Treasury Wine Surges as KKR Bid Puts Grange-Maker in Play

Photographer: Carla Gottgens/Bloomberg

An employee operates a scissor lift in the red barrel room at Treasury Wine Estates Ltd.'s Wolf Blass winery in the Barossa Valley, Australia. Treasury wine decided to reveal the offer after learning yesterday that KKR and its advisors had talked to one or more of its shareholders. Close

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Photographer: Carla Gottgens/Bloomberg

An employee operates a scissor lift in the red barrel room at Treasury Wine Estates Ltd.'s Wolf Blass winery in the Barossa Valley, Australia. Treasury wine decided to reveal the offer after learning yesterday that KKR and its advisors had talked to one or more of its shareholders.

Treasury Wine Estates Ltd. (TWE) surged above a spurned A$3.05 billion ($2.9 billion) takeover bid from KKR & Co. (KKR) in Sydney trading, on speculation the world’s second-largest listed wine company will attract higher offers.

Shares of the Melbourne-based maker of Penfolds Grange jumped by a record 18 percent to close at A$4.80 in Sydney, compared with the A$4.70 cash offer from KKR disclosed today. The company remains open to further engagement from the buyout firm or other investors, Chief Executive Officer Mike Clarke told a conference call after the market closed.

“It’s now got a ‘For Sale’ sign on it so it’ll be on the radar of a lot of international players,” Peter Esho, chief market analyst at Invast Securities Co., said by phone. “When cheap money’s lying around and you have an asset that’s been distressed for a while, it’s a perfect recipe for deal flow.”

Treasury’s market capitalization of A$2.64 billion as of yesterday was about 16 percent less than its book value, making it a target amid rising wine consumption in nearby Asian markets. Food, drink and agricultural businesses in Australia have attracted $26 billion in takeover bids over the past five years, according to data compiled by Bloomberg.

The A$4.70 cash offer doesn’t reflect the fundamental value of the business, the company said in its statement announcing the approach today.

Offer Disclosure

Discussions with KKR after an April 16 approach only broke off when Treasury discovered that a shareholder had been informed of the bid, forcing the company to disclose the offer to the market.

“There probably would have been continued dialog with KKR had there not been a leak,” Clarke said on the conference call. “If people want to engage or continue to engage that’s an option that they have open to them.”

KKR’s advisers held discussions with some of Treasury’s shareholders within the past week, the firm founded by Henry Kravis said in an e-mailed statement today. The talks were confidential, the firm said.

Treasury’s Penfolds label alone is probably worth at least A$3 billion in a takeover and its U.S. assets could go for A$800 million, David Errington, an analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in a Feb. 13 note to clients.

The company has underperforming brands as well as unused winery and packaging assets it would be prepared to sell, Clarke said in an April 8 interview.

China Sales

“There’s definitely demand for premium wines in emerging Asian markets and they have quite strong sales into China,” Daniel Mueller, a Sydney-based analyst at Morningstar Inc., said by phone. “There’s certainly buyers for their assets.”

The company was spun off from Foster’s Group Ltd. in May 2011 before the brewer’s own A$10.5 billion takeover by SABMiller Plc later that year.

Treasury Wine will cut jobs and costs to save about A$35 million during the year to June 2015 and use the savings to increase its consumer marketing spending by about 50 percent, Clarke said in a separate statement today.

The job reduction will amount to about five percent of the company’s 3,500 global workforce, spokesman Roger Sharp said by phone.

“Implicitly the stock should be worth more” if Clarke is able to cut A$35 million in costs, Mueller said. The amount is equivalent to about 32 percent of Treasury’s A$108 million in earnings before interest, tax, depreciation and amortization over the 12 months ended December. “You could argue that whatever premium was offered a few days ago should now apply to higher earnings from the cost savings.”

Executives Left

Treasury Wine shares had fallen about 37 percent over the 12 months to yesterday’s close as four of its top executives left amid A$160 million of writedowns in its U.S. business and cuts to its forecasts in Asia and Australia.

On May 13 about 54 million shares were being borrowed by short-sellers betting on further price declines, according to data compiled by Bloomberg. That’s equivalent to 8.4 percent of the freely traded stock or 22 days of trading volume, the data show.

Some of today’s advance may come from those traders trying to quit loss-making positions before the price rises further, Esho said.

‘Takeover Battle’

“The last thing they want to do is get squeezed if it goes to a takeover battle,” he said.

Trading conditions in Australia “continue to be difficult, underpinned by intense competitor activity and a challenging retail environment,” Clarke said in today’s statement.

While the business is working hard to meet its earnings forecast, Clarke said he won’t “engage in short-term practices to the detriment of our long-term objectives.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Suresh Seshadri, Dave McCombs

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