Treasury Wine Estates chief Michael Clarke says he has the strong backing of the winemaker’s biggest shareholders, as well as both private equity suitors circling the group, to embark on an acquisition campaign in the US and reverse years of drifting by the business.
Mr Clarke told Fairfax Media in an exclusive interview that he had already compiled a “hit list” of acquisition targets in the US, with the deals making sense whether Treasury Wine remained in the hands of shareholders or was sold to private equity.
He also said that after only four months at the helm of the world’s biggest listed pure-play wine company he had already met his initial target of stripping $35 million of costs out of the business and would capture more savings this year.
The accelerated cost-cutting program, combined with pouring extra funds into marketing Treasury’s most prestigious brands, had already shown some success and with nascent signs of a pick-up at the luxury end of the North American wine segment it was time to go for growth, Mr Clarke said.
Mr Clarke said his decision to try his hand at acquisitions, with Treasury Wine targeting luxury or premium wines, had won the support of shareholders at recent meetings.
“In the discussions we have had with our shareholders, and I’m talking about the top 10 to top 15 shareholders which is in excess of 50 per cent of our register, and we’ve talked to them a number of times now because of all the different takeover bids.
“They have been very supportive of how quickly we have addressed getting costs out, investing in brands and really focusing on how we are going to actually build the quality of this business.
“And there is an opportunity for us to build on top of that, especially luxury and masstige [mass-produced, prestige wine] portfolio where we are doing well and to accelerate that beyond just ‘organic growth’ and the feedback has been positive.”
Shareholder support was however limited to bite-sized deals, with investors naturally gun-shy of acquisitions like the company’s $2.9 billion purchase of Beringer in the US 14 years ago when it was part of Foster’s and never booked a decent return.
“We are not talking major acquisitions, we are talking bolt-ons,” Mr Clarke said.
“Albeit I have only been here for four months, but there was an element of ‘if that’s the road map that you are on, and you believe that’s the right thing to do then we are supportive’ – is the messaging that we have been getting.”
Mr Clarke was aware of the mistakes made by previous managers of the business, which saw brewer Foster’s splurge $6 billion on wine assets, much of it at the top of the market, and then was later forced to spin off Treasury Wine in a demerger to reclaim some lost value.
“So long as we don’t do what previous management did where they overpaid for businesses and then didn’t realise the revenue synergies and cost synergies, then [shareholders] are supportive.
“We have shown the discipline that we can take costs out in a very short period of time, we will over-deliver on that $35 million of costs out of the business, and we can show we can then do the appropriate acquisition to build on the great momentum that we are building up in luxury and masstige.”
Still bearing the weight of past mistakes, Treasury Wine last week posted a net loss of $100.9 million for fiscal 2014 against a profit of $47.2 million in the previous year. The dive into the red was driven by $281 million in write-downs, including the cost of destroying 240,000 cases of unwanted low-end commercial wine in the US.
Mr Clarke said he also had the backing of the board even as private equity player Kohlberg Kravis Roberts, along with an unnamed second bidder presumed to be TPG, had both pitched a takeover set at $5.20 a share to value the winemaker at $3.4 billion and were now conducting due diligence.
“The board felt it was important for shareholders to understand that while we are engaging in these takeover offer discussions, should they not materialise we want people to realise that we are still focused on doing bolt-on acquisitions to deliver on our strategic road map which is to further accelerate our growth in luxury and masstige wines.”
Mr Clarke, who last year worked for New York-based Kohlberg Kravis Roberts to advise on a £1.5 billion ($2.7 billion) bid for drinks brands Lucozade and Ribena, said he had presented his acquisition strategy to both bidders and they had been very receptive.
“Both of the private equity firms that have reviewed the business are very supportive of our strategic road map which includes potential acquisitions … They have said they are backing management to execute those plans.”
Mr Clarke said the value of the potential upside Treasury Wine now had within the business was for shareholders to consider as they faced the likelihood of one or two takeover offers from private equity.
“Shareholders are going to determine how far is up and at the same time they might be prepared to sell and let the private equity firms take the execution risk,” he said.
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