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Treasury Wine Estates Rejects $2.8 Billion Conditional Offer From KKR

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Treasury Wine Estates Limited is in the news today in Australia, reporting it has rejected takeover overtures from the US private equity firm KKR.

The Board of Directors of Treasury Wine Estates announced that it has rejected a preliminary, indicative, non-binding and conditional proposal from KKR to acquire all of its shares at a price of about US$4.36 per share (A$4.70 per share).

The KKR proposal, which is at a premium of around 15% over its most recent trading level before the news was disclosed, calls for the consideration to be paid entirely in cash and to be effected by way of a scheme of arrangement if ultimately definitively agreed and then approved by the company’s shareholders.

Treasury Wine Estates is a global wine making and distribution business, based in Melbourne Australia. Formerly the winemaking subsidiary of the Foster’s brewing group, the company was spun off as a separate listed company on the Australian Stock Exchange in 2011.

Before today’s announcement the shares were trading at about US$3.75-3.80 (A$4.05-4.10) and ticked up afterwards to about US$4.45 (A$4.80) on the news of both the offer and its rejection by the Board.

With almost 650 million shares currently outstanding the company has a market capitalisation of around US$2.9 billion (A$3.1 billion). At the bid price, KKR was offering a total of just over US$2.8 billion (A$3 billion) for the company.

KKR had made the proposal in a letter to the company which it received as long ago as April 16th, and which its Board kept confidential at the request of KKR while the company considered it. As it was, and indeed remained, a highly conditional offer the Board acceded to the request and then commenced certain discussions with KKR.

In their announcement today, Treasury Wine Estates states it learned after the market closed yesterday that KKR, and/or their advisors, had spoken to one or more of its shareholders, and therefore there was a significant risk that the confidentiality of the KKR proposal had actually been lost.

For that reason, in order to ensure there is a properly informed market for the company’s shares for all of its shareholders, as part of its continuous disclosure requirements, the Company felt it had to make today’s announcement. That is indeed the trouble, and the risk, with such confidentially maintained proposals which obviously materially impact a company.

Treasury Wine Estates has a new CEO, Michael Clarke who arrived on board only at the end of March. His mandate is to lead with plans to improve the Company’s performance, with a focus on improving brand prioritisation and investment, addressing structural challenges facing the business and reducing overhead costs.

Treasury Wine Estates states in the announcement today such plans may well entail potential asset impairments, but affirms they are anyway fundamental to a turnaround in its short term performance and the Company’s ambitions to deliver long-term sustainable growth.

For those reasons Treasury Wine Estates says it came to the conclusion that the KKR proposal does not reflect the fundamental value of the Company and is therefore not in the best interests of shareholders, leading to the rejection.

Just last week the company also quashed separate press rumours to the effect it was on the point of selling its US business activities to another company.

The recent level of Treasury Wine Estates shares, i.e. before the uptick today, is only about the same as when it was first floated just three years ago, in May 2011. They have all been quite volatile, and peaked as recently as last summer up 65% on their original flotation price, before sinking back down again on poor business performance.

With the disclosure of the KKR interest in the company, some investors may now undoubtedly conclude that the company is “in play” and that it is only a matter of time before another offer is received from somewhere else, or perhaps even a better one from KKR itself.

Bloomberg today is quoting several analysts as saying the company is effectively a prime candidate for a break-up once it is acquired by somebody. On the other hand if the new CEO is effective, and succeeds in taking out substantial chunks of cost on his own, he could rewrite the script with a sharply rising share price based on that success. It is heartening that his Board of Directors is willing to give him that chance; unless and until, that is, a better offer does indeed come along.



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