Treasury Wine Estates Ltd (ASX: TWE) shares are currently paused from trade.
This is because the wine giant is undertaking an equity raising to fund a major acquisition.
If you're wondering whether you should be buying Treasury Wine shares when they return to trade, then it could be worth listening to what Goldman Sachs is saying about the deal.
Are Treasury Wine shares a buy?
Goldman Sachs appears to be a fan of the company's plan to acquire California-based DAOU Vineyards for US$900 million plus a US$100 million earnout.
And while the broker highlights that the deal remains subject to US anti-trust approval, if it is completed, Goldman expects it to give Treasury Wine's earnings a nice boost. It explains:
Based on management guidance for low-double digit NSR growth over the medium term, our pro-forma analysis suggest a DAOU NSR range of US$235-242mn for FY25 and US$261-276mn for FY26. We further estimate an EBITS range for DAOU of US$71mn-73mn and US$78mn-83mn (pre-synergies) assuming a stable 30% EBITS margin. Adding a range of US$10-20mn synergies in FY25/26 respectively, our analysis shows EBITS uplift for TWE to be in the range of US$81-93mn in FY25 and US$98-103mn in FY26 respectively.
In light of the above, Goldman calculates the pro-forma net profit after tax uplift to be in the range of 17% to 20% for FY 2025 versus its latest published estimates. However, with the company undertaking a capital raising to fund the deal, the increase won't be as large on an earnings per share (EPS) basis.
Goldman assumes a "~12% share count dilution from ~10% rights issuance and ~2% new share issuance to DAOU founders." In light of this, it calculates "the EPS accretion in a range of 3.6%-6.8% for FY25."
Luxury wine leader in the US
The broker highlights that the acquisition will make Treasury Wine the leading player in the luxury wine market in the United States. This could be a positive given how this segment has been growing while the lower-value market is contracting. It said:
The addition of DAOU will increase Treasury Americas exposure to Luxury from 38% in FY23 to 53% on a pro-forma basis, according to the company. This will also take TWE's exposure from 43% to 49%. Treasury Americas will become the leading player in US luxury, with 11.1% value share, with the next player at 8.1%. The acquisition specifically fills a portfolio gap at the US$20-40/btl range. The US US$20+ market has grown at 5% CAGR over the past 3 years vs overall US$4+ market growth of -3%.
Decent upside ahead
Overall, as things stand, Goldman has a buy rating and a $13.40 price target on Treasury Wine's shares.
This implies a potential upside of 11% for investors over the next 12 months from current levels. In addition, the broker is forecasting dividend yields of 3.1% in FY 2024 and 3.6% in FY 2025.
