Australia's Treasury buys Diageo's wine division

Deal to pay $600m for brands including Blossom Hill marks turnaround for Australian wine group

By Jamie Smyth in Sydney October 14, 2015
Treasury Wine Estates has agreed to buy Diageo's wine division for US$600m, in a deal that bolsters its US business and highlights a turnround in fortunes for the world's largest pure play winemaker.

The Australian company will add US wine brands Sterling Vineyards, Beaulieu and Acadia to its portfolio of wines following the acquisition. Blossom Hill, the second-biggest selling wine by value and volume in the UK, is also part of the deal with drinks group Diageo, which is selling off assets to tidy up its sprawling global operations.

"Wine is no longer core to Diageo and this sale gives us greater focus," said Ivan Menezes, Diageo's chief executive, who added that the company has realised £1bn by selling assets since the start of the year.

Treasury, which already owns the Penfolds, Lindeman's and Rosemont Estate brands, also revealed a profit upgrade on Wednesday, saying that strong sales during the first few months of the year would drive full-year 2016 earnings to between A$270m and A$290m. This compares with consensus analyst forecasts of A$271m.

"Treasury's turnround strategy is working," said Farina Parsons, analyst at Morningstar. "Although it is early days, management seems to be delivering on what they have promised."

Last year Treasury turned down bids from private equity firms KKR and Rhone Capital, which were fuelled by the group's problems, particularly in its US operations where oversupply forced it to destroy 6m bottles of aged wine and take a A$155m writedown. These difficulties prompted the ousting of David Dearie as chief executive in September 2013, with Michael Clarke, formerly chief executive of Premier Foods in the UK, taking over.

Since taking the helm at Treasury, Mr Clarke has implemented a restructuring plan and reshaped strategy to focus on higher-end mass-market brands. The company has also benefited from its exposure to the US market due to the recent weakening of the Australian dollar.

He said the acquisition of Diageo's wine operations would transform Treasury's US business.

"The additional supply ... will be a game-changer for our US brands, providing us with an immediate opportunity to step-change our growth in the US, Canada, Asia and Latin America," he said.

Treasury will pay US$552m in cash to Diageo and assume US$48m of capitalised leases under the deal, which implies a transaction multiple of 7.9 times earnings before interest and tax for the 12 months to July 2015.

This does not take into account synergies created by the deal, which the group has forecast to be at least US$25m per year before 2020. Treasury said the acquisition should deliver low-double-digit earnings per share growth in the first full year.

The company is raising A$486m from shareholders to help fund the deal.

Analysts at UBS said the earnings outlook for Treasury continued to improve: "The Asia business continues to have very good momentum, and could well over-take the Americas as the largest EBITS (earnings) contributor over the next few years."