Treasury Wine Estates Ltd (ASX: TWE) shares are currently halted as the wine business makes a very large US acquisition.
The wine business has a growing global presence with its various brands including Penfolds.
Treasury Wine Estates share price
US acquisition called DAOU Vineyards
Treasury Wine Estates said that it’s going to acquire DAOU, which is a leading US luxury wine brand, for US$900 million, or A$1.4 billion at the current exchange rate.
The company said that this is a highly strategic transaction which fills a “key gap” in the Treasury Americas portfolio at between US$20 to US$40 per bottle and strengthens the existing portfolio above US$40 per bottle.
It also said that it accelerates Treasury Wine Estate’s luxury-led portfolio ‘premiumisation’ focus with the luxury portfolio contributing approximately 50% of global group net sales revenue (NSR) after the acquisition is integrated.
TWE also said that the acquisition will strengthen the company’s growth profile and enhance its NSR and EBITS growth, as well as the EBITS margin (EBIT explained). This could be helpful for TWE shares in time.
The ASX share said that it establishes Treasury Americas as a “leading and iconic and US luxury wine business” and that it “provides the scale to support a future standalone Treasury Americas luxury division”.
In the first full year of ownership, being FY25, the deal is expected to add mid-to-high single digits to profit / earnings per share (EPS).
The deal is expected to be completed by the end of 2023, subject to US anti-trust approval.
How will the deal be funded?
There will be an upfront consideration of US$900 million plus an additional earn-out of up to US$100 million payable in the event that certain NSR targets deliver growth in excess of pre-agreed thresholds from 2025 to 2027.
The upfront consideration is going to be funded with a combination of debt and equity (new TWE shares).
It’s doing a A$825 million capital raising through a fully underwritten pro-rata accelerated renounceable entitlement offer with retail entitlements trading to provide the “fairest possible structure for TWE shareholders.”
There is an A$157 million placement of new TWE shares to the existing owners of DAOU at an issue price of $11.97 per share, with half of these shares subject to a one-year voluntary escrow, with the other half subject to a two-year voluntary escrow. In other words, they can’t sell the shares during those time periods.
TWE also announced a new US$350 million acquisition bridge facility for funding the debt component of the acquisition and related costs.
Final thoughts on TWE shares
The business is making a big move, and taking on a sizeable amount of debt is not ideal when interest rates are as high as they are.
Hopefully the US business it’s buying is high-quality and has a lot of growth in its future because otherwise TWE would be burning a lot of shareholder capital.
I’m not a TWE shareholder, so I’m not sure about how comfortable I’d be with this higher-risk play to expand. But, with Chinese tariffs to be possibly removed in 2024, things are looking up for the business.
