China Crackdown Turns Treasury Wines Into a Takeover Target

Billionaire Henry Kravis may turn out to be an unlikely beneficiary of Xi Jinping’s campaign to fight corruption in China. The Chinese president has been leading a fight to curtail conspicuous consumption and extravagant gift-giving among Communist Party and Chinese government officials, and that has dampened demand for, among other high-end luxury goods, premium wines.

With Melbourne’s Treasury Wine Estates feeling the impact of slower Chinese growth, Kravis’s KKR is taking aim at the world’s second-largest listed winemaker. KKR and Rhone Capital are offering $3.4 billion Australian dollars ($3.2 billion) for Treasury, according to a regulatory filing. That’s 10.6 percent more than an April bid that the company rejected.

At the time KKR first began chasing Treasury, the maker of Penfolds and other wines, the company’s stock price was in the doldrums. Treasury’s shares had lost 23 percent of their value from the start of the year, while the benchmark Australian index was flat.

Contributing to the malaise was investor worry about China. Like other industries, winemakers have been counting on Chinese demand to overcome tepid growth in more mature markets. China is the world’s largest country, but in wine consumption it ranks No. 5, with Chinese in 2012 consuming 1.3 liters per capita, according to data from National Australia Bank. Even with growth more than doubling over the previous year, China’s wine consumption was tiny compared with No. 1 France at 48 liters, Australia at 24 liters, Britain at 20 liters, and the U.S. at 9.2 liters.

But what if China doesn’t deliver? That’s a question many executives in the wine industry worldwide need to be considering as Xi’s campaign against corruption and extravagant spending hits demand for wine and other high-end luxury goods.

Indeed, Treasury Wines’ new chief executive, Michael A. Clarke, told analysts in April that the company was feeling pressure from Xi’s campaign to curtail conspicuous consumption. “Yes, there’s a hiccup in Asia at the moment in China with the austerity programs,” he said. “A number of companies have been hit, which is affecting trading, which is affecting inventory levels. And so a number of us are going through these changes.”

With so many companies counting on healthy demand from China, though, even just a “hiccup” can cause damage. But is there reason to worry the slowdown will have more of a long-term impact? Not according to Clarke, who worked in China for Coca-Cola, Kraft Foods, and Reebok International. “I think it’s going to come back,” he said in April, since the country has a growing number of affluent consumers interested in wine. “These are guys who are going to buy top-end wines, and that will continue.”

For now, though, there will probably be more pain ahead. Treasury, which took about $160 million Australian dollars in writedowns last year, is scheduled to announce its full-year earnings on Aug. 21, and the results are likely to show the impact of the China crackdown. The company in January said earnings would be as much as 24 percent lower than it had earlier forecast.