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Australia's largest wine company Treasury Wine Estates Ltd (ASX:TWE) is considering spinning off its highly profitable Penfolds business into a new ASX-listed entity following a strategic review of its business.
The move comes as TWE reveals that sales in China have been 'significantly impacted' by the nationwide shutdown during the March quarter.
It has also announced plans to reduce the scale of its commercial wine business, particularly in the US.
While the proposal to spin off the Penfolds business is not expected to occur until the end of calendar year 2021, it remains subject to final board approval as well as shareholder and regulatory approval.
"Penfolds accounts for approximately 10 per cent of our volume, but well over half of our earnings, with unique resources and a differentiated execution focus compared to the remainder of our business," says TWE's CEO Michael Clarke.
"A potential demerger would enhance New 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, in addition to enabling investors to more appropriately assess the fundamental value of the brand and its assets."
Following a potential demerger, existing TWE shareholders would own a share in Penfolds and in the New TWE that will be proportional to their existing TWE holdings.
TWE, which currently has a market capitalisation of $7.6 billion and is listed in the ASX 50, expects the new Penfolds entity to join the ASX 50-100. The New TWE would be ranked among in ASX 100-150, which implies a higher valuation is expected for Penfolds.
"I am excited about the prospects that a potential demerger could bring for both New TWE and Penfolds," says chairman Paul Rayner.
"New 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.
"Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally."
The stand-alone Penfolds company is expected to source and distribute premium wines globally, including Australia, France and the US. New TWE plans to enhance its own luxury wine portfolio while scaling back its commercial portfolio.
The costs and benefits of the planned demerger have yet to be fully assessed.
Meanwhile, despite social restrictions being eased in China, TWE says it is adjusting its business to accommodate reduced volumes. Consumption levels remain subdued even though consumers are getting back to work, the company says.
In other areas, including Australia, it reports strong stockpiling by consumers towards the end of the third quarter has resulted in stock depletion. However, this has mostly been skewed towards lower-margin products.
"In the short term these are unusual and very challenging times with consumers trading down," says Mr Clarke.
"Therefore, TWE is not in a position to provide detailed numbers or detailed timelines at this stage as it is unclear how trading will play out in the short term.
"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."
TWE posted a net profit of $229.2 million in the latest December half, up 5.1 per cent on a year earlier.
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