Treasury Wine Estates – a first post script of many?

The announcement that none of the potential pivate equity bids for TWE has come to fruition does not entirely surprise, although the purported attitude of some shareholders toward the price previously offered is curious. The nature of the due diligence and bidding process instituted by the TWE Board appears to have been designed to get just this result. The reports from TWE that both bidders supported the company’s strategy rather supports the hypothesis that this backing was a prerequisite for bid support, notwithstanding the fact that it likely reduced the value of the bids (unless both KKR/Rhone Capital and TPG really were clueless, which I doubt although without knowing who has advised them I can’t help but feel their wine industry nous is open to question). What remains to be seen is whether the agreement KKR and TPG will have signed up for in order to gain entry to due diligence now precludes them from returning with a new or revised unfriendly (i.e. unrecommended) bid. If so, this transaction appears to have been cynically managed to preserve the status quo, potentially contrary to the interests of TWE shareholders.

There have been many comments in recent weeks regarding the implications of private equity bidding for TWE. I do not believe that comparisons with Accolade are helpful. Accolade is a much simpler business and, as a consequence, its private equity owner CHAMP has been able to institute a much simpler strategy to add value.

By contrast, if I were a private equity buyer for TWE I would definitely be aiming to gear up as high as possible for the simple reason that I would be planning to sell assets quickly to reduce debt with a view to ending up with enhanced equity in the assets that remain after debt has been repaid from proceeds. The value adding process would not be a vainglorious attempt to grow earnings of the whole but rather an attempt to get the business back to a state of simplicity and focus. These are the hallmarks of the most profitable wine businesses worldwide, which TWE is not. Paradoxically, I also believe that the current wine conglomerate incarnation of TWE requires more capital and working capital investment than a smartly run smaller business cherry picked put of the balance of relatively unloved or undersupported brands.

Some media and industry commentators would have us believe that break up of TWE would be some sort of disaster for the Australian wine industry. I suggest this couldn’t be further from the truth, although part of that is a spectator’s desire to see how some of TWE’s famous brands could perform if actually set free and properly loved. Another paradox: it could be better for the Australian wine industry AND consumers AND investors. That would be a rare combination, but none are possible under the present configuration.



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