Treasury Wine Estates scoops up Diageo wine business

By Mathew Lyons

Published: 14 October, 2015

Treasury Wine Estates has acquired the bulk of Diageo's US and UK wine operations for £390 million.

The acquisition includes key US brands Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt, as well as Blossom Hill in the UK. Blossom Hill is second largest wine brand in the UK by both volume and value.

The cash payment of £390m million includes the assumption of capitalised leases valued at £31 million.

TWE plans to raise £230 million from investors to help fund the deal. The remaining funds will come from a debt issue.

Michael Clarke, TWE's chief executive, said: "This acquisition will transform our US business into a larger player of scale in the attractive luxury and masstige segments of the high-growth US market.

"The additional supply of luxury and masstige wine will be a game-changer for our US brands, providing us with an immediate opportunity to step-change our growth in the US, Canada, Asia and Latin America."

The Financial Times reports that synergies from the acquisition are believed to be worth at least £16 million a year to the group over the next five years. The deal should result in low-double-digit earnings-per-share growth from the first full year.

Connor Campbell, senior market analyst at www.spreadex.com, said: "Coming just as the Australian company announced an improved profit guidance for its full year outlook, an increasingly ambitious Treasury may have snagged a potential game-changer in its acquisition of Diageo's wine portfolio, especially since the deal includes low-brand favourite Blossom Hill."

The inclusion of Blossom Hill in the deal may speed TWE's separation into two distinct businesses focused on high-end and mass market commercial wines.

"The acquisition of Blossom Hill in Diageo's UK wine business will provide us with the scale and critical mass to deliver enhanced value creation from our combined commercial businesses by accelerating our separate focus on the commercial portfolio, globally," Clarke said.

Treasury currently owns 83 brands, including Wolf Blass, Penfolds, Lindeman's and Rosemont Estate.

The acquisition represents a turnaround for the Australian winemaker.

Its troubled US operation was forced to destroy 6 million bottles of wine last year and to accept a resultant £73m writedown.

The problems led to the company being eyed as a possible acquisition target by private equity houses, with KKR and Rhone Capital both making their interest plain.

The sale represents a defensive measure for Diageo. Chief executive Ivan Menezes has been under pressure from investors to divest of non-core businesses after a string of poor results for the global drinks group.

The sale has not been well received by the market, however.

"Diageo investors were less than impressed with the portfolio-shrinking sale, sending the stock 1% lower despite Ivan Menezes' pledge that it gives the company 'greater focus'," Campbell said.

Wine was responsible for 4% of Diageo's net sales.

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