Treasury Wine Estates mulls over possible demerger of Penfolds brand

Australia’s biggest wine producer Treasury Wine Estates is considering splitting its flagship brand Penfolds into a separate listed company by the end of next year.  

The demerger plan is a result of TWE’s strategic review, which it announced today. If it does go ahead, the Penfolds business will be the larger of the two, with the New TWE focusing on a streamlined stable of commercial bands.   TWE chief executive Michael Clarke said that while Penfolds accounted for about 10% of the firm’s volume, it represented well over half its earnings.

The Melbourne-based company said the move would create a new ASX top 50 – 100 company for Penfolds and an ASX 100 – 150 company for New TWE, and  would build on TWE’s internal operating model, which is focused on premiumisation and accelerating the separate focus for luxury versus commercial portfolios globally.   

“A potential demerger would enhance New TWE’s and Penfolds’ ability to pursue their own strategic priorities and deliver a stronger long-term growth profile under separate teams and ownership structures,” said Clarke.   However, TWE said the move remained subject to cost-benefit evaluation regarding shareholders, along with regulatory approvals.  

TWE Chairman Paul Rayner said he was excited about the prospects that a potential demerger could bring for both New TWE and Penfolds.   “New TWE would remain the largest globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunity ahead of it to continue the growth of its iconic brand portfolio across all markets,” he said. “Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally.”  

A surge in Chinese exports in the past two years led to a 2018/19 net profit of $419.5 million and helped drive TWE’s share price to $19 in late November. But weaker than expected US sales and the COVID-19 pandemic saw the share price bottom out at $8.61 in mid March. ASX shares opened at $10.56 this morning.  

TWE’s chief operating officer Tim Ford will take over from Clarke as CEO in July.   “These initiatives will accelerate the separate focus on the luxury versus commercial portfolios, and will be implemented in an orderly manner over time to maximise potential gains on asset sales, minimise associated one-off cost impacts and minimise disruption to business performance while ensuring benefits are not compromised by the current economic or capital market conditions,” he said.   

The company also provided an update on the Covid-19 crisis and said that although TWE’s staff in China had recently returned to work, depletions and shipments for the qurter had been “significantly” impacted by shutdowns.  

“In the short term these are unusual and very challenging times with consumers trading down,” he told the ASX. “We do know that, post Covid-19 and as consumption rates normalise, the underlying longer- term growth potential of the business and therefore the value of the Penfolds franchise and the remaining TWE portfolio is significant.”