Treasury Wine Estates an attractive spin-off

Treasury Wine Estates (TWE:AU, TSRYY.OTC)

Price (A$3.16, $2.90) - note that you can buy the ADR for less than the AU share

Treasury Wine Estates is an Australian wine producer with wineries worldwide, the company was spun out of Fosters Group back in May.  The good news for a potential investor is sampling the product could be a worthwhile undertaking, invite some friends over and "research" the Treasury brands.

Company Background

Treasury owns 54 brands spread across three continents.  Prominent brands include, Beringer, Lindemans, and Penfolds among many others.  The company has annual sales of A$1.9b a year, the biggest markets are Americas, ANZ, Europe and Asia.  Asia is the fastest growing market for Treasury.  The company produced 35.6 million cases of wine in 2010.

I'm not going to re-hash the entire prospectus, if you're interested in reading more about the company here is the spin-off filing.

Reason for Spin-off

Fosters stated that the reason for the spin-off was that each company would be able to focus on the individual products (beer/wine) with greater intensity.  While that might be true I think there were other drivers at play.

The first driver was that Fosters spend around AU$8 billion to build out the Treasury portfolio.  The portfolio didn't exactly play out as Fosters expected and they ended up writing down a large portion of their investment.  The problem was that as Fosters was building out a wine portfolio other companies were doing something similar, the end result is a large glut of capacity at Australian wineries.

The second driver is a bit more interesting, Fosters received an unsolicited bid for Treasury at a price between A$2.3b and A$2.7b which Fosters turned down as too low.  Fosters has also been the subject of a takeover bid from SABMiller as well.  It seems that management broke the companies apart with the idea that each company as a pureplay would be a much simpler takeover target.  This is good news for an investor, the catalyst is built in.

Investment Catalyst

There are a few catalysts as I see them for investment into Treasury.  The first is that the company is a spin-off and management is motivated to improve operations which is a similar thesis to all spin-offs.

The second is that the company is trading below book value, currently the shares trade around 25% lower than book value.  Book value should be pretty accurate considering Fosters took a lot of write downs pre spin-off.

The biggest catalyst is that the company is a takeover target, this was part of the motivation for the spin-off and it appears there is a potential buyer in the wings.  Rumors started to float about a month ago that Chinese Brighthouse Foods was considering a bid for Treasury.  As of this post nothing has materialized but Brighthouse is in the market.  There have been some other market rumors that a few private equity groups are interested in acquiring Treasury as well.  I think with the recent decline a sizable bid is even more likely.

The last catalyst is that the strong AUD has been a bid of a headwind for Treasury.  They produce and sell a lot of wine in the US and EMEA and then bring the currency home to Australia.  In doing so they've been able to buy less and less Australian dollars which hits the bottom line negatively.  While the company is profitable a weaker AUD will have a large impact on profit for Treasury.

I should also point out that often an investor is able to buy the ADR shares for less than the AU shares.  I ended up purchasing the ADRs myself after noticing this.  For a while the ADRs were selling for almost 15% less than the AU shares, but the spread really depends on the day. If an investor doesn't buy into the Treasury story they could still make money buying the ADRs and converting them to AU shares and making the spread.


-The biggest risk is that there is overcapacity in the wine market currently.  While this is currently an issue the company is still profitable and should be able to weather the storm.
-If the AUD strengthens the impact could result in losses for Treasury Wine Estates.
-The buyout thesis could fail to materialize, although I'm happy to own the company stand alone.


This is a great article about Treasury from Bloomberg
Company Website

Talk to Nate about Treasury Wine Estates

Disclosure: Long Treasury Wine Estates

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