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Diageo Helps Treasury Back From Cliff

April 2016
by Paul Franson
Treasury Wine Estates revenue by region

Napa, Calif.—After a troubling recent past, Treasury Wine Estates (TWE) seems to have recovered its footing in the global wine industry and is even thriving.

On Feb. 18, TWE announced its interim 2016 financial results, with net profits after tax more than double the previous period at $65.6 million (all figures in USD) on a reported currency basis and up 39% on a constant currency basis.

Earnings before interest, tax, assets and material items were up 72% to $109.6 million.

The company’s Americas division reported a 67% increase in earnings to $56 million. Sales growth has been fueled by the new focus on higher priced wines and reshaping the company’s U.S. portfolio.

European earnings also doubled to $12.7 million, and earnings grew by $19.4 million to $35.1 million in Asia.

The change in the company’s overall strategy, which has been led by CEO Michael Clarke, who took the job in February 2014, appears to have paid off for TWE.

The new strategy also paid off for Clarke, who received a 30% raise to $1.6 million per year in March. In announcing the pay increase, the company noted the “significant turnaround of the business,” and chairman Paul Rayner said Clarke’s “vision and leadership has been critical to TWE achieving outstanding results for our shareholders.”

TWE’s U.S. operations also have a new boss. The company announced Bob Spooner as the new president of TWE Americas in February. Spooner joined the company in January 2015 as chief supply officer to help make the shift toward more luxury and premium brands.

Outlook wasn’t so positive
Less than three years ago, in July 2013, TWE announced plans to destroy $145 million of unsold, low-priced wine that had gone bad sitting in warehouses. The embarrassing move did have some tax benefits, but full-year profits reported in August 2013 plunged by 53% despite a 2.9% rise in sales.

In September 2013, CEO David Dearie left the company, and after an interim period, Clarke—a former Coca-Cola Co., Kraft Foods and Premier Foods executive—took over in February 2014.

Then the acquisition speculation started. In May 2014, a rumor circulated that Pernod Ricard would buy TWE’s U.S. wine assets. Two weeks later, TWE denied that it had held talks with Constellation Brands regarding a similar move.

Later that year, three private equity firms made bids to acquire TWE’s U.S. wine business, but the company rejected those offers.

A week later, TWE released full-year results with $74.6 million of losses on a 5.3% fall in sales. Clarke said the company would be cutting costs and changing its focus to bolster the sales of its high-priced brands, especially in the United States. He also suggested that TWE might be on the hunt for acquisitions of its own.

From buyout rumors to making the buyout
In October 2015, TWE announced it was buying most of the wine brands of giant spirit and beer empire Diageo for $552 million and taking on leases of $48 million, for a total expenditure of $600 million. The acquisition added prestigious and well-distributed wines—Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt—to Treasury’s portfolio.

TWE did not buy real estate or wineries, only brands and inventories. The land had previously been sold to an investment company and leased back to Diageo; these leases are being assumed by TWE.

The acquisition doubled TWE’s sales revenue from Diageo’s portfolio of luxury wines in the Americas as more than 80% of Diageo’s U.S. wine sales come from higher priced brands (while much of Beringer’s sales are of inexpensive wines including an ocean of white Zinfandel). In 2015, Diageo’s U.S. wine business produced about 4 million cases of wine and generated sales of about $470 million.

The deal also secured a supply of grapes for the better wines. TWE was selling just about all the premium wine that it was making in the United States, and the new sources of grapes might help it make more.

TWE also got Diageo’s Blossom Hill volume wine brand, the No. 2 wine brand in the United Kingdom by volume and value. Diageo’s U.K. wine business produces about 5 million cases of wine, which are sold in Great Britain and 28 other markets. CEO Clarke said the addition of Blossom Hill would give TWE the scale and critical mass to improve the profitability of the group’s portfolio of lower priced commercial wines.

In July 2015, Treasury Wine Estates sold the historic Asti winery—one of the largest production facilities in Sonoma County, Calif.—and the declining Souverain brand to E. & J. Gallo Winery. TWE sold the 535-acre Alexander Valley property that is home to the Asti winery, including 275 acres planted with grapes, again shedding hard assets. Treasury will enter into a long-term lease agreement with Gallo to buy grapes from the vineyard that it has traditionally used for its wines.

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