Jamie Nicol

Treasury Wines has announced they have received a revised bid from KKR Rhone Industries which values it at $5.20 a share.  Treasury are now allowing KKR to enter the data room which is a condition of the bid. Dalton Nicol Reid entered the company during the past six months having met its quality criteria.

“The change to the bid represents a more reasonable reflection of the potential value of Treasury Wines.  On our estimation, at these prices a strong return remains available to KKR as they sell off assets and re-gear the company,” said Jamie Nicol, Dalton Nicol Reid Director and CIO.

“While management is now pleasingly engaging with KKR we would expect that they are continuing to consider ways to realise the value embedded in the business.  Treasury Wines can seek to extract the break-up value for shareholders and other potential buyers for the business as a whole.”

According to Mr Nicol, the US business has significant hard assets across agricultural assets and infrastructure as well as a portfolio of well-regarded brands that Dalton Nicol Reid values at close to $1bn excluding inventory.  This business includes 36 brands including Penfolds, Wynns, Lindemans, Rosemount and Wolf Blass with substantial agricultural assets and infrastructure.

“These businesses have material earnings potential and with good management execution, we see value in excess of the implied value from KKRs initial bid – albeit with a degree of uncertainty around execution.”

“The company has suffered from neglect, poor management and a cyclical downturn.  Australian vineyard production had doubled from the late 90’s creating a grape glut. This was a global trend, which is now starting to ease following a number of years where uneconomic producers have exited the market and with demand picking up in China and the US.   However in the past year Treasury Wines has also suffered a number of short term profit issues, including a crack-down on gift giving in China, an inventory issue in the US and a poor promotional performance over Christmas in Australia.”

Mr Nicol said he believed the market has been too short term focused on this company.

“The market has been focused on the current poor profit performance and if you apply a multiple to these distressed earnings, then a valuation is indeed difficult to justify.   However, we prefer to take a medium term view of a company such as Treasury Wines and are interested in the quality of the underlying brands such as Penfold’s.  We also like the strong balance sheet including long term inventory, which enables investment to drive stronger profit growth in the future.”

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Jamie Nicol

Dalton Nicol Reid has released a statement on the bid from private equity firm KKR for Treasury Wines.   KKR has made a conditional bid for Treasury Wines at $4.70 a share, surprising many in the market.  Dalton Nicol Reid entered the company during the past six months having met its quality criteria.

Jamie Nicol, Dalton Nicol Reid Director and CIO, said there is some caution from analysts regarding the amount that KKR will be prepared to pay for the company, however the value of the business should not be underestimated.

“The company has suffered from neglect, poor management and a cyclical downturn.  Australian vineyard production had doubled from the late 90’s creating a grape glut. This was a global trend, which is now starting to ease following a number of years where uneconomic producers have exited the market and with demand picking up in China and the US.   However in the past year Treasury Wines has also suffered a number of short term profit issues, including a crack-down on gift giving in China, an inventory issue in the US and a poor promotional performance over Christmas in Australia.”

Mr Nicol said he believed the market has been too short term focused on this company.  “The market is focused on the current poor profit performance and if you apply a multiple to these distressed earnings, then a valuation is indeed difficult to justify. However, we prefer to take a medium term view of a company such as Treasury Wines and are interested in the quality of the underlying brands such as Penfold’s.  We also like the strong balance sheet including long term inventory, which enables investment to drive stronger profit growth in the future.”

“We have no doubt KKR will be looking at the asset value underpinning Treasure Wines and will be considering the value that can be extracted via a breakup and regearing strategy.  In this regard, we see substantial upside for the owners of the business.”

According to Mr Nicol, the US business has significant hard assets across agricultural assets and infrastructure as well as a portfolio of well-regarded brands that Dalton Nicol Reid values at close to $1bn excluding inventory.

“This along with $2bn in realisable inventory means at $4.70 per share, KKR would be buying the entire Australian and New Zealand business for under $400m.  This business includes 36 brands including Penfolds, Wynns, Lindemans, Rosemount and Wolf Blass with substantial agricultural assets and infrastructure.  These businesses have material earnings potential and with good management execution, we see value well in excess of the implied value from KKRs initial bid.”

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