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Yellow Tail Maker Looks to Bottle Abroad Amid Debt Breach

Yellow Tail Maker Looks to Bottle Abroad Amid Debt Terms Breac
Cases of Yellow Tail wine are on display at a store in Sydney. Casella Wines Pty. has announced plans for a more expensive wine to sell at around $10 a bottle. Photographer:Andy Shaw/Bloomberg News

Australia’s Casella Wines Pty., maker of the third-best selling U.S. wine brand Yellow Tail, is looking at bottling so-called bulk wine overseas to cut costs after breaching terms on its debt.

“Bulk we could certainly do, and that’s part of what we’re looking at,” Managing Director John Casella said in a phone interview.

Closely held Casella, which accounts for one in five wine bottles leaving Australia, intends to conclude talks in about two weeks with National Australia Bank Ltd., after recording its first annual loss in at least 20 years, the managing director said. The loss pushed earnings below a threshold the bank monitors to assess its ability to pay interest, he said.

“Bottling overseas would carry risks” as local operations would become more competitive should the Australian currency decline, he said. “The danger is you do it and you’re in no man’s land -- you’re over there when you should be here.”

Australian wine companies including Accolade Wines Ltd., owned by Champ Private Equity, and the largest listed group Treasury Wine Estates Ltd. have moved to bottle some of their product in end-markets to earn more profit margin on exports that have been hit by the strength of the local dollar, the strongest-performing major currency against the U.S. dollar in the three years ended Dec. 31.

Bulk Chardonnay

Exports of chardonnay in so-called bulk containers climbed 37 percent to 117 million liters in 2012, government-backed industry body Wine Australia said yesterday. Total export volume rose 3 percent, while the value of overseas sales fell 2 percent to A$1.85 billion ($1.95 billion) as lower-priced bulk wine outpaced more expensive bottled exports.

The rapid growth of Yellow Tail and other lower-priced, high-volume Australian wines has attracted criticism in some quarters.

“A focus on volume sales and not value building” had hurt the reputation of Australian wine, Pernod-Ricard SA’s Premium Wine Brands unit said in a October 2011 government inquiry submission.

Yellow Tail is the third-biggest seller in U.S. stores, where it sells for about $5.80 a bottle, more than Treasury’s Lindemans and Little Penguin labels and Accolade’s Banrock Station, according to ACNielsen data quoted by Goldman Sachs Group Inc. analysts in a Jan. 7 note to clients.

‘Pineapple Juice’

The backing of influential critics such as Wine Advocate founder Robert Parker, who was quoted by the New York Times describing it as “surprisingly well-made” in a 2006 article, hasn’t been matched across the industry. A 2003 tasting by the Los Angeles Times described Yellow Tail’s 2002 chardonnay as “excellent lighter fluid” and reminiscent of “pineapple juice”.

The dominance of Casella’s brand, whose labels carry an Aboriginal-style painting of a kangaroo, “left most Americans with the impression that Australian wine is sweet, cheap, and adorned with a ’critter’,” U.K.-based wine critic Jancis Robinson wrote in an article last April.

The company, founded in 1969 by Sicilian immigrants and based in Griffith, New South Wales state, fell into a loss last year after hedge contracts written when the dollar was weaker expired over the past year, John Casella said.

“We had a really strong hedge book that ran out. I think we did quite well to get this far,” he said. “We really didn’t expect this exchange rate to stay so high for so long.”

Foreign currency hedges with National Australia Bank worth $150 million at the end of June 2011 had fallen to $45 million a year later, according to the company’s annual report. That’s now close to zero, apart from “odds and ends,” Casella said.

Covenant Breach

The company hadn’t been granted a formal waiver for its covenant breach and its borrowings are secured against its assets, according to Casella’s annual report.

“The fundamentals are still the same as what they were,” he said. “The only issue is exchange and margin pressure as a result of those issues.”

Sharna Rhys-Jones, a Melbourne-based spokeswoman for NAB, declined to comment on the debt talks.

Annual sales fell 2.8 percent from a year earlier to A$335 million, according to the report filed in December. Net income dropped from a A$45 million profit to a A$30 million loss, the results show. The loss was driven by a A$30 million writedown of loans and a A$59 million decline in earnings from its foreign exchange hedges, according to the report.

Joint Venture

Casella has announced plans for a more expensive wine to sell at around $10 a bottle and entered a potential beer joint venture with Coca-Cola Amatil Ltd. via a convertible loan from the soft-drink bottler as it seeks to minimize the exposure of its low-priced wine to the strength of Australia’s currency.

Net debt was A$118 million as of June 30, based on the value of the company’s borrowings minus its cash, according to the report. Borrowing costs came to A$6.1 million, against operating cash flows of A$59 million, the data show.

Casella had A$125 million in bank bills at the end of June as well as an overdraft drawn to A$7.1 million, the data show.

“We’ve been squeezed by the exchange rate,” John Casella said. “I don’t see there’s any Australian company that hasn’t been squeezed by that.”

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