and that further deteriorated the price people were willing to pay for our bulk wine. As a result it will cost us more and we updated shareholders to that effect."

E&T's problems have been caused by a grape glut that has affected all Australian wineries. But as a mid-sized winemaker, some analysts believe E&T has been particularly vulnerable because it has neither the economies of scale of a giant like Fosters-Southcorp nor the boutique appeal of a very small winery. Analysts have also suggested that if the current conditions continue, companies like E&T may find it difficult to survive and many famous names could end up being subsumed into larger drinks conglomerates.

However, not everyone believes that the mid-sized companies are doomed.
Stephen Strachan, chief executive of the Winemakers' Federation of Australia, says: "For the mid-size companies, there may be some pressure to get larger, but there are examples here in Australia of mid-sized companies that are doing very well. They are doing well because they have strong brands, they know and understand their business and they have excellent relationships with the trade and consumers. I don't subscribe to the 'Get big or get out' view."

John Hopkins of E&T agrees: "There is an intense amount of rationalisation at the top end where size does matter but I do think there is room for the mid-sized companies."

However, before E&T can attempt to carve its niche in the middle of this polarising marketplace it will have to resolve some serious challenges. Its money woes will not disappear: with half-yearly interest payments of A$7m compared with interim profits (assuming no more write downs) of about A$3.5m, the company is going to have to be very clever about how it restructures its debt.
Despite this, Strachan is optimistic that companies like E&T can survive.

"The industry has gone through a massive expansion over the last decade and is now going through the growing pains that were inevitable from that expansion. A large number of companies have undergone stock write downs because of the change in market circumstances. The key point is that the oversupply will not be around forever and as we work through it, we will be able to build margin back into the business."

There is also optimism within E&T and Hopkins insists that he is "highly confident" the company can survive. However, E&T's future will continue to be dictated by its bank in the near future and if a buyer is found for some, or all, of the company's brands then this famous winemaker could be asset-stripped.