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https://www.theaustralian.com.au/bu...s/news-story/e225fc2cedde9c425f287640851ee180

Rally suggests Treasury Wine Estates may be in the suitors’ sights

Lower wine consumption in China has been weighing on Treasury’s performance.

• BRIDGET CARTER
  DATAROOM EDITOR
  
• 11:15PM JULY 7, 2020

The recent rally in the Treasury Wine Estates share price for six days straight has some wondering whether it could be in the cross hairs of a suitor.

The most obvious explanation for the rally has been the strong performance of the sharemarket in China, which is an important revenue earner for the Australian winemaking and distribution business.
However, when Treasury announced a spin-off of its high-end Penfolds brand, many saw it as a strong signal for the private equity industry to make a play for what is considered the most attractive part of the company.

Based on Treasury’s current market value of $8bn, the business looks cheap, according to analysts, with the stock sold off in the COVID-19 environment this year.

Trade players as well as buyout funds could show interest in Penfolds, such as Pernod Ricard Australia or US-based producer Constellation Brands.

With the improving China market conditions — a key export market — it may also offer a greater incentive for a suitor to come forward.

At the current $8bn market value, it suggests that Penfolds is worth around $7bn, with the commercial wine operations then valued at about $1bn.
This is based on a multiple of 16 times earnings, which had earlier been applied to Penfolds.

Analysts at Bank of America had its value far higher — at between $10bn and $13bn before COVID-19.
This is factoring in additional amounts of luxury wine in its supplies that were destined for the Chinese market.

The departure of boss Michael Clarke and lower wine consumption in China has been weighing on Treasury’s performance.

Penfolds comprises about 10 per cent of Treasury Wine’s volume but more than 50 per cent of its earnings, so it is an attractive business.

It was earlier thought that the business commanded an asking price of between 15 and 25 times earnings, so the question is whether this is a price that private equity would be prepared to pay.

Last year, there was talk in the market that Treasury would demerge its commercial wine business.