Glenboden M & A Originations

Shareholders should grasp the opportunity to sell TWE to KKR (pt. 1)

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Origination Status TWE rejection of KKR's offer to shareholders, May 2014
Asset Treasury Wine Estates Ltd (Australia), top five global wine group
Buyer KKR & Co LP (USA), leading global private equity firm
Seller public shareholders of TWE
Buyer Rationale break-up value of brand portfolio, restructuring measures
Seller Rationale attractive valuation given long-term sectoral dynamics
NBs KKR's offer represents a 28% premium to the one-month average TWE share price
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KKR's bid for Treasury Wine Estates hinges on an assessment of value from brand disposals and restructuring measures. However in our view the whole future of the premium estates- based wine business model is questionable; TWE's shareholders should therefore grasp the opportunity to exit now.

Valuation already attractive ...On an EBITDA -multiple basis, KKR's offer is clearly not a low-ball one (see valuation), especially for a business that exhibits a negative growth trend and mediocre profitability (see profile).

Moreover the recent history of estates- or appellations- based wines, from defined geographies, has often been a sorry one. Just look at the intangible asset -impairment charges that groups like Foster's (TWE's predecessor) or Constellation Brands have had to make since cca. 2008.

The fundamental problems for this model include (i) depremiumisation ('a $5 bottle of wine is the new $10 bottle'); (ii) consolidation in the retail trade with stricter category management; and (iii) shifts in consumer preference towards more commercial wines and flavoured alternatives.

... sea-change in wine retailing ...Whether it be the growth of discount chains in Europe or the frequency of price promotions in the US, food retailing in developed countries is becoming more competitive and category management ever tighter.

In this context wine buyers aim to consolidate their purchasing, in order to focus their efforts on beer, which provides greater volume, and spirits, which deliver higher margins. This works to the advantage of local producers and bottlers that can provide them with service, innovations, even dedicated brands.

So, the days of wine aisles choking with scores of estates- wines from numerous countries, and consequent consumer confusion, may be numbered. Indeed, in some countries retailers are now dividing wines aisles by drinking occasion rather than country of origin.

... shifting consumer preferencesIn tandem with the above trend goes the consumer's preference for not only easier choices but also flavoured alcohol beverages. Hence the success of e.g. Heineken's 'Desperados' in the beer-based segment, or Belvedere's 'Fruits & Wine' in the wine-based segment in France (of all places).

Thanks to the ingenuity of marketers and advances in the technology of fruit and other flavours, young people in particular expect many and varied flavours in their drinking experiences. This expectation will carry on through adult life. In parallel, the palate of the statistical alcohol beverage drinker has become sweeter.

So, coming back to the main point of this article, the days of the traditional estates- based wine model, from defined geographies like Australia, as represented by TWE, are numbered. In our view, TWE's shareholders should grasp the opportunity to sell to KKR, and e.g. put their money into locally- based wine bottlers and fruit alcohol producers in selected markets.

Telling example of CasellaTo underline our argument, we point to one recent case of a wine producer that has woken up to the above trends, and sought to re-invent itself in order to survive - Casella in Australia.

Earlier in 2014, that company changed its name from Casella Wines to Casella Family Brands, to support its long term positioning and growth strategy, 'to stay relevant to our consumers around the world' and 'to create new and exciting products and drinking occasions'.

So, less emphasis now on premium Australian wines with provenance, more focus on a 'multi-beverage' approach including flavoured RTD spritzers.

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THIS LEAD'S VALUATION
Size (€ mln) 2.300
Sector wine
Asset Quality global top 5 branded
Seller large plc
Buyer private equity
P/S 2,0
P/Ebitda 12,7
Type enterprise value of bid
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