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TWE considers Penfolds demerger

April 8, 2020
By Alana House

Treasury Wine Estates has announced is considering a Penfolds demerger by the end of 2021 as it restructures its business.

TWE revealed in January that CEO Michael Clarke was conducting a strategic review of the company’s commercial wine business before his impending retirement.

“We need a separate focus on luxury, and a separate focus on commercial,” Clarke said at the time. “We do know the answers. We’re going to move quickly on this”.

It’s a big day for the winemaker, with Diageo also announcing top TWE executive Angus McPherson as its new MD, replacing David Smith.

The decision to consider a Penfolds demerger follows Clarke’s review of TWE’s portfolio and builds on the company’s growing focus on premiumisation.

“A potential demerger would facilitate the creation of incremental long-term value by allowing one team to focus on driving the luxury Penfolds multi-country of origin portfolio (Australian, French and US sourced propositions) while a separate team focuses on accelerating the mix shift towards luxury in new TWE business, while also reducing and right-sizing the commercial portfolio,” TWE noted.

TWE Michael Clarke

Clarke (above) 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.”

Paul Rayner, Chairman of TWE said: “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.”

Commercial wine business restructure

Regardless of whether the Penfolds demerger goes ahead, TWE said it will reduce the size and scale of its commercial wine business, particularly in the United States.

This will include adjusting its operating model and organisational structure to “align with the future scale of the right-sized business and to reduce fixed costs”, as well as drive improved engagement and performance with customers.

There will also be a restructuring of TWE’s supply chain and the sale of some of its lower margin commercial tier brands.

TWE COO Tim Ford said: “These initiatives will accelerate the separate focus on the luxury versus commercial portfolios, and will be implemented in an orderly manner over time to maximise potential gains on asset sales, minimise associated one-off cost impacts and minimise disruption to business performance while ensuring benefits are not compromised by the current economic or capital market conditions.”

TWE provides COVID-19 business update

TWE also provided an update on its current state F20 trading performance.

TWE China

In China, TWE’s staff have recently returned to working in the office and, while Q3 depletions and shipments were “significantly impacted” as a result of the nationwide shutdown, TWE said it is now working closely with its partners to resume operations through the remainder of F20.

“It should be noted that while consumers are getting back to work, socialising and consumption levels remain at subdued levels,” the company said.

In TWE’s other regions, strong retail depletions growth towards the end of Q3 reflected consumers stocking up on product, consuming wine at home during government-imposed shutdown periods, and strong momentum through e-commerce channels.

However, TWE said performance during this period had been skewed towards the lower margin commercial and masstige portfolios.

Clarke said: “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.”

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