Treasury Wine Bid Not A Given

This story features TREASURY WINE ESTATES LIMITED. For more info SHARE ANALYSIS: TWE

-Opens up potential rival bid
-Risk if bid unsuccessful
-Low risk of FY14 earnings miss
 

By Eva Brocklehurst

Treasury Wine Estates ((TWE)) has stared down Kohlberg Kravis Roberts (KKR) and obtained a higher bid. The private equity firm has raised its bid price for the wine distributor to $5.20 from $4.70 and consequently received the green light for due diligence.

Rhone Capital has joined KKR in this proposal. The initial bid back in May was conducted solely by KKR and the company deemed it insufficient. At the time several brokers observed KKR would not be able to increase the bid without significantly raising its risk profile. The revised proposal is subject to due diligence and final approval of the investment committees of the consortium, as well as a unanimous recommendation from the Treasury Wine board. The board has advised shareholders to take no action until the offer is formalised and recommended. The board's criteria include whether the value of the offer exceeds the expected benefits of management's strategic changes. The company recently announced a cost efficiency program, an increase in consumer marketing expenditure and a separation of the luxury/masstige brands from the commercial brands.

Citi upgrades its rating to Neutral from Sell on the back of the revised offer. The broker expects the bidders will break down the company, with the due diligence process critical to determining which brands can stand alone. The books are open on due diligence, so there is potential for a rival bidder to enter the fray. On Citi's forecasts the bid represents a FY15 enterprise value/earnings multiple of 12.8 times. This is above the multiple paid by Foster's to buy Beringer (12.0) but below that which Foster's paid to acquire Southcorp (14.8). The new bid price seems fair to Citi and the timing excellent. The company's Australasian segment is depressed while in the US the company is struggling with excess inventory. Management may have a compelling vision about turning the company around but, given the risks inherent in the wine industry, Citi doubts shareholders will be able to resist the new offer.

On the FNArena database there are three Hold ratings and four Sell. Brokers have observed for some time the company was facing structural and cyclical pressures as the advance of private labels threatens branded product margins. Prior to the KKR bid, brokers considered the stock was under-achieving its potential, given the quality of the assets. The announcements in June around marketing and separating the brands produced a positive response from the market. Now the share price is well above Deutsche Bank's view of fair value, even assuming a dramatic earnings improvement. The broker was surprised there was a bid at $4.70, let alone an upwardly revised offer at $5.20, albeit with KKR now in consortium.

Deutsche Bank suspects the due diligence process represents a considerable risk and there is a chance the consortium will walk, or lower its price. If the bid is successful Deutsche Bank believes it would be a very good outcome for shareholders. A return on tangible capital would need to be almost 16% to justify a $5.20 price target and the broker has not heard of such a return in the wine segment. Of note, the consortium stated that payment of any dividends or capital returns prior to completion of a transaction would affect the valuation of Treasury Wine and would need to be deducted from the proposed price.

Morgan Stanley observes wine assets tend to be traded on relatively high multiples, given their strategic and unique qualities. The broker offers the argument that as Treasury Wine is not achieving on its historical earnings record, a higher multiple could be justified. As the company has signalled the new bid price is a starting point for gaining access to the books the broker suspect this may dredge up other interested parties. Moreover, the timing of the offer indicates a low risk that FY14 earnings will miss forecasts. Treasury Wine announced a pulling forward of promotional activity in June, altering the timing of the luxury releases and pulling profit into FY14 from FY15. Morgan Stanley believes this indicates the promotional program has performed well. The new CEO may have only sat in the driver's seat since March but is now under greater pressure to deliver superior value.

See also, Surprise Bid Puts Spotlight On Treasury Wine's Value on May 21 2014.
 

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