By James Atkinson
Treasury Wine Estates (TWE) CEO Mike Clarke’s new vision is very similar to the ill-fated Foster’s Wine Review of 2009, according to Citi analysts, who argue TWE’s US portfolio is an unlikely target for Pernod Ricard.
Citi’s Gino Rossi and Craig Woolford this week said they approved of Clarke’s preliminary vision for the company, but the proof will be in the execution.
“Many aspects of his strategy replicate Foster’s Wine Review in 2009, which had limited success,” the analysts said in a note to investors.
The 2009 Foster’s review identified more than $100 million a year in cost savings by way of efficiency programs that included 300 job losses, rationalisation of ‘tail’ brands and the sale or closure of non-core vineyards or wineries.
TWE not suited to Pernod Ricard
Pernod Ricard recently purchased Kenwood Vineyards in California and the French company has stated its ambitions to become one of the top suppliers of premium wines in the US.
But Rossi and Woolford said they doubt Pernod Ricard would be interested in buying Treasury’s entire US business, as has been suggested.
“Pernod Ricard’s focus is typically on the more premium segment of the market. Treasury’s US portfolio is broad and has some strong brands. However, in general, it is biased to commercial wine.”
“The company’s presence in the US wine market is minor, so a lack of synergies may make it hard to justify a knock-out price for Treasury’s assets.”
The analysts said Treasury Wine is looking to divest some of its smaller US brands and this may be of interest to Pernod Ricard.
“Pernod Ricard’s preference may be to cherry pick some of Treasury’s smaller brands that may be up for sale,” they said.
“Making a full bid for Treasury, including Australia, has limited strategic appeal given the highly concentrated nature of its Australian customers and the high degree of overlap between the two company’s portfolios.”
Earnings forecasts too optimistic
Currently, Rossi and Woolford say TWE’s short-term earnings remain under pressure and consensus forecasts for the company’s 2015 financial year appear “too optimistic”.
“Momentum in the Australian business has still not improved and its volume declines may continue into FY15,” they said.
“Asia remains depressed and the US de-stocking process has spilled into FY15. Furthermore, management plans to rationalise brands and step away from some low end sales which will reduce sales and earnings.”
They forecast TWE will achieve eight per cent EBITS growth in FY15 compared to consensus growth of 23 per cent.
“In the short-term, earnings are under pressure and the market is pinning high hopes on a stellar FY15 Penfolds release.”
“Beyond FY15 the outlook is more favourable as the company rides an improving wine cycle in the US and ongoing strong demand growth for wine in its key markets.”