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TWE and Penfolds consider separating

Published:  08 April, 2020

Treasury Wine Estates (TWE) and Penfolds are considering going their separate ways, with the latter set to be split off into a separate company to pursue global expansion into luxury beverages.

TWE said it was considering a plan to split off its flagship Penfolds brand into a separate company by the end of 2021, with demerger plan a key outcome of TWE's strategic review, which it announced to the Australian Securities Exchange this morning.

If the company does split, the Penfolds business will be the larger of the two with the slimmed down TWE’ focusing on a reduced portfolio of commercial brands, including Wolf Blass, Wynns Coonawarra and Rosemount Estates.

The move would build on TWE’s internal operating model, which is focused on premiumisation and accelerating the separate focus for luxury versus commercial portfolios globally, said the statement, with TWE chief executive Michael Clarke adding Penfolds accounted for about 10% of the firm’s volume but “well over half its earnings”.

“A potential demerger would enhance TWE’s and Penfolds’ ability to pursue their own strategic priorities and deliver a stronger long-term growth profile under separate teams and ownership structures,” said Clarke.

In 2018, TWE announced it was expanding its footprint as it began making premium Penfolds red wine from Californian grapes in Napa Valley and Champagne in France. The potential demerger would “help drive this multi-country of origin portfolio while a separate team focused on accelerating the shift towards luxury in TWE, said the statement. 

TWE Chairman Paul Rayner said he was “excited about the prospects that a potential demerger could bring for both TWE and Penfolds”.

“TWE would remain the largest globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunity ahead of it to continue the growth of its iconic brand portfolio across all markets,” he said.

“Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally,” he added.

The company also provided a Covid-19 business update saying that although TWE’s staff in China had recently returned to work, depletions and shipments for the quarter had been significantly impacted by shutdowns.

In TWE’s other regions, strong retail sales in February and March reflected consumer behaviour to stock up on wine and the greater propensity for in-home consumption during government-imposed shutdown periods. 

Sales through e-commerce channels had also been strong, however sales had been "skewed towards the lower margin commercial portfolios", it added. 

TWE was not in a position to provide detailed numbers or detailed timelines at this stage as it was unclear how trading would play out in the short term, said Clarke. 

“In the short term these are unusual and very challenging times with consumers trading down. 

“We do know that, post-Covid-19 and as consumption rates normalise, the underlying longer-term growth potential of the business and therefore the value of the Penfolds franchise and the remaining TWE portfolio is significant.”