Is Treasury Wines (TWE) a buy?
On Tuesday, TWE announced the $1.6bn acquisition of upmarket Californian unlisted wine group Daou Vineyards, another foray into the US, which some would argue hasn’t been a great hunting ground for the winemaker over the last decade – 86% of Daou’s trade is in the US. This is a reasonably bold play by CEO Tim Ford; considering its chequered history in the US, we admire his belief and, unlike many, the confidence to take the hard/bold calls, let’s hope he’s right! The definite alignment with this purchase is the company’s continued focus on the luxury end of the market, i.e. in the US last year, TWE volumes fell by 25%, but earnings improved by 14%; Ford is clearly hoping for more of the same.
- The purchase will make TWE a market leader in the US luxury wine market with over 11% market share. Importantly, this is the fastest-growing high-end market, with the deal affording ~$20mn in cost synergies.
- The deal is made up of $US900mn upfront and up to $US100m depending on targets achieved through 2025-27. The acquisition will be largely funded through a $US825mn equity raising with details due in the coming 48-hours.
Ford can point to the recent success story in the 2021 acquisition of Frank Family Vineyards; this business accounted for 20% of Treasury’s US earnings in 2023. Over recent weeks, the bull case for Treasury has been around the removal of China’s tariffs on Australian wines, which now seems likely, and Penfold’s growth can recommence in earnest. However, while we like this deal in the medium/longer term, it’s unlikely to deliver outperformance into 2024, with pending details of the capital raise clearly a determining factor.
- We would rather TWE had announced a buyback, but we remain bullish on the stock and may increase our exposure into weakness – MM has a 5% TWE position in our Active Growth Portfolio.
