Kohlberg Kravis Roberts Targets Penfolds Wine


May 22, 2014

The Sydney Daily Telegraph is reporting that New York City headquartered private equity and buyout specialist Kohlberg Kravis Roberts & Co. (KKR) has offered AUS$3.04billion (US$2.85billion) to Penfolds wine owners Treasury Wine Estates in a takeover bid. The story is also covered by the Wall Street Journal (WSJ) at this link, with both sources reporting that Treasury Wine Estates have rejected the offer.


It had been expected in many circles that such a bid could be successful. The global wine markets are facing a challenging time right now, with Treasury Wine Estates themselves destroying thousands of gallons of wine in 2013 owing to poor sales performance in the United States, according to the WSJ.


However, other than this it is worth noting that the business has been performing well elsewhere. Other brands owned by Treasury Wine Estates, in addition to Penfolds, includes Lindeman’s and Wolf Blass.


The higher end brands and more expensive wines have continued to perform well, particularly in areas where demand has been historically low but is now booming, such as China. The presence of more expensive brands and wines within the Treasury portfolio is seen as key to the business’s ongoing success, given the lower end of the wine market is often about little more than price these days.


Where KKR Stands Now
The rejection of the offer doesn’t necessarily mean the deal is dead in the water. As this is a first offer, it is likely that KKR will have some room for manoeuvre in their valuation of the share price, so could up their offer beyond the last one, which valued shares in Treasury Wine Estates at AUS$4.70 each.


Existing shareholders clearly expect there to be further activity, with the share price in Sydney rising to AUS$4.80 by close of trading on Tuesday, Australian time. Wine industry analyst for Merrill Lynch, David Errington, believes that AUS$3billion would represent a low price for the Penfolds brand alone.


The Sydney Daily Telegraph cited him in a research piece from earlier in 2014 as having stated, “In our view, $3 billion is a very low price for Penfolds.” In contrast, Will Seddon, of White Funds Management in Sydney, a shareholding company in Treasury Wine Estates, told the WSJ,


“KKR is looking to split it [Treasury Wine Estates] up, clean up the U.S. business for an eventual trade buyer who can benefit from synergies. There’s a lot of debate about what the company is worth, but in our view the stock isn’t cheap, so the offer price isn’t a lowball number.”


Analysts at the Macquarie Group agreed that the proposed deal was an attractive one, but believes KKR will tweak its bid in order to secure the takeover, without necessarily paying a substantially more. They told the WSJ, “Despite offering what we believe is an already reasonable price, we believe it most likely that KKR will further sweeten their bid in coming weeks, albeit not materially higher.”


This proposed deal is the latest in a long line of attempts to get into the Australian marketplace by KKR, all of which up to now have failed.

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