The Treasury Wine Estates Ltd (ASX: TWE) share price will be on watch on Wednesday after the release of an update on its strategic review.
What did Treasury Wine Estates announce?
This morning Treasury Wine Estates announced its intention to consider a demerger of the Penfolds business and associated assets into a separate company listed on the ASX by the end of calendar year 2021.
According to the release, the decision to consider a demerger of the Penfolds business follows a detailed review of its portfolio and an assessment of both the optimal strategy and structure of the business. It also builds on its internal operating model, which focuses on premiumisation and accelerating the separate focus for the Luxury versus Commercial portfolios.
Management also believes a potential demerger would facilitate the creation of incremental long-term value. This is by allowing one team to focus on driving the luxury Penfolds multi-country of origin portfolio, while a separate team focuses on accelerating the mix-shift towards Luxury in "New TWE", while also reducing and right-sizing its Commercial portfolio.
The company's chief executive officer, Michael Clarke, believes the potential demerger would create value for shareholders.
He said: "Penfolds accounts for approximately 10% of our volume, but well over half of our earnings, with unique resources and a differentiated execution focus compared to the remainder of our business."
"A potential demerger would enhance New TWE's and Penfolds' ability to pursue their own strategic priorities and deliver a stronger long-term growth profile under separate teams and ownership structures, in addition to enabling investors to more appropriately assess the fundamental value of the brand and its assets," he added.
This sentiment was echoed by the company's chairman, Paul Rayner.
He commented: "I am excited about the prospects that a potential demerger could bring for both New TWE and Penfolds."
"New TWE would remain the largest globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunity ahead of it to continue the growth of its iconic brand portfolio across all markets. Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally," the chairman added.
What now?
There's still a long road ahead before this potential demerger can become a reality. But if it does, Treasury Wine Estates shareholders would own a share in Penfolds and in New TWE proportional to their existing holdings.
The potential demerger remains subject to a detailed evaluation of the costs and benefits to shareholders, along with final board, shareholder, and regulatory approvals, and the receipt of third party approvals on satisfactory terms.
Commercial wine update.
In addition to this, the company has decided to pursue a range of initiatives to reduce the size and scale of its Commercial wine business, particularly in the United States.
This includes adjusting its operating model and organisational structure to align with the future scale of the right-sized business and to reduce fixed costs. It also plans to restructure its supply chain to improve its cost of goods sold.
Further, management will accelerate its reduction of lower margin commercial tier brands and divest or delete selected brands and production assets, either individually or in combination.
Trading update.
Finally, the company provided an update on how its business is performing during the coronavirus pandemic.
In China its third quarter depletions and shipments were significantly impacted as a result of the nationwide shutdown. However, in other regions, it experienced strong retail depletions growth towards the end of the quarter. This reflects consumer behaviour to stock up on product and the greater propensity for in-home consumption during government-imposed shutdown periods.
Mr Clarke commented: "In the short term these are unusual and very challenging times with consumers trading down. Therefore, TWE is not in a position to provide detailed numbers or detailed timelines at this stage as it is unclear how trading will play out in the short term. We do know that, post COVID-19 and as consumption rates normalise, the underlying longer term growth potential of the business and therefore the value of the Penfolds franchise and the remaining TWE portfolio is significant."
