Score one for the skeptics as the company announced that it was terminating talks with the private equity firms after it became apparent that ‘the bidders are not able to support a transaction on terms and at a price acceptable to the Board.’ The company reached this conclusion by talking with holders of ~50% of its shares who made it clear that they ‘believed a price of $5.20 per share undervalued the Company.’ How so?
This view is driven by the value that major shareholders, the Board and Management believe will be delivered over time through the Company’s strategic plans to:
Increase and accelerate consumer marketing investment in the Company’s brands;
Change Penfolds release dates;
Deliver the significant overhead cost reduction program;
Deliver supply chain savings and efficiencies through a separate focus on the Commercial portfolio versus the Luxury & Masstige portfolio in Australia; and
Build improved momentum in the top line through stronger consumer, retailer and distributor relationships, enhanced marketing programs and a greater focus on the Company’s priority brands.
They must have been serving some of the really good stuff at those ‘meetings’. The reality is likely a bit murkier though. Despite noting that neither firm identified ‘any major concerns with the business’, apparently neither were going to come in at A$5.20 either. According to this piece, one group was going to lower its bid due to expected regulatory hurdles and the other bid planned to pile on too much debt. High debt levels? That must have been quite the surprise coming from a private equity bidder.
At this point, shareholders are now left hoping that the current management team, led by CEO Michael Clarke, can right the ship. The Chairman of the Board, Paul Rayner echoed this by saying that the “process has now concluded and the Board is confident in the strategic plans to grow the Company and is looking forward to working with Management to deliver value to its shareholders.” It’s worth noting that Mr. Clarke, a former Kraft & Coke exec, has only been on the job since March, after prior leadership teams failed to turn the company around. To his credit, Mr. Clarke seems to have inspired shareholders enough to reject a sure thing and this is really a big, big win for him. He noted that ‘the company still saw tremendous opportunities in North America, especially in luxury labels, and that it was looking to deepen its push into Asian markets with some of the brands it already produces in Australia and North America.’ The company might be open to alliances and/or further acquisitions, but was light on detail. A lot to prove and a lot of hope, but there is little detail on how they will really accomplish these goals.
The other half of Treasury’s shareholders let their disappointment out by sending the company’s shares tumbling. I think Morningstar’s Daniel Mueller put it nicely when he said, ‘You’ve effectively gone through two previous management teams that have said the right things and haven’t delivered… it’s hard to see what’s going to change that.’ Additionally, he added that ‘weakness in the Australian dollar in recent weeks may help the company’s export sales in the short term but A$5.20 was a “stretched valuation’.
The stock is currently trading at A$4.14 or roughly 20% less than the bid. Management may have dodged a bullet, but now comes the hard part – actually delivering good news and proving to shareholders that they made the right choice by not selling ‘low’ and sticking with them to turn around the company.
Disclosure: Author holds no position in any stock mentioned.