Shares in Australia's largest wine-maker, Treasury Wine Estates Ltd (ASX: TWE), entered a trading halt this morning after the company announced an acquisition and capital raising.
Rumours have circled for a little while about Treasury being in talks with global drink conglomerate Diageo about purchasing Diageo's wine portfolio, which it is spinning off. Treasury confirmed those rumours this morning when it announced that the US$552m purchase would be funded by the announced capital raising.
Here's what the acquisition entails:
- US$552m (A$754m) in cash in return for the majority of the assets associated with Diageo's UK and US wine portfolio. Treasury will also take on Diageo's capitalised leases (US$48m)
- In return, expected to deliver low-double digit earnings per share increases in the first full year (financial year 2017) following the acquisition
- An estimated US$25m in unspecified synergies achieved by 2020
- $486m Australian dollars will be raised from shareholders, with the remainder of the purchase to be funded by debt denominated in US dollars
- Treasury avoids US$80m of capital investment that would be required to replace its existing bottling facility in the US
- Expected to immediately double Treasury's 'Americas' luxury and 'masstige' (mass-market prestige) wine revenues
- More than 80% of the acquisition's revenues come from luxury and masstige sales, which enhances Treasury's premium-wine strategy
Treasury will raise the A$486m through a 2-for-15 pro-rata accelerated renounceable entitlement offer priced at $5.60 per share.
What on earth is that?
Basically, you will be offered 2 shares for every 15 that you already hold, with the option to sell your right (to buy shares) to somebody else if you're not interested in taking up shares yourself. The retail offer opens on Monday 26 October, and closes at 5pm on Wednesday 4 November.
I have recently been critical of Treasury's price and sceptical about management, but today's announcement appears a shrewd purchase that indicates management is serious about going the premium route with their wine marketing. Diageo's portfolio is a natural fit for Treasury and is likely to remain capital-light, given that Treasury isn't just paying for vineyards.
I particularly like the cost savings achieved as a result of not having to replace Treasury's existing bottling facility and believe that investors can place confidence in management's approach.
The announced raising appears fair to shareholders and investors who want to own more of Treasury could consider taking up their entitlements in the capital raising.
