Treasury Wine Cellars Profits With Diageo Deal: David Ficklingby
What’s an alcohol seller to do when the world loses its thirst? There’s no need to speculate -- that’s the universe that brewers, distillers and vintners have been inhabiting for a generation.
Global alcohol consumption has been stable at 4.3 liters (1.1 gallons) to 4.7 liters per capita since 1990, according to the World Health Organization. The future doesn’t look much brighter: Seven of the 10 countries forecast to have the biggest population in 2050 have a majority or substantial minority of Muslims.
The answer for Anheuser-Busch InBev NV has been to go for quantity. If its $106 billion takeover of SABMiller Plc announced Tuesday goes ahead, the maker of Budweiser will end up selling one in every three beers worldwide. But that strategy is facing diminishing returns as the world’s beer consumption hits a plateau. So why not go for quality instead?
That’s the plan being followed by Australia’s Treasury Wine Estates. Spun out of Fosters before the latter was gobbled up by SABMiller in an earlier round of brewery deal-making in 2011, Treasury is now paying $600 million to buy Diageo’s U.S. and U.K. wine assets including the Beaulieu Vineyards, Sterling Vineyards, and Blossom Hill brands. The maker of Penfolds Grange and Beringer has been selling as much prestige wine in the U.S. as it can produce and hopes to drive more profitable sales by acquiring Diageo’s suite of high-end brands.
It’s a bold strategy. Winemakers need to pick the best grapes from a vintage that varies in size and quality every season. Some analysts argue that means winemakers can only survive as low-margin commodity businesses, closely held companies such as E&J Gallo or units of diversified groups such as LVMH’s wine and champagne brands. The absence of publicly traded vintners -- with a market cap of $3.4 billion, Treasury Wine is the biggest pure winemaker globally -- speaks volumes.
Still, the world’s appetite for wine looks to be increasing, which is more than can be said for beer and spirits:
Analysts who questioned Chief Executive Officer Mike Clarke’s decision last year to turn down a A$5.20-a-share offer from a KKR-led group have underestimated Treasury Wine. The stock climbed to A$6.46 before trading was halted for today’s announcement.
Clarke will have to raise A$486 million ($352 million) selling new shares to pay for the deal and will end up with a mass-market brand in Blossom Hill that he’ll probably want to shed -- Treasury’s European unit made just 16 Australian cents of operating profit per bottle in the first half. Still, he forecast full-year operating profit above analysts’ estimates today and expects the acquisition to increase earnings per share at double-digit rates the year after that.
Treasury Wine is valued at 24.6 times next year’s earnings -- pricier than the S&P 500 beverages sub-index on 22.1, but below the 26.4 assigned to the only winemaker in the group, U.S.-based Constellation Brands. Right now, Treasury Wine shares are cheaper than a bottle of Blossom Hill and should leave a better taste in the mouth.