Aussie winemaker ferments risky US deal vintage

Mulled whine. Tim Ford must hope he’s not had one too many in the United States. On Tuesday, the boss of Treasury Wine Estates revealed the Australian company is splashing out $900 million, plus up to $100 million more based on performance, for California-based Daou Vineyards. The deal comes just two years after the Penfolds maker downed Napa Valley’s Frank Family Vineyards for $315 million and is the latest step in the $5.5 billion company’s recovery from punitive Chinese tariffs that corked a third of its earnings. Yet past experiences leave a sour taste.

Founded in 2007 by brothers Georges and Daniel Daou, the eponymous company is maturing fast. Its revenue has grown 45% on a compound annual basis since 2020, while core earnings have swelled by 61%. That makes the purchase price of almost 13 times this year’s expected EBITDA – roughly in line with Treasury Wine’s own multiple – look reasonable. Factor in cost cuts and favourable U.S. accounting treatment for acquired goodwill on the earnout and the multiple drops to less than 9 times.

Listed U.S. winemakers offer a bitter tasting note, though. Shares in Vintage Wine Estates, which has been undergoing a restructuring, have fallen 82% this year, while those of $1.2 billion Duckhorn Portfolio have dropped almost 40%. Treasury Wine is no stranger to stateside hangovers. The company was battered by an oversupply of cheap plonk in the U.S. market in 2014, and again in 2020.

Ford, who took over in July 2020 in the aftermath of the second incident, has since restructured the business to focus on the mid- and high-end wine market, which is where Daou fits in: its Patrimony wines can sell for more than $250 a bottle, while cheaper options cost between $20 and $40. Memories run deep, though: one analyst wondered why Treasury’s Americas business still makes less than it did in 2019, despite the acquisition of Frank and a favourable exchange rate. Another lamented he didn’t “know what it is about TWE CEOs in Australia to think you can succeed in the U.S. … when you’ve never delivered”.

Beijing is now considering whether to lift tariffs on Australian wine. But Ford has learned the hard way that over-reliance on Chinese wine drinkers is a bad strategy. If Daou keeps growing earnings at three-quarters of the recent annual rate, Treasury would pour out a 12% return on its acquisition in around two years, Breakingviews calculates. If not, the company will have to go cold turkey on dealmaking.

(Source: Reuters Breakingviews)