Treasury Wine Estates Eyes Penfolds Demerger

Desperate times call for desperate measures and so it was not that big a surprise that embattled wine giant Treasury Wine Estates (TWE) says it is thinking of de-merging its high-quality Penfolds wine business from the rest of the company.

TWE would be following Wesfarmers in the way it demerged Coles and the way GrainCorp has just completed the separation of United Malt Group.

The news had the desired effect – it stopped the rot in TWE shares and sent them 10% higher to a seven-week high of $11.63 in early trading.

But second thoughts set in as analysts pointed out that TWE has to get through a tough 2019-20 and 2020-21 and won’t derive any direct financial benefit from the spin ff, except that it will probably put a floor under the share price.

Those second thoughts saw the share price rise fade during the rest of the session and the shares ended up 1.1% at $10.68.

In a teleconference, TWE CEO Michael Clarke said: “Our initial findings indicate that a demerger of Penfolds will create incremental long term value for shareholders.”

“We believe that both Penfolds and the remaining TWE entity…will be better positioned to pursue their own strategic priorities independently, and deliver a stronger long term growth profile.”

“Penfolds accounts for approximately 10 percent of our volume, but well over half of our earnings, with unique resources and a differentiated execution focus compared to the remainder of our business,” he said.

TWE shares have been under pressure since January when it emerged that its strategy of pushing wine through its distribution channels in the US and China had clogged the system, leading to a slide in sales and earnings.

This pre-dated the impact of the COVID-19 virus from late February onwards.

The de-merger proposal comes as the company is still conducting a review of its US operations it announced in January at the time of the shock earnings downgrade.

If the demerger goes ahead, existing TWE shareholders would own a share of Penfolds and “New TWE” in direct proportion to their current TWE shareholding.

Treasury said if a demerger proceeded, it anticipates it would be completed by the end of 2021.

Woolies has paused its big demerger idea – separating its Endeavour drinks (think the giant Dan Murphy’s chain) and hotels business from the supermarkets and Big W.

In a note, optimistic analysts at Citi estimated Penfolds could be worth about $6.5 billion while Bank America Merrill Lynch analyst David Lynch said a standalone Penfolds would be “fabulous”.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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