Glenboden M & A Originations

Shareholders should grasp the opportunity to sell TWE to KKR (pt. 2)

Priority Rating priority rating 5
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Origination Status submission of competing bid for TWE, August 2014
Asset Treasury Wine Estates Ltd (Australia), top five global wine group
Buyer consortium of KKR & Co LP and Rhone Capital (USA), private equity groups; plus unknown second bidder
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 revised offer represents a 11% premium to its initial offer in May 2014
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In May we argued that TWE's shareholders should sell out to KKR, on the basis that long-term structural changes in the global wine market were unfavourable to TWE's business model. With a revised bid now valuing the company at x14 EBITDA, the case for cashing in is very compelling. But why the competing bid from another private equity group ?

Valuation fully attractive ...KKR's revised offer is up by just over x1 EBITDA from the initial offer (see valuation). We believe this to be full now; especially since the business exhibits a negative growth trend and mediocre profitability (see profile).

On top of that, last month TWE announced another impairment charge on its brand portfolio and other assets. Premium estates -based wine portfolios have a history of impairment, and global trends towards more commercial and flavoured fruit -based alcohol beverages won't help that.

TWE's restructuring measures appear to recognise those trends; for example they plan to separate the group's Australian commercial wines portfolio from its Luxury & Messtige one. However TWE's shareholders might feel that business model changes will be best implemented by new owners.

... surprise competing bidder ...A few days after KKR's revised offer, TWE announced that another global private equity firm had made a competing bid. Both bidders have now been admitted to non-exclusive due diligence on TWE.

In Glenboden's experience, valuation consensus among private equity investors is very high. We're therefore surprised that a second private equity firm might want to compete on price with KKR, over TWE.

Unless it's a private equity group that already has wine assets in its portfolio, creating the opportunity for cost synergies and a broader sales offering to justify a higher valuation than that of KKR. There aren't many private equity groups with such a profile; examples include Aurelius PE and Verlinvest, both in Europe.

... three-way due diligenceAnother curiosity in this transaction is that the two rival bidders have apparently agreed to conduct non-exclusive due diligence, in parallel. That's quite a rare occurrence, especially in the private equity world.

We can only assume that the due diligence process will be staged; in the first phase the bidders will focus on commercial DD, in order to obtain enough information to submit binding offers. The winning bidder will then gain exclusivity, on which basis they'll stump up the money for full financial and legal DD.

Whoever wins, the fact that there are now two competing bidders surely seals TWE's fate; it will be sold to private equity this year. TWE's shareholders could then e.g. put the money into locally- based wine bottlers and fruit alcohol producers in selected markets, which is where future growth lies.

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THIS LEAD'S VALUATION
Size (€ mln) 2.335
Sector wine
Asset Quality global top 5 branded
Seller large plc
Buyer private equity
P/S 2,2
P/Ebitda 13,9
Type enterprise value of revised bid
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