A lively couple of months in the global wine industry has Chris Losh jumping for joy

A lively couple of months in the global wine industry has Chris Losh jumping for joy

This month, Chris Losh not only welcomes a spate of M&A activity in the wine world, he positively bathes in it, with Treasury WIne Estates, PLB and Bibendum feeling the warmth of his spotlight.

The wine world hasn’t exactly been awash with corporate activity over the last five years. And then, suddenly, we get two stories in a month. Two stories, moreover, that sum up much of what is happening at producer and importer/distributor level, and whose success or failure over the next year or two will tell us a good deal about the current state of the wine world.

First of all, there was the Treasury Wine Estates non-sale, in which two private equity bids, each for AUD3.4bn (US$3.2bn), were tabled for the Australian giant. After a bit of humming and hahing, the shareholders rejected both deals as ‘undervaluing’ the company.

This may well have been an attempt to generate a bidding war and flush out a higher offer. But, if it was, it failed. Both prospective suitors walked away from the deal, causing Treasury’s shares to drop 8.5%, though they’ve since recovered and are currently more or less mid-way between their high and low points of the last 12 months.

So, was the offer a fair one?

Private equity firms are better known for picking off wounded members of the corporate herd, rather than pursuing healthy ones, and their offers tend to reflect this. That said, most neutral observers (including analysts at Deutsche Bank) reckoned the AUD5.20-per-share offer was not a million miles away, and the fact that neither private equity party sought to up their bid suggests this is probably right.

Certainly the bullishness of the TWE shareholders in rejecting the offers was not lacking in chutzpah. This, after all, is a company that has undergone multiple write-downs over the last three years - the latest, in June, was for AUD260m, while a year ago, it dumped AUD160m-worth of US wine.

Given this, it might seem odd that Treasury’s Chief Executive, Michael Clark, has since been making confident noises about being in the market for purchases, quoted in the Wall Street Journal as hoping that "shareholders will support us in doing bolt-on acquisitions".

It could, of course, be corporate smoke and mirrors; a way of distracting attention from a sale that went south when it perhaps shouldn’t have done. On the other hand, Clark makes the not unreasonable point that both bidders went through TWE’s books with a fine-toothed comb and found nothing there to scare the horses. 

While the demerger from Foster's Group was clearly effected so that both arms of the business could be easily sold off – indeed, Fosters was snapped up by SABMiller within a year of the split – and this (for the right price) probably remains the preferred option of the board, it’s possible that Treasury might be close to turning a corner.

The write-downs have been addressing the fact that TWE was saddled with a string of brands that were bought by the financially-incontinent Foster's Group when the market was at its peak, and that were clearly now heavily over-valued.  

And, while the US remains a disappointment, the underlying figures for the rest of the world are not bad. The company’s boast of returning to fiscal growth in 2015 looks reasonable.

The interesting questions here are:

  • Will the work that has clearly gone into restructuring the business, coupled with a return to some form of profitability, be sufficient to smoke out an increased bid, from a committed, rather than opportunistic buyer? and
  • Would any improved offer  test the company’s apparent commitment to making a go of it on its own?

Personally, I suspect we might see one more bid once the board have had time to sweat for a bit. But, I doubt it will be high enough to be acceptable, and we’ll be able to learn a lot from whether the company is able to turn itself from an over-inflated, post-millennial, corporate basket case into a genuinely profitable wine business.

Here’s hoping.

The other big business move is a regional, rather than international one, but it’s important nonetheless. Last week, Bibendum Wine merged with Private Liquor Brands in the UK, to form the country’s biggest independent drinks supplier - the imaginatively-titled Bibendum PLB - with a combined annual turnover of GBP300m (US$479m).

The deal seems to make sense. PLB has made its money supplying supermarkets; Bibendum is largely on-trade focused, so there is little overlap. The various companies will continue to trade independently, focusing on their core strengths, and there may be something to be said for becoming a one-stop shop for both on- and off-trade.

And yet, while rumours have abounded about both companies for a while, meaning that some sort of corporate activity was not entirely unexpected, it’s not entirely clear – beyond sheer size – what the real benefits might be. Yes, there will doubtless be a consolidation of back-office staff, premises etc, and yes, the company will have volume heft behind it. But, behind the press releases and PR smiles, I’d suggest that this is as much a marriage of convenience as it is a match made in heaven.

PLB has been trying (and largely failing) to establish an on-trade arm to its business for a few years, has lost several of its blue-chip wine brands following a channel-centred restructuring, and is battling in the cut-throat pile-it-high, sell-it-cheap end of the off-trade where margins are niggardly.

Bibendum, meanwhile, was badly stung by being the sole wine supplier to the London Olympics two years ago, and has spent the last decade noisily rowing away from supplying supermarkets.

Hitching itself to a company that does just that is rather like a coalition between two parties at opposite ends of the political spectrum. I’m not saying that the deal won’t work out, but I’m not entirely convinced that, all things being equal, either party would necessarily have looked for it. Either way, its success (or otherwise) will tell us a good deal about the nature of the UK market: Whether bigger is always better, whether other large distributors will go to the wall or merge in response, and whether smaller, more niched companies will grow in the long shadows thrown by this new arrival.

What is certain is that, after five years of tumbleweed, it’s good to have a couple of stories to keep an eye on.

Watch this space…