Treasury Wine Estates mulls Penfolds demerger

TWE is considering a demerger of its wine brand Penfolds, and also revealed it would reduce the size of its commercial wine business, particularly in the US.

In a statement released today (8 April), Treasury Wine Estates (TWE) said the result of its strategic review, announced in January, has meant that it is considering the potential demerger of its Australian wine brand Penfolds.

This, it said, would mean that Penfolds would become a separate entity listed on the ASX.

CEO Michael Clarke said the demerger was still subject to detailed evaluation and full regulatory and shareholder approval. If approved, it would be completed by the end of calendar year 2021.

As things stand, he said that Penfolds accounts for only 10% of the company’s volume, but well over half its earnings.

He said that the separation of TWE and Penfolds would mean that both companies would be “better positioned to pursue their own strategic opportunities independently and deliver a stronger long term growth profile once separated”.

He added it would create “incremental long term value” for Penfolds’ shareholders and that the “transparency” of a separate listed entity would enable investors “to more readily assess the fundamental value of the Penfolds brand and its assets”.

If the demerger goes ahead, current TWE shareholders would own a share in Penfolds and the ‘new TWE’ proportional to their existing holdings in TWE.

Paul Rayner, chairman of TWE, added: “I am excited about the prospects that a potential demerger could bring for both New TWE and Penfolds. New TWE would remain the largest globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunity ahead of it to continue the growth of its iconic brand portfolio across all markets. Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally.”

Commercial wine business restructure

Regardless of whether the demerger is approved, TWE has revealed that it will restructure its commercial wine business, paying particular attention to the US.

Tim Ford, TWE’s chief operating officer, said that while decisions taken over the past six years have resulted in a “considerably stronger and more profitable business”, he said the company realised it must act “more quickly and decisively”.

He said that the company would adjust its operating model and organisational structure to align with the future reduced size and scale of its commercial wine business.

TWE will accelerate the reduction of its commercial lower tier wine brands with the aim of having a “smaller portfolio of profitable and differentiated brands”. He said the company would divest all of these selected brands and production assets it owns, either individually or in combination.

Ford said these changes would be implemented in an “orderly manner across 12 to 18 months” in order to minimise disruption to business performance, reduce one-off costs and ensure that the benefits would not be compromised by the current economic conditions.

Further details about which brands will be divested will be provided in August 2020.

Covid-19 update

Ford continued that the situation remains “fluid” and it would be some time before the company has an idea of the full financial impact of the coronavirus on business.

He said that in China, TWE staff had returned to work and that things were gradually returning to normal, and people were socialising “to some degree”. He said that consumption levels remain “subdued” but that he was starting to see some “green shoots appearing”.

He said that performance in other regions had been largely consistent, with strong retail performance growth in Q3 (end of March) as consumers “stocked their homes…for high levels of in-home consumption driven by the government imposed shut down periods”. He also said that there had been “strong momentum” for the TWE portfolio across e-commerce channels around the globe.

The highest growth rate was seen among the group’s lower margin commercial and masstige brands.

In contrast, he said that some of the company’s key sales channels for its higher margin and luxury products had been “significantly impacted” by shutdowns, including sales from cellar doors, on-premise and in the global travel retail market.

Despite this, he said that balance sheets remain “strong and flexible” and the company was “well placed” to navigate the crisis, with approximately AU$1.1 billion in hand as of 1 March.

He said the group’s priority was the health and well-being of staff and safeguarding jobs. However, he said that if “absolutely required”, the company will look to “adjust levels of remuneration across the board to reflect the underlying level of business activity and also any future changes to gov requirements”.

Michael Clarke added:  “In the short term these are unusual and very challenging times with consumers trading down. Therefore, TWE is not in a position to provide detailed numbers or detailed timelines at this stage as it is unclear how trading will play out in the short term.

“We do know that, post Covid-19 and as consumption rates normalise, the underlying longer term growth potential of the business and therefore the value of the Penfolds franchise and the remaining TWE portfolio is significant.”