Treasury Wine Estates CEO Michael Clarke announced the company is considering a demerger of its Penfolds business into a separately listed company on the ASX by the end of CY21.
In March, The Australian Financial Review reported the Bank of America valuing the Penfolds business between $10-13 billion. It estimated Penfolds generated $450 million in earnings before interest, tax, depreciation and amortisation, prior to COVID-19.
In January Clarke announced a company-wide strategic review after an unexpected profit downgrade announcement following poor performance in its US markets wiped $3 billion off the company’s value and saw its share price drop by around 40 per cent (Food & Drink Business 29/01/2020).
In an investor briefing on 8 April, he said the demerger consideration was based on an assessment of what would be the optimal strategy and structure of the business, which would focus on premiumisation and accelerating the separate focus on luxury versus commercial portfolios on a global scale.
Penfolds only accounts for 10 per cent of the company’s volume, but “well over half” of its earnings, Clarke said. It has “unique resources and a differentiated execution focus compared to the remainder of our business”.
A demerger would let Penfolds pursue its own strategic priorities with a stronger long-term growth profile if it was under a separate team and ownership structure. It would enable investors to better assess the value of the brand and its assets, he said.
If completed, it is anticipated that the potential demerger would create a new top ASX 50-100 company listed on the Australian Securities Exchange for Penfolds and an ASX 100-150 company for New TWE (existing TWE without Penfolds brands and associated assets).
For New TWE Clarke said it was an “exciting opportunity” for it to grow its brands and step up in luxury, focus, sourcing and prioritisation.
TWE shareholders would own a share in Penfolds and in New TWE proportional to their existing TWE holdings
TWE chair Paul Rayner said: “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.”
COO Tim Ford (who will move into the CEO chair in July) said: “These initiatives will accelerate the separate focus on the luxury versus commercial portfolios, and will be implemented in an orderly manner over time to maximise potential gains on asset sales, minimise associated one-off cost impacts and minimise disruption to business performance while ensuring benefits are not compromised by the current economic or capital market conditions.”
Clarke also announced TWE would continue its premiumisation strategy and reduce the size and scale of its commercial wine business, particularly in the US.
The potential demerger remains subject to a detailed evaluation of costs and benefits to shareholders, along with final board, shareholder and regulatory approvals and the receipt of third-party approvals on satisfactory terms.
Subject to the stabilisation of market volatility and the global COVID-19 pandemic, if a decision is made to proceed and is approved by shareholders, the potential demerger is expected to be completed by the end of calendar year 2021.
Slater and Gordon has announced it is launching a class action against TWE following the profot downgrade in January (Food & Drink Business, 06/04/2020).
