Key investors in Treasury Wine Estates are believed to be preparing to crank up discussions with the board to offload the global wine giant's beleaguered US division before it becomes a drag on the Australian business.
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.
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.