Australia’s Treasury Wine Estates (TWE.AX), the world’s largest standalone winemaker, has agreed to acquire California’s DAOU Vineyards for $900 million. This move is part of TWE’s strategy to focus on selling higher-margin luxury products amid uncertainties surrounding trade with China. To fund the acquisition, Treasury plans to raise $525.53 million through an equity offering at a discounted price of A$10.80 per share.
TWE has been reevaluating its strategy to diversify away from China, which previously accounted for one-third of its profits. The imposition of tariffs on Australian wine by Beijing in response to Canberra’s call for a COVID-19 origins investigation prompted this shift. However, the Australian government recently announced that Beijing has agreed to expedite the review of these tariffs, which could potentially help TWE rebuild its China business over time.
The acquisition of DAOU fills a crucial gap in TWE’s portfolio in the $20 to $40 per bottle range and strengthens its luxury offerings above $40 per bottle. According to TWE’s annual report, its combined premium and luxury portfolios achieved double-digit gross profit growth in fiscal 2023.
Analysts have expressed confidence in the acquisition’s rationale and financial metrics. However, concerns have been raised about TWE Americas’ recent underperformance, with the Frank Family Vineyard acquisition driving earnings. The deal is expected to be completed by the end of 2023 and contribute between $23 million and $25 million in earnings before interest and taxes in the second half of 2024.
Including cost synergies of over $20 million, the acquisition is projected to have mid to high-single-digit earnings per share (EPS) accretion in fiscal 2025, the first year of Treasury’s ownership of DAOU. Additionally, Treasury will issue $157 million worth of new shares to the existing owners of DAOU.
In conclusion, TWE’s acquisition of DAOU Vineyards represents a strategic move to focus on luxury products and expand its presence in the US market. Despite uncertainties surrounding trade with China, TWE aims to rebuild its China business with the potential expedited review of tariffs. The acquisition is expected to contribute to TWE’s earnings and be accretive to EPS in the coming years.
