Treasury Wine Estates: Corporate Action—Recommend Taking Up Entitlements

We maintain our AUD 11.50 fair value estimate for shares in no-moat Treasury Wine Estates TWE following the acquisition of U.S. luxury winemaker Daou Vineyards. The transaction is in line with Treasury’s strategy to focus on higher-margin, higher-price, premium, and luxury wines in the Americas. Including transaction costs, the AUD 1.5 billion price tag will be funded by AUD 157 million placement of new shares to the existing owners of Daou, an AUD 825 million entitlement offer, and AUD 490 million in debt. The deal, expected to complete by end of calendar 2023, is broadly neutral to our fair value estimate after accounting for the dilutive impact of the equity raise.

Entitlements are relatively attractive on valuation grounds. The AUD 10.80 rights price represents a 10% discount to the theoretical ex-rights price of AUD 11.98 per share and a 6% discount to our fair value estimate. Importantly, the 1 for 9.45 renounceable entitlement offer doesn’t disadvantage the often-overlooked retail investor—who can avoid dilution by participating in full, or selling or transfering their entitlements should they choose not to participate. Retail entitlements can be traded from Nov. 3, 2023 until Nov. 16, 2023. The retail entitlement offer opens on Nov. 8, 2023, and closes Nov. 28, 2023. The shares issued to existing owners of Daou at AUD 11.97 is marginally accretive to our valuation. But this is more than offset by the dilutive impact of the much larger entitlement offer. Half the shares issued to Daou owners need to be held for one year, and half for two years.

The deal, and Treasury’s focus on increasing premiumization in general, make strategic sense. USD 900 million acquisition is relatively cheap at about 13 times calendar 2023 EBITDA—broadly in line with the fiscal 2022 acquisition of Californian luxury winemaker Frank Family Vineyards. This is slightly cheaper than Treasury’s own multiple implied by our fair value estimate, at around 15 times fiscal 2023 underlying EBITDA.