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Less is more for TWE if it can unload its low-end US brands

 

Treasury Wine Estates could create more than $2 billion in company value by selling  its low-end U.S. brands and restructuring its operations here, according to a July 16, 2020 analysis by Merrill Lunch/BofA Securities. The analysis said that “TWE’s US business [is] being currently valued by the market at close to zero.”

“Based on comments it has made on recent briefings, TWE is looking to exit up to 6m cases of production capacity (~75% of total capability) in the US. With inventory and assets included, we think TWE could realise around $400m from divesting such assets.

“TWE’s US business would then be a business driven by luxury/masstige growth brands capable of generating around $200m EBIT (25-30% EBIT/sales margin)…subject to less risk.”

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More information about the analysis upon which this article is based, may be obtained by contacting John Heflebower, Merrill Lynch Wealth Management, Napa.

Low-end brand EBIT = zero to negative

[T]his low end wine (such as Beringer Main and Vine and BV Coastal) generated around A$250m of revenue (~US2/bottle) in FY19, at probably 0 to negative EBIT contribution.

“Based on the price Constellation looks to be selling around 22m cases of low end wines to Gallo (around A$1.5bn), we think TWE could realise around $400m for its assets (which would include in our view between $100-200m of inventory, some wineries and other production facilities). Such assets albeit unprofitable for TWE (due its subscale) could be profitable for another wine producer in our view.”