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Penfolds not going anywhere

Treasury Wine Estates Limited (ASX: TWE), owner of perhaps Australia’s most famous premium wine brand, Penfolds, has denied that it plans to hive off the Penfolds brand into a separate entity.

According to a report in The Australian, Treasury Wine’s chief executive, David Dearie said speculation had been rife since the company split from Foster’s in May, 2011. “It’s not something we’re considering. We’ve been asked that question many different ways over the last 18 months.

The newspaper reports that the rumour mill went into overdrive after a Macquarie analyst suggested the company could become a potential takeover target, if Penfolds wasn’t demerged. The same analyst estimates that Penfolds was responsible for 25% of Treasury Wine’s gross profits, despite generating just 5% of the company’s total revenue, but was dragged down by underperforming brands.

Mr Dearie is seeking to boost the quality and returns across the company’s entire portfolio, after the company downgraded earnings guidance to mid-single-digit growth for the 2013 financial year.

Macquarie analysts estimate that Penfolds could be worth $3.1 billion if it was spun off – only slightly less than Treasury Wine’s current market capital of $3.3 billion.

Analysts’ views of the company are divided. Global wine demand is expected to outstrip supply, while global production is at its lowest in 37 years according to Morgan Stanley analysts. Some stress that the company faces several risks to its business that it has no control over, like weather conditions, currency and regional demand fluctuations.

Like other agricultural companies, Graincorp Limited (ASX: GNC), Ridley Corporation (ASX: RIC), Select Harvests Limited (ASX: SHV) and Australian Agricultural Co Ltd (ASX: AAC), weather plays a prominent part in Treasury Wine’s financial results. The strong Australian dollar doesn’t help our exporters compete in global markets either.

The Foolish bottom line

As is often the case, analysts look at the short-term benefits over a long-term strategy. It would likely be only a matter of time before Penfolds was swallowed up by an international company, if it was listed. For the benefit of Treasury Wine shareholders, the company is better off keeping the brand in house and looking to improve its other products.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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