Australia's Treasury Wine begins second US tilt with US$552m Diageo buy-up

Penfolds maker was forced to destroy thousands of cases of low-end wine two years ago

PUBLISHED : Wednesday, 14 October, 2015, 7:49am
UPDATED : Wednesday, 14 October, 2015, 1:13pm

Australia's Treasury Wine Estates , the world's top standalone winemaker, will buy most of Diageo's US and British wine unit for US$552 million, making a second tilt at the American market after its disastrous retreat two years ago.

The deal is the brainchild of chief executive Michael Clarke, brought in last year to rethink the Penfolds maker's global expansion following its earlier failure to penetrate the United States, when it was forced to destroy thousands of cases of low-end wine and book A$280 million (HK$1.53 billion) in writedowns.

Clarke has decided to stop chasing volume at the expense of margins and focus on the more profitable “mass prestige” end of the world's biggest wine market, which consumes more product than it can make. Diageo has a portfolio comprising 80 per cent “masstige” and luxury labels from its Napa, California base.

“This acquisition is highly complementary to our premiumisation strategy, not just in the United states but globally,” Clarke told analysts and media in a teleconference, noting the Diageo portfolio included the British Blossom Hill label as well as US brands Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt.

“This is an incredible price. This is cash positive from year one, including one-off costs. There are so many positive ticks to why we should be doing this,” he added, adding that the company was now growing so fast in the US it needed a new bottling facility.

The deal comes just two months after the company said Asia would soon be its biggest earnings contributor and returned to profit following the US experience.

“Financially, yeah, it stacks up but ... the US has been a graveyard for [Treasury] for 20 years,” Bank of America Merrill Lynch analyst David Errington said on the teleconference.

For London-listed Diageo, maker of Smirnoff vodka, Guinness beer and Johnny Walker whiskey, the sale is part of a broad shakeup under chief executive Ivan Menezes, who last week said the firm was selling stakes in two beer brewers to Heineken for US$780.5 million while buying a 20 per cent stake in Guinness Ghana Breweries from Heineken.

Clarke and Menezes had been discussing the wine deal since November last year, Clarke said on Wednesday, two months after Clarke rebuffed two takeover approaches for Treasury from private equity firms at A$5.20 a share.

To pay for the Diageo assets, Treasury hopes to raise A$486 million by issuing new shares at A$5.60 each. The shares were in a trading halt on Wednesday, having closed at A$6.57 a day earlier.