Treasury's US plans could improve with age

Paul Rayner’s insistence yesterday that Treasury Wine Estate remains committed to its US business appears to be an unpopular popular view.

Analysts and journalists appear to have given up on that US presence, urging Treasury to offload it for whatever it can get for it, which would be a lot less than the $US2.9 billion ($A3.08 billion) Foster’s paid for Beringer Wine Estates at the start of the last decade.

While the Treasury chairman conceded that David Dearie’s successor might bring a different view to the board, Rayner also said the board remained committed to its agreed strategic priorities, which included expanding the group’s global routes to market.

If Treasury were to offload the US business, it would be adopting a very different strategy to the one that Foster’s decided upon when it bought Beringer. That acquisition was a core element of a strategy of creating a global premium wine business.

Selling out of the US — the world’s largest wine market — would essentially recreate Treasury as an Australian wine business with an export dimension. It would be a niche player in international markets.

Former Foster's CEO Ted Kunkel’s vision of an international business was driven by a conviction that in the US and other international markets, imports can only ever account for a relatively small proportion of wine sales, and that imports from particular geographies would only ever represent a slice of those overall imports.

He believed the overall market share ceiling for Australian wine export to the US was about 10 per cent, hence the decision to acquire a US domestic production base.

Beringer was recognised at the time as quite an expensive acquisition, with Foster’s paying a premium to enter the market and with no offsetting synergies. Beringer was, however, supposed to be only the first step in a series of acquisitions that would give Foster’s a major presence in the US market, generating the synergies that would justify the original deal.

Unfortunately for Foster’s — and Treasury post de-merger — history hasn’t been kind.

Foster’s acquired Beringer at the tailend of an industry cycle; essentially the last time the industry was in a position where supply and demand were broadly in balance. The impact of the financial crisis on US demand hasn’t helped, nor has the strength of the Australian dollar since the crisis.

If Treasury were to decide to exit the US, now is probably not the time.

The only buyers for large-scale wine assets would be private equity firms, which essentially guarantees that a vendor in Treasury’s circumstances wouldn’t get reasonable value for its assets.

More particularly, the US market is showing signs of recovery, particularly at the masstige and luxury end where Dearie has re-positioned the group and the dollar has fallen significantly from its highs.

For the first time in nearly 15 years, the overall supply-demand equation is moving in the producers’ favour, thanks to large-scale production cutbacks across the sector and a couple of poor seasons in succession in France. The general industry settings are looking more favourable since Foster’s acquisition of Beringer.

Dearie appears to have lost his job, and investors have lost their faith in the US strategy, because of the shock $155 million of writedowns of excess and aged inventories in the US earlier this year.

Treasury has, however, taken that hit. By the end of the first half of this financial year, the financial impact of that decision will have worked its way through its numbers and Treasury will have a cleaner US business to work with.

There is no obvious reason why the new management Dearie installed in the US can’t manage the business as well as anyone else, or why Treasury’s US business should somehow be more valuable to someone else than it is to an existing international industry player.

It would probably be desirable, as Rayner said yesterday, that Dearie’s successor had experience in wine in the Americas. But in theory, there is no obvious reason why competent local management can’t produce respectable results from that market, particularly if the US economy continues to improve.

It might be, of course, that Treasury’s US presence is simply sub-scale, which would be an argument for either exiting or completing the original vision and using the Beringer beachhead to build a larger US domestic market presence.

It is unlikely the market or Treasury’s shareholders would, in its current circumstances, extend the group a mandate to expand by acquisition in the US.

But it is conceivable that if the US performance could be improved and the favourable trends within the industry’s settings do continue, that expansion might be looked upon differently in the future.

The US base creates options for future growth that would disappear if Treasury were to concede defeat in its decade-and-a-half attempt to develop a sustainable domestic business in that market.

Given the apparently improving industry settings, even if Treasury were to eventually decide not to continue to pursue its US ambitions, that’s a decision that should probably be made later rather than sooner.