Treasury Wine Estates, Australia’s largest wine business, is considering a plan to split off its flagship Penfolds brand into a separate company by the end of 2021.
The demerger plan is a key outcome of TWEs strategic review, which it announced to the Australian Securities Exchange this morning. If Australia’s biggest wine company does split, the Penfolds business will be the larger of the two with the ‘New TWE’ focusing on a reduced portfolio of commercial brands.
The statement said the move would build on TWE’s internal operating model, which is focused on premiumisation and accelerating the separate focus for luxury versus commercial portfolios globally.
Penfolds was founded at Magill near Adelaide, South Australia, in 1844 and produces Australia’s most revered wine Penfolds Grange. It still has a cellar door and small vineyard at Magill Estate but its main production winery is now located in the nearby Barossa Valley, where it sources much of its fruit.
TWE chief executive Michael Clarke said Penfolds accounted for about 10 per cent of the firm’s volume but well over half its earnings.
“A potential demerger would enhance New TWE’s and Penfolds’ ability to pursue their own strategic priorities and deliver a stronger long-term growth profile under separate teams and ownership structures,” he said.
TWE announced in 2018 it was expanding its footprint to begin making premium Penfolds red wine from Californian grapes in Napa Valley and Champagne in France.
This morning’s statement said the potential demerger would help drive this multi-country of origin portfolio while a separate team focused on accelerating the shift towards luxury in New TWE.
Other well-known South Australian TWE brands include Wolf Blass, Wynns Coonawarra and Rosemount Estates.
The Penfold family sold its controlling share of the company in 1976 and it became part of the Foster’s Group from 2005. TWE was formed in 2011 and listed on the ASX after Foster’s decided to split its wine and beer businesses.
A boom in Chinese exports in the past two years led to a 2018/19 net profit of $419.5 million and helped drive TWE’s share price to $19 in late November. But weaker than expected US sales and the COVID-19 pandemic saw the share price bottom out at $8.61 in mid March. ASX shares opened at $10.56 this morning.
TWE Chairman Paul Rayner said he was excited about the prospects that a potential demerger could bring for both New TWE and Penfolds.
“New TWE would remain the largest globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunity ahead of it to continue the growth of its iconic brand portfolio across all markets,” he said.
“Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally.”
TWE’s chief operating officer Tim Ford will take over from Clarke as CEO in July.
“These initiatives will accelerate the separate focus on the luxury versus commercial portfolios, and will be implemented in an orderly manner over time to maximise potential gains on asset sales, minimise associated one-off cost impacts and minimise disruption to business performance while ensuring benefits are not compromised by the current economic or capital market conditions,” Ford said.
The company also provided a COVID-19 business update this morning and said although TWE’s staff in China had recently returned to work, depletions and shipments for the quarter had been significantly impacted by shutdowns.
In TWE’s other regions, strong retail sales in February and March reflected consumer behaviour to stock up on wine and the greater propensity for in-home consumption during government-imposed shutdown periods. It said sales through e-commerce channels had also been strong. However, it said sales had been skewed towards the lower margin commercial portfolios.
Clarke said TWE was not in a position to provide detailed numbers or detailed timelines at this stage as it was unclear how trading would play out in the short term.
“In the short term these are unusual and very challenging times with consumers trading down,” he told the ASX.
“We do know that, post COVID-19 and as consumption rates normalise, the underlying longer- term growth potential of the business and therefore the value of the Penfolds franchise and the remaining TWE portfolio is significant.”
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