The acquisition of Frank Family Vineyards in the famed Napa Valley in California is an incremental deal for Treasury Wine Estates. The US luxury chardonnay brand is a good fit for TWE and earnings could triple on a four year horizon.
Frank Family Vineyards (FFV) is a small but very premium wine brand in the US. It has a long term track record of delivering strong revenue and EBITS growth with a very high margin around 38%. The acquisition is expected to be completed in December 2021, funded by a combination of debt and cash, including proceeds from recent US asset divestments worth approximately US$300 million.
The acquisition is small from TWE’s perspective but it will add about 5% to EPS on a full-year basis and 3% to group sales.
TWE has a target of 25% EBITS margin over time for its Americas business. In FY21, the company was at 16% and the addition of FFV quickly takes that to 19% on its own. The recent divestments of low margin wines in North America will also help to lift the average margin of the portfolio.
TWE has paid a multiple of 13.2x EV/EBITDAS for FFV, consistent with its own trading multiple and to other recent transactions in the US wine market. There is scope to increase case volumes from FFV so the multiple paid is justified.
In FY21, FFV sold 174.2k cases with net sales revenue of US$54.4 million and EBITS of US$20.6 million, a margin of 37.9%. The portfolio price points ranged from US$38-US$225 per bottle with varietals including Chardonnay (47% of volume), Cabernet Sauvignon (32%) and Pinot Noir (9%).
TWE can utilise its distribution network as a growth opportunity for FFV to drive sales in under-penetrated states beyond California. It also extends TWE’s premium wine portfolio providing greater marketing and eCommerce opportunities.
The founders, Rich and Leslie Frank, have committed to staying involved in the business covering brand management, marketing and general advisory.
Investment view
The approaching change in reporting structure for TWE will begin to highlight the value in its Penfolds brand, showcasing tis high margins, premium status and global appeal. This is happening at a time when the loss of sales to China has disrupted earnings but is being partially offset by increased sales in other regions, particularly Asia.
TWE is likely to see an improvement in both margins and demand in the Americas over the next year. The FFV acquisition will assist in this change.
TWE should also benefit from a recent fall in red wine grapes due to the larger FY21 vintage. This should result in a cost saving around $40-60 million over the next two years. A gradual exit from commercial wines will also help lift gross profit margins and there are savings to be made in the supply chain as well.
TWE earnings remain exposed to competition in key markets in a global wine industry that is highly fragmented. TWE also carries FX and tariff risks that can affect earnings.
We have retained our Buy recommendation on TWE.
