Australian Vintage seeks emergency capital

The malaise in Australia’s wine industry has deepened even further with the third largest producer, Australian Vintage, signalling that it is facing a financial crisis.

Following last Friday’s suspension of its shares on the Australian Stock Market (ASX), Australian Vintage, the struggling owner of the McGuigan, Tempus Two and Nepenthe brands, is being forced to seek emergency capital after potential merger talks with larger rival Accolade collapsed.

Australian Vintage revealed that its debt by the end of next month was likely to be more than 50% higher than expected, soaring to between AU$70 million to AU$75 million (£37 million to £39 million)

Previously it had told investors that it expected its debt to be between AU$43 million and AU$50 million.

In addition, it told the stock market, “AU$15 million of existing bank capacity is due to expire at the end of July 2024, reducing Australian Vintage’s bank capacity, including overdraft facilities, to approximately $78 million. That is some 90% of its existing market capitalisation.

“Given expected working capital requirements in Q1 FY25, Australian Vintage believes that commencing trading would be materially prejudicial to its ability to source additional capital which is critical to support its continued financial viability and operations”.

Strategic review

AV has been undertaking a strategic review for several months and in February stressed to investors that it would be able to continue successfully if the talks with Accolade came to nothing.

It had been in potential merger talks since February and they were said to have progressed well but in its letter to the ASX AV said: “On the evening of 22 May 2024, AVG received correspondence from Accolade, via its advisors, that. Accolade and its senior lenders [the Bain consortium which had taken over Accolade from under a mountain of its own debt] were ‘not in a position to continue discussions further at this time’.

“While Accolade’s advisors declined to provide any further detail, AVG notes that this guidance was received shortly after the CCW Co-operative ……voted down a special resolution to restructure Accolade’s largest grape supply contract.”

Accolade has been left with its own financial headache following the 511 growers in South Australia’s Riverland overwhelmingly voting down its proposal to overhaul its contract with them by paying those willing to quit the industry AU$4,000 per hectare.

In return Accolade would have had to take only 80% of the current volumes, or around 150,000 tonnes annually. That contract has 30 years to run.

AV had hoped that its shares would resume trading today but now they will remain suspended until at least June 11 while it attempts to fix its balance sheet. The shares were suspended at AU$0.34, valuing the company at AU$ 87m (£45.5 million).

In April, while the talks with Accolade were ongoing, they stood at AU$0.48.

Shareholders

Already AV’s largest single shareholder has signalled concern. Investment group Allan Gray holds about 17% of the group and had been pushing hard for a potential back-door listing of Accolade using the Australian Vintage share quote.

Simon Mawhinney, Allan Gray’s head, told the Australian Financial Review that he would need to see the details of the capital raising before assessing the “extent to which we will participate in the raising”.

He said the entire wine industry needed to find a solution to the large oversupply, which stands at about two billion bottles.

“Unfortunately. it does seem like there is a lot of painful water still to pass under the bridge,” Mawhinney is quoted as saying.

The collapse of the Accolade talks adds to Australian Vintage’s exiting woes.

Earlier this month it sacked CEO Craig Garvin after the board said he had shown a “lack of judgment”.

Accolade

Accolade has also been widely rumoured to be in talks with Pernod Ricard about taking over the French giant’s Australian wine interests, including the Jacob’s Creek brand.

Pernod Ricard, it is said, is unhappy with the returns on capital invested it earns from Australian wine.

While both sides have refused to comment on whether any such talks are taking place, Accolade’s stepping back from discussions with AV suggests that it could be uneasy about investing further capital in Australian wines.

It too has a chequered financial history. Bought by finance house Carlyle for AU$1 billion in 2018, it met the perfect storm Covid restrictions, China’s punitive tariffs on Australian wine and consumers moving away from the
commodity lines that form the backbone of its portfolio.

As debts mounted, Carlyle abandoned the sector, allowing the Bain team to buy up that debt at about 40 cents on the dollar and take control at the end of last year.