Board warned: sell US division, or else
The message is simple: sell the business or face investor wrath, including a downgrade by one of the leading analysts, David Errington at Merrill Lynch.
It comes as class action lawyers Maurice Blackburn and litigation funder IMF are leading the charge to launch a class action, alleging Treasury Wines misled the market when it made a $160 million write-down including up to $35 million to buy back and pour down the sink "aged and obsolete inventory" held by its US distributor partners.
In a report issued on Wednesday, Errington made it clear he did not believe the company could turn around the US business and warned if it kept hold of it, then his valuation of the company would be at risk.
"It is difficult for a management team or board to throw in the towel and admit defeat ... relinquishing value allocated for brand equity and/or management contribution to the physical assets. However, in Treasury Wines' case, we believe this would be the best outcome for shareholders," he said.
The reason is simple. Every day it kept the US business, value was being destroyed and it was putting at risk the Australian business, through a lack of focus and the potential loss of key staff caused by disillusion.
The Australian business performed exceptionally well in 2013 yet team members within the TWE group received no bonus as global targets were not met because of the fiasco in the US.
The latest September quarter Nielsen figures show retail sales of Treasury Wines' Australian products grew 8.7 per cent in volume and 12.2 per cent in value, compared with negative volume growth for the overall market and a 3.8 per cent lift in value. In the June quarter, Treasury Wines' retail sales grew 14.1 per cent by volume and 18.9 per cent by value.
"Treasury Wines has shown over a long period it lacks the ability to succeed in the US," Errington warns in a note. This is why key investors are keen for the company to sell the business.
The US business is valued at an estimated $1 billion yet generates $20 million of earnings, which is a woeful performance.
In Australia the business contributed $220 million to group earnings. Errington forecasts earnings will more than double to $500 million by 2016.
Frequently Asked Questions about this Article…
Investors are pushing for the sale of Treasury Wine Estates' US division because it is underperforming and dragging down the overall business. The US division is valued at $1 billion but only generates $20 million in earnings, which is considered poor performance. Selling it could prevent further value destruction and allow the company to focus on its successful Australian operations.
If Treasury Wine Estates does not sell its US division, it risks facing investor dissatisfaction and potential downgrades from analysts like David Errington at Merrill Lynch. Additionally, the ongoing poor performance of the US division could continue to negatively impact the Australian business and lead to a loss of key staff due to disillusionment.
Treasury Wine Estates' Australian business has been performing exceptionally well. In 2013, despite global targets not being met due to the US division's issues, the Australian business saw significant growth. Recent Nielsen figures show an 8.7% increase in volume and a 12.2% increase in value for Australian products, outperforming the overall market.
The class action against Treasury Wine Estates, led by Maurice Blackburn and IMF, alleges that the company misled the market when it made a $160 million write-down. This included up to $35 million to buy back and dispose of 'aged and obsolete inventory' held by its US distributor partners.
Analyst David Errington from Merrill Lynch believes that Treasury Wine Estates lacks the ability to succeed in the US market. He has warned that holding onto the US division could put his valuation of the company at risk, and he supports the idea of selling it as the best outcome for shareholders.
Treasury Wine Estates' US division is significantly underperforming compared to its Australian division. While the US division is valued at $1 billion, it only generates $20 million in earnings. In contrast, the Australian division contributed $220 million to group earnings, with forecasts to more than double by 2016.
The poor performance of the US division has impacted Treasury Wine Estates' employees by preventing them from receiving bonuses, as global targets were not met. This has led to disillusionment among staff, particularly as the Australian business performed well but was overshadowed by the US division's issues.
The growth prospects for Treasury Wine Estates' Australian business are strong. The business has shown significant growth in both volume and value, outperforming the overall market. Analyst forecasts suggest that earnings from the Australian division could more than double to $500 million by 2016, indicating a positive outlook.
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