M&A Watch - Treasury Wine Estates Shareholders Should Grasp Opportunity to Sell
Last month, Treasury Wine Estates (TWE) turned down a US$2.85bn takeover bid from Kohlberg Kravis Roberts & Co (KKR). While an improved bid has not yet materialised, Stefan Kirk from M&A practitioner Glenboden believes that the wine firm's shareholders should ponder selling up sooner rather than later.
KKR's bid for Treasury Wine Estates hinges on an assessment of value from brand disposals and restructuring measures. However, the whole future of the premium estates-based wine business model is questionable; TWE's shareholders should therefore grasp the opportunity to exit now.
Valuation already attractive ...
On an EBITDA-multiple basis - Treasury's H1 2014 EBITDA totalled AUD88.4m (US$83m) - KKR's offer is clearly not a low-ball one, especially for a business that exhibits a negative growth trend and mediocre profitability.
Moreover, the recent history of estates- or appellations-based wines, from defined geographies, has often been a sorry one. Just look at the intangible asset-impairment charges that groups like Foster's Group (TWE's predecessor) or Constellation Brands have had to take since around 2008.
The fundamental problems for this model include
- depremiumisation ("a $5 bottle of wine is the new $10 bottle")
- consolidation in the retail trade with stricter category management, and
- shifts in consumer preference towards more commercial wines and flavoured alternatives
... sea-change in wine retailing ...
Whether it be the growth of discount chains in Europe or the frequency of price promotions in the US, food retailing in developed countries is becoming more competitive and category management ever tighter.
In this context, wine buyers aim to consolidate their purchasing, in order to focus their efforts on beer, which provides greater volume, and spirits, which deliver higher margins. This works to the advantage of local producers and bottlers that can provide them with service, innovations, and even dedicated brands.
The days of wine aisles choking with scores of estates-wines from numerous countries - and the consequent consumer confusion - may be numbered. Indeed, in some countries retailers are now dividing wines aisles by drinking occasion rather than country of origin.
... shifting consumer preferences
In tandem with this trend goes the consumer's preference for not only easier choices but also flavoured alcohol beverages. Hence the success of the likes of Heineken's Desperados in the beer-based segment, or Belvedere's Fruits & Wine in the wine-based segment in (of all places) France.
Thanks to the ingenuity of marketers and advances in the technology of fruit and other flavours, young people in particular expect many and varied flavours in their drinking experiences. This expectation will carry on through adult life. In parallel, the palate of the statistical alcohol beverage drinker has become sweeter.
The traditional estates-based wine model - from defined geographies like Australia, as represented by TWE - looks outdated. In our view, TWE's shareholders should grasp the opportunity to sell to KKR, and put their money into locally-based wine bottlers and fruit alcohol producers in selected markets.
Telling example of Casella
To underline this argument, consider this recent case of a wine producer that has woken up to the above trends, and sought to re-invent itself in order to survive - Casella in Australia.
Earlier in 2014, the company changed its name from Casella Wines to Casella Family Brands, to support its long-term positioning and growth strategy, "to stay relevant to our consumers around the world' and 'to create new and exciting products and drinking occasions".
The time has come, then, to place less emphasis on premium Australian wines with provenance, and increase focus on a 'multi-beverage' approach, including flavoured RTD spritzers.
The imminent departure of Constellation Brands' CFO has put the wind up many in the financial community, less so because of the speed of the move, more because of his past achievements....
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