Barbarians gather at the gate as foreign investors eye Penfolds, the mighty Australian whose flagship red is known simply as ”Grange”

Barbarians gather at the gate as foreign investors eye Penfolds

May 24, 2014

Eli Greenblat

With a takeover battle looming at Treasury Wine, Eli Greenblat looks at what structure is best suited to owning wine assets.

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‘Treasury Wine need to re-create the brand value’.

If it were a trinket or a bauble, a cheap toy made in China and sold from a clearance bucket in a suburban discount store, it would be the perfect gift for a game of pass the parcel at a child’s birthday party.

But this is Penfolds, the mighty Australian whose flagship red is known simply as ”Grange”, long considered a ”first growth” wine the equal, if not better, of any French wine and which can sell for more than $25,000 a bottle.


‘The wine industry works best with family businesses.’

Fans queue outside Penfolds’ Magill Estate in South Australia awaiting a new release as if it were a spiritual leader handing down a sermon from the cellar door.

It’s a wine famed and feted as much overseas as it is here, worshipped at Washington, DC, parties attended by US generals, congressmen and senators, where actress and Academy Award-winner Cate Blanchett graces the event but is rendered the accessory playing second fiddle to a bottle of wine.

But now Penfolds, along with its stablemates Wolf Blass, Lindeman’s, Seppelt and about 80 other wine brands, has fallen into a game of corporate pass the parcel.

The takeover battle for Treasury Wine that many expect to break out soon – and which will likely lead to its sale – will also raise the question of what type of corporate vehicle is best suited to owning wine assets.

Is it private equity or a publicly listed company? Or does family ownership and protection provide the best soil from which to grow vines? For some in the wine industry, structure is irrelevant. They say it’s more about the investment in brands and an understanding that wine is an agricultural play that can take five or 10 years to develop and pay investment returns.

This time it is rapacious US private equity firm Kohlberg Kravis Roberts – the asset strippers for whom ”Barbarians at the gate” was coined to both describe and malign – that wants to grab Treasury Wine Estates and be lord of the manor.

It was revealed this week by Treasury Wine that it had been approached by KKR a month earlier with an indicative and conditional bid of $4.70 a share, valuing the world’s biggest pure-play wine company at $3.1 billion.

Treasury Wine, and its CEO of less than two months, Michael Clarke, had only held the parcel since 2011, when the wine company was split off from brewer Foster’s. But it could now be snatched up by KKR, or another bidder that could soon emerge with a higher, more compelling bid.

”It’s being passed around a lot now, like all things, but the sad part would be if the brands disappeared from Australian ownership,” former Southcorp chief executive Ross Wilson told BusinessDay.

He should know. Wilson was the boss of SA Brewing in 1990 when it paid $410 million for Penfolds and a collection of other top wine brands from the billion-dollar wreckage of failed conglomerate Adsteam.

Still 25 years after that deal, Wilson is reluctant to crow that he got Penfolds and the other wines for a steal. But he did.

”Adsteam was in trouble and they had to sell, and we were able to buy their stable for basically book value,” Wilson said this week.

Merrill Lynch’s gun analyst, David Errington, has valued the Penfolds wine brands alone at about $3 billion, and is one of many analysts who have led calls for Treasury Wine to sell its struggling US business, valued at about $800 million, and divest Penfolds into a standalone business.

This may be part of KKR’s plans. The private equity firm is notorious for breaking up companies that fall into their clutches, hiving off business units or factories here and there, cutting through silos, and wiping out little fiefdoms that typically sprout up at businesses that have long been badly managed.

But Wilson, who then led Southcorp, with its considerable wine assets, before it was sold to Foster’s for $3.7 billion in 2005, believes there is strength in numbers and keeping the brands together is one of the best mechanisms to drive profits.

”I think if they [KKR] can really develop brands again, that’s the key to it,” Wilson said.

”You would have to say brand value at Treasury Wine has fallen quite significantly over the years, and they need to re-create the brand value, particularly for the top wine brands.

”Yes, there a lot of small brands in the Treasury Wine portfolio that might divert their attention … but the high-end quality brands was always the strength of that company.

”It’s why we bought the brands: the strength of that acquisition was the strength of the brands and, of course, it was a different market back then, we didn’t have the consolidation of the retail sector. But if you maintain the strength of those top brands, it helps to strengthen the other brands below.

”They determine the price points that flow to everyone else, and I think that’s where you need someone like a Treasury Wine and these big guys, to really set the price points for the top-end wines.”

Less than a 10-minute drive from Mr Wilson’s family winery, Medhurst Wines in Victoria’s bountiful Yarra Valley is a vineyard tended by Tony D’Aloisio.

The former chairman of the Australian Securities and Investments Commission is president of the Winemakers’ Federation of Australia, and from his privately owned Oakridge Wines estate he is well placed to enhance, protect and speak on behalf of the nation’s leading winemakers.

For D’Aloisio the future of Treasury Wine is for its shareholders to decide, and he remains agnostic over the best corporate structure suited to house a vineyard and wine brands.

