M&A Watch - Counter-Bid Seals Fate for Treasury Wine Estates
Has the second bid for Treasury Wine Estates sealed its fate?
Earlier this Summer, I argued that TWE's shareholders should sell out to Kohlberg Kravis Roberts & Co (KKR), on the basis that long-term structural changes in the global wine market are unfavourable to TWE's business model. With KKR's revised bid with Rhone Capital now valuing the company at 14x EBITDA, the case for cashing in is very compelling.
But, why the competing bid from another private equity group earlier today?
Valuation fully attractive …
KKR's revised joint offer with Rhone Capital is up by just over x1 EBITDA from its initial, sole offer back in May. We believe this to be full now; especially since the business exhibits a negative growth trend and mediocre profitability.
On top of that, in June TWE announced another impairment charge - this time of US$243.6m - on its brand portfolio and other assets. Premium estates-based wine portfolios have a history of impairment, and global trends towards more commercial and flavoured fruit-based alcohol beverages won't help that.
TWE's restructuring measures appear to recognise those trends; for example, the company plans to separate its Australian commercial wines portfolio from its 'Luxury & Masstige' offerings. However, TWE's shareholders might feel that such business model changes will be best implemented by new owners.
... surprise competing bidder ...
A week after KKR's revised offer, however, TWE said today that another global private equity firm has made a competing bid, at the same offer price of AUD5.20 per share. Both bidders have now been admitted to non-exclusive due diligence.
In our experience, valuation consensus among private equity investors is very high. We're therefore surprised that a second private equity firm might want to compete on price with KKR and Rhone Capital. That is, unless it's a private equity group that already has wine assets in its portfolio. This would create the opportunity for cost synergies and a broader sales offering to justify a higher valuation than that of KKR.
There aren't many private equity groups with such a profile: Examples include Aurelius, which holds majority control of Germany's Berentzen Gruppe, Verlinvest, which has invested in India's Sula Vineyards, and CHAMP, the owner of Accolade Wines.
... three-way due diligence
Another curiosity in this transaction is that the rival bidders have agreed to conduct non-exclusive due diligence, in parallel. That's quite a rare occurrence, especially in the private equity world.
We can only assume that the due diligence process will be staged: In the first phase, the bidders will focus on commercial due diligence, in order to obtain enough information to submit binding offers. The winning bidder will then gain exclusivity, on which basis they'll stump up the money for full financial and legal due diligence.
Whoever wins, the fact that there are now two competing bidders surely seals TWE's fate; it will be sold to private equity this year.
TWE's shareholders could then put the money into locally- based wine bottlers and fruit alcohol producers in selected markets, which is where future growth lies.
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