KKR Firesale Bid for Penfolds Has Room for Bump: Real M&A

KKR & Co.’s offer to buy Treasury Wine Estates Ltd. for less than the maker of Penfolds shiraz could fetch in a firesale leaves the door open for a higher bid.

After rejecting the buyout firm’s A$3.05 billion ($2.8 billion) proposal as too low, Treasury Chief Executive Officer Mike Clarke this week said any suitor is free to approach the Melbourne-based company, whose labels also include Stags’ Leap, Wolf Blass and Beringer. Treasury shares have since surged past the spurned A$4.70-a share bid, and traders are betting that the winemaker is more likely to win a higher offer than any other large target of a deal announced in Asia this year, according to data compiled by Bloomberg.

The stock is “factoring in a new bid or at the very least that they’ll agree to a bid,” Sam Fimis, a client adviser at Patersons Securities Ltd. in Melbourne, said in a phone interview. “They’ve got some really good premium products.”

Fine wine sales in the U.S., Treasury’s biggest market, are poised to rise for the first time in four years. The potential of some of the vintner’s top wine brands may attract Pernod Ricard SA or Constellation Brands Inc., according to White Funds Management. With Treasury’s market capitalization barely above the A$3.14 billion value of its net assets, private-equity firm TPG Capital also may join the bidding, according to fund manager Pengana Capital. Treasury should command a takeover price of more than A$5 a share, Pengana estimates, compared with A$4.94 yesterday.

KKR Approach

Home to more than 80 brands sold worldwide, Treasury has for years lured suitors -- even before its 2011 spinoff from Australian brewer Foster’s Group Ltd.

In 2010, Foster’s said it rejected an offer of as much as A$2.7 billion for the wine business from a private-equity firm. In 2011, people familiar with the matter said Shanghai’s Bright Food Group Co. considered making a bid.

This year, Treasury said it was approached by KKR in April. Discussions broke off when the winemaker discovered that a shareholder had been informed of the buyout firm’s 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,” CEO Clarke said on a May 20 conference call. “If people want to engage or continue to engage that’s an option that they have open to them.”

Clarke said Treasury rejected KKR’s initial bid because it doesn’t properly value the company. The former Kraft Foods Inc. executive joined Treasury in March to lead a turnaround following writedowns and a drop in profit last year, and has pledged to invest more in marketing.

Deal Comps

KKR’s A$4.70-a-share offer values Treasury’s equity at A$3.05 billion, below the A$3.14 billion value of the company’s net assets.

Treasury’s shares jumped a record 18 percent the day KKR’s proposal was announced and have remained above the bid every day since, a sign traders expect a higher offer. They rose 4.7 percent today to A$5.17 in Sydney, the highest close since July 2013.

Bright Food is weighing a bid for Treasury, the Australian Financial Review reported today, without saying where it got the information. The Shanghai-based consumer products company hasn’t discussed internally whether to bid for Treasury, Pan Jianjun, a spokesman for Bright Food, said by phone.

The winemaker should fetch at least A$5 a share in a takeover, based on the value of its unsold inventory -- A$1.2 billion in December -- and its earnings prospects, said Mark Christensen, an investment analyst at Pengana in Sydney.

Brightening Outlook

Treasury’s earnings before interest, taxes, depreciation and amortization are projected to rise every year through 2018, reversing a decline in the year ended last June, according to analysts’ estimates compiled by Bloomberg.

In the U.S., Treasury’s biggest market by revenue, sales of fine wines will rise by 6 percent to 10 percent in 2014 following three years of declines, Santa Clara, California-based Silicon Valley Bank said in a report in January.

Rising wealth in Asia is also swelling a middle class with more money to spend on luxury goods. The continent, home to more than half the world’s population, accounted for just 8 percent of Treasury’s sales last year.

“The upside does lie in Asia and China, in particular,” Christensen said. While it’s currently Treasury’s smallest market by sales, “longer term it probably will prove to be a good region.”

Even after the surge in Treasury’s stock this week, the shares are down more than 20 percent from a year ago.

Public Scrutiny

At these levels, Paris-based Pernod, whose labels include Jacob’s Creek, and Constellation, which sells Robert Mondavi wine, may be among bidders for Treasury, said Angus Gluskie, who helps manage about $550 million at White Funds in Sydney. Buyout firm TPG, a former owner of Treasury’s Beringer vineyard, would be able to reorganize the business away from public scrutiny, Christensen said.

“We’re focused on closing the current financial year in the strongest possible fashion,” Roger Sharp, a Melbourne-based spokesman for Treasury, said in an e-mailed response to questions about the takeover interest. “It’s business as usual.”

Ian Smith, an Adelaide-based spokesman for KKR, didn’t return calls. In a May 20 statement, KKR said the firm hasn’t been given access that it requested to review Treasury’s financial statements.

Stock Forecasts

Cheryl Gossin, a representative for Victor, New York-based Constellation, said the company doesn’t comment on speculation. Constellation is “focused on completing the expansion of its Mexican brewery, driving organic growth and paying down debt,” Gossin said.

A spokeswoman for TPG in Sydney declined to comment. Pernod’s media office in Paris didn’t reply to an e-mail seeking comment.

While Treasury rejected the offer as too low, it still represents a 27 percent premium to the company’s share price on April 15, the day before KKR made its bid.

Treasury has twice forecast lower earnings since last June, and before the company disclosed KKR’s approach, analysts expected the stock to fall to A$3.82 in the next 12 months.

‘Pretty Good’

To justify rejecting an offer of A$4.70, Treasury’s return on invested capital would need to be almost 15 percent, Michael Simotas, an analyst at Deutsche Bank AG in Sydney, said in a May 20 report. The figure was 1.7 percent last year, according to data compiled by Bloomberg.

“It’s hard not to think that the price KKR has thrown out there is actually pretty good,” said John Maysles, a Los Angeles-based event-driven analyst at Elevation LLC.

All the same, Treasury’s Penfolds label alone is probably worth at least A$3 billion in a takeover, David Errington, an analyst at Bank of America Corp., wrote in a Feb. 13 note.

Treasury’s engagement with KKR indicates the company’s willingness to entertain a sale, Shannon Rivkin, a Sydney-based director at Rivkin Securities Pty, said by e-mail.

“My guess is that this is an opening offer from KKR and the TWE board would be amenable to a takeover at the right price,” he wrote.

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