Bloomberg News

Wine Never Cheaper as Bidders Circle Foster’s Spinoff: Real M&A

July 22, 2011

July 22 (Bloomberg) -- Buying Napa Valley wine has never been so cheap with Treasury Wine Estates Ltd. selling at less than 80 cents on the dollar.

The world’s second-largest winemaker, which owns Beringer Vineyards and Stags’ Leap Winery, was spun off by Foster’s Group Ltd. in May after it rejected a private-equity buyout for the unit last year. Treasury Wine has gained less than 3 percent since the spinoff, giving it a market value of A$2.2 billion ($2.4 billion). That’s 23 percent less than the Melbourne-based company’s net assets, the biggest discount among makers of wine or spirits, according to data compiled by Bloomberg.

Earnings at Treasury Wine, which cost Foster’s at least $8 billion to build, have fallen in the past two reported years as demand stalled, a global glut of grapes pushed down prices and the Australian dollar’s rally reduced its operating margin to the lowest of any producer outside Japan. Now, with China helping lead a rebound in worldwide wine consumption, Treasury Wine this month attracted interest from Bright Food Group Co. in Shanghai. Its wine inventory alone may be worth at least A$2 billion, Bank of America Corp. estimates.

“It’s got plenty of assets in vineyards, brands and the like,” said Theo Maas, a Sydney-based money manager at Arnhem Investment Management, which oversees $5.4 billion and owns Treasury Wine shares. “A buyer could just ride out what looks to be the worst of the cycle.”

Relative Value

Rebecca Smith, a spokeswoman for Treasury Wine, declined to comment, as did Bright Food’s Pan Jianjun.

Treasury Wine, which owns 50 brands, is a collection of wineries Melbourne-based Foster’s bought in the past two decades. Helped by the purchase of Beringer Wine Estates Holdings Inc. in 2000 and the Southcorp Ltd. deal in 2005, Treasury Wine trails only Victor, New York-based Constellation Brands Inc. among winemakers.

Before the spinoff of Treasury Wine, Foster’s rejected an offer for as much as A$2.7 billion from a private-equity buyer, saying it “significantly” undervalued the business. Foster’s, Australia’s biggest brewer, didn’t name the suitor.

As a publicly traded company, Treasury Wine’s equity currently trades at 0.77 times the company’s so-called book value of A$2.9 billion at the end of December, according to data compiled by Bloomberg. The eight other winemakers and distillers from developed nations with market values of over $1 billion trade at a median 2.3 times net assets. Constellation Brands, the owner of the Robert Mondavi Winery and Ravenswood brands, is valued at 1.7 times, the data show.

Treasury Wine climbed as much as 2 percent in Sydney trading today, before closing up 0.6 percent at A$3.46.

‘Screaming Buy’

“From a valuation perspective, it’s a screaming buy,” said Martin Schulz, who manages $360 million of international equities as a senior portfolio manager at PNC Capital Advisors LLC in Cleveland. “For companies that are interested in a pure- play wine business, it makes a lot of sense.”

Treasury Wine had earnings of A$184.6 million before interest and taxes last reported fiscal year, a 40 percent drop from 2008, according to a Foster’s presentation. Including writedowns from the wine business, Treasury Wine would have had losses in each of the past three years as a standalone company.

As wine demand rebounds, analysts project that Treasury Wine’s profit will increase. It earned A$131 million in net income in the year ended June 30 and will make A$142 million this fiscal year, estimates compiled by Bloomberg show.

Global wine consumption, which had been flat since the end of 2008, will increase 3.2 percent between 2009 and 2014, a Vinexpo study conducted by the International Wine & Spirit Research showed last month.

Chinese Wine Demand

Wine demand in China and Russia will lead the recovery along with the U.S., the study said.

A depreciating Australian dollar may also make Treasury Wine’s exports cheaper, while increasing the value of its overseas sales. After surging more than 50 percent since the end of 2008, the Australian dollar is forecast to weaken to 93 U.S. cents by 2014, a 14 percent decline from its current rate of $1.08, foreign exchange forecasts compiled by Bloomberg show.

That may help boost Treasury Wine’s 10.7 percent operating margin, the lowest of any winemaker or distiller outside Japan.

“If you believe the very strong Australian dollar and the oversupply in Australia are temporary factors, then this business can get back to where it was in the past,” said Paul Van Meurs, an analyst at Deutsche Bank AG in Sydney. “What isn’t built into the market valuation is the potential for the brands in Asia and new markets.”

‘A Good Place’

That’s lured potential acquirers such as Bright Food, Shanghai’s biggest food and daily producer. The closely held company is considering a bid for Treasury Wine, two people familiar with the matter said on July 1.

Treasury Wine, which sells Penfolds Grange at more than A$600 per bottle and also owns labels such as Chateau St. Jean and Etude, has inventories worth at least A$2 billion, according to David Errington, an analyst at Bank of America in Melbourne.

“It’s a business which doesn’t need a lot of investing at this point of the cycle,” said Arnhem Investment’s Maas, who says Treasury Wine may be an appealing buyout target. “It’s a good place to be.”

--With assistance from Tara Lachapelle and Daniel Hauck in New York. Editors: Mohammed Hadi, Michael Tsang

To contact the reporters on this story: Robert Fenner in Sydney at rfenner@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net.


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