”You need to be careful that structure is not overemphasised in the sense that it’s not structure [that] determines your success, it’s really the underlying value of the profit of these businesses and what they can generate – and so, consequently, you will see typically different structures will provide returns,” he says.

One would expect that D’Aloisio, a former chief executive partner at law firm Mallesons Stephen Jaques and a one-time boss of the Australian Stock Exchange, would have a bent towards public ownership.

But he believes there are many ways to pipe capital from the city to the vineyard.

”There isn’t a general rule you can say that one strategy fits all,” D’Aloisio says.

”I think private equity, well clearly there is a demand for it and a part for them to play, and they add capital to industries, speaking generally, that might not necessarily get access to capital.

”Because access to capital in agriculture is proving difficult, it’s hard to get finances from banks today, difficult to go on public listings, listed capital, so unlisted capital or private equity capital is a very important part of the economy, and very important to agricultural businesses.”

What investors need to remember, whether they be family members, shareholders, institutions or Canadian teachers’ pension funds, is the wine business is deeply agricultural and therefore at the mercy of all the vagaries of the sector from weather to pests, bushfires and floods.

”The [wine] industry is one that needs patient long-term capital because of the nature of agricultural investment,” D’Aloisio says.

”And those businesses need to attract what I would call patient long-term capital; capital that can be prepared to take a 15- to 20-year horizon for returns.

”For example, we are seeing at the moment significant investment in Australia from overseas pension funds and superannuation funds that are taking positions in beef, cotton and so on, and they are entities that are restructuring these operations with a view to taking more of a patient, long-term view on returns.”

But don’t expect D’Aloisio to join in the savaging of private equity or KKR. You won’t see him using a phrase like ”barbarians at the gate” – well, not in public.

”Like all investors, they [private equity] need to drive a return; they have principles and targets and they need to achieve them, and, in a way, they might initially come across as being more aggressive,” he says.

”But long-term, they have got to come up with an asset that really stands up to scrutiny – and stands up to attracting a resale value – so they have to take a long-term value as well.”

Wine businesses have had mixed fortunes on the sharemarket.

Evans & Tate was a successful family winery that floated and later failed. Others struggled for years and were bought up by larger overseas beverage companies for a few cents in the dollar.

”The wine industry is a hard gig,” says Neil McGuigan, a link in the chain of four generations of the McGuigan family, which has made wine for more than 80 years.

McGuigan took the public listing approach, with his Australian Vintage floating on the ASX more than two decades ago, originally under the name McGuigan Wines.

McGuigan wears the scars of the investment market. Restructuring and writedowns led his group to post a loss of $123.64 million in 2008-09, and only now is it recovering and lifting investment returns.

”We are not a mining company, not a dotcom, not into IT,” he says. ”We are an agricultural company and, therefore, you have got to understand that there are ebbs and flows in agriculture, and decisions we make today won’t manifest themselves – whether right or wrong – in three years down the track.”

McGuigan is neither a flag-bearer for public ownership nor a foe of private equity. He says there are greater worries for a wine company than whose name is on the shingle.

”So my view is, it doesn’t matter who owns it; it’s about the management structure and decisions being made, and those decisions have got to be about the long term.

”The way to make money out of a wine business is to build quality brands, and that doesn’t happen in one minute, it happens over a long period of time.

”You work very hard on wine quality, you work at engaging with consumers, and you work with retailers to help them get your wine flying off the shelf.”

McGuigan recognises Treasury Wine as a mighty competitor and would be saddened to see it lost to overseas owners, be it KKR or anyone else.

”They [Treasury Wine] have fantastic brands, fantastic people, and I hope they come through this and are a very strong No.1,” he says.

”The only thing I’m concerned about is, I wouldn’t like them to fall into international hands but to remain Australian.

”Emotional attachment is very important and Australians love Australian brands, and if it is owned by someone else, I think that would be disappointing.”

Mitchell Taylor, the managing director of Clare Valley winemaker Taylors, is more strident in his views about the best form of ownership for wine businesses.

”I believe it would be very sad to see jewels like a Penfolds, that was originally set up by a family business, that this brand could be in the hands of overseas multinationals, or private equity,” he says.

Taylor, who is also chairman of Australia’s First Families of Wine, a club of 12 multi-generational family-owned wineries, is naturally a believer in the virtues of family ownership and is resisting corporate intrusions into the sector.

”We know where private equity head when they invest: they make a killing, break things up and then sell them down, so myself, as a family business, I believe the wine industry works best with family businesses. We have long-term vision, and that’s what the wine industry needs.

”The average investment time they [private equity] have is somewhere between three and five years, where we believe in the wine industry you need 10-plus years’ vision.”

Back at Treasury Wine headquarters in Melbourne, far from any of their vineyards, the next six weeks could be the key to what happens next.

Clarke this week said that May and June were crucial trading months for the company – when it shifts its biggest volumes – and any misstep or profit downgrade off the back of deteriorating trading conditions could firmly place the entire company on the auction block as shareholders finally give up and let someone else have a go with one of Australia’s most expensive toys.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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