Treasury puts a cork in sales talk

Michael Clarke's determination to build Treasury's global brand aligns with strengthening US demand, while raising questions on whether the group's US presence is large enough to propel those ambitions.

Treasury Wine Estates’ new chief executive Michael Clarke has laid down the biggest marker of his new career. The group’s US wine business is not for sale.

Twice this month Treasury has been forced to respond to speculation that it has been approached by prospective buyers of that business.

First there was speculation that Pernod Ricard was interested in acquiring Treasury’s US wine business and now Treasury has today dismissed reports that it has been approached by Constellation Brands. It said it had not been approached and was not in discussions with Constellation.

“In addition, the company has no intention of selling its US operations and sees that market as a key plank of its future growth platform,” Treasury said.

That’s about as definitive a statement of intent as the group could issue and a significant shift in the position Clarke articulated in his first appearance before investors and analysts last month, when he said he had no emotional attachment to any of the group’s brands or businesses and that “everything is on the table.”

He also said, however, that he believed the US business could be improved and today’s statement that the business is a key to Treasury’s future growth signals that his conviction that there was upside in the US has strengthened as he has had more time to analyse and understand the group and the problems that have plagued it in the US.

While there will be analysts and fund managers disappointed with today’s emphatic rejection of their calls for the US business to be sold, there are arguments for its retention, albeit that Clarke represents probably its final opportunity to remain within the Treasury portfolio.

For a start, if Treasury were to exit the US its ambition of being a global premium wine player would be ended. It’s a market in which any player with international aspirations has to be present.

It’s also arguably the wrong time to consider exiting (and therefore, perhaps the right moment for an opportunistic buyer).

Foster’s entered the US industry in 2001 with the acquisition of the Beringer business. With hindsight it bought into the US just as the wine industry was peaking ahead of a decade-and-a-half wine glut and, of course, the impact of the financial crisis.

For the first time since then the industry is shifting towards a better balance of supply and demand, with demand for premium wines -- and Treasury has nearly $500 million of premium non-current inventory -- now strengthening.

Clarke has said he can see opportunities to reduce overhead costs, invest more in his core brands, “right-size” Treasury’s infrastructure and cull low-value brands in the US and elsewhere. If he can improve the US platform and external conditions do continue to improve the US business could, for essentially the first time since it was acquired, make a respectable contribution.

The interesting question that Clarke would have to ponder if he can stabilise and re-base the business’ performance is whether Treasury’s US presence is significant enough for it to be the key plan of the group’s growth platform.

It is often forgotten that Foster’s paid a big premium for Beringer because it saw the business as a beachhead for further US expansion. Indeed, former Foster’s CEO Ted Kunkel made it clear that the group would only be able to justify that premium -- and planned to justify that premium --  via further acquisitions and the opportunity they would generate to extract synergies.

Foster’s did kick the tyres on other US wine groups like Robert Mondavi (acquired by Constellation in 2004) and Kendall-Jackson but couldn’t consummate the deal that would have helped make sense of the Beringer acquisition and given it real scale and clout – and synergies – in the US.

If Clarke can lift Treasury’s performance, particularly in the US, that question of the size of Treasury’s presence in the US may again be a live one.

In the meantime, Treasury’s statement of intent (or lack of it) today says strongly that Clarke is optimistic about his prospects of improving its performance and committed to a global strategy rather than its abandonment and the retreat of Treasury, via divestments, to an Australasian production platform.