Wine lovers face sour taste of Wine as private equity eyes off Grange

Penfolds Grange is in the news once more, just one month after a 1959 bottle from the most famous wine in Australia played a role in the resignation of New South Wales premier Barry O’Farrell. The wine is now being praised for its ultra-premium reputation associated with the multiple-vineyard Shiraz blend that comes from South Australia, which tempts corporate raiders.

After being in the loop for several months about Treasury Wine Estates (TWE), an American private equity firm Kohlberg Kravis Roberts (KKR) this week launched a failed attempt to acquire TWE, the second largest wine company and the ailing owner of several international brands such as Penfolds.

If KKR is successful with another offer, the company’s primary goal of maximizing the dividends it pays its shareholders will force it to tear the assets of TWE in order to extract the most lucrative resales, starting with Penfolds, which is the most coveted star in the world, of Australian premium brands.

Unprofitable brands face a grim future.

In the case of such a merger of assets, however, the fate of brands that are not profitable is not a good one. Brands that are familiar to us but were deemed unprofitable due to their financial viability will vanish in the event that they are not revived with new ownership.

More important is the future of top brands that are on an inferior level to Grange yet have a rich history and vineyards that are recognized as having Terroir.

The brands might be secure for the moment. However, the next stage of corporateization in the Australian wine industry could jeopardize the medium or long-term prospects of a lot of winemakers and grape growers.

Large corporations have repeatedly not understood and correctly managed the wine industry, which has harmed the overall quality of Australian wine and diminished the range of reasonably priced Australian premium wines available in our glasses.

It is ironic that the global impressions of the quality and value of Australian wineries – and the brand Australia in terms of sales of wine and tourism – are based on the history of their vineyards and experiences in the production of wine. This is highlighted in the web pages of Treasury Wine Estates and the other major wine brand, Pernod Ricard Australia, where the earliest Australian vineyards and wineries are portrayed as a treasure.

Unknown to many people as the KKR raid was the announcement this week of Pernod Ricard Australia is to shut down the cellar doors at the oldest remaining vineyard along with a winery location – Wyndham Estate located in the Hunter Valley. In a world of wine, which is still heavily affected by French ideas of wine’s history and culture, these sites are precious gold.

Although this closure is likely not to have any impact on the available wines, it does serve as a cautionary tale for the future of the wine industry as an Australian culture in the event that the fate of TWE is decided.

Ripe to make a splash

The trend towards wine corporatization in Australia was first noticed in the late 1980s as the expansion of Southcorp into the country’s largest winemaker after it bought a variety of vineyards with small sizes. The year 2005 saw Foster’s Group bought Southcorp, but in the year 2011, Foster’s separated its wine division, which was in trouble, to form the new Treasury Wine Estates.

TWE has been a prime target for an acquisition. It is a strong asset. However, it has not been able to perform well since the demerger. Its financial troubles result from lower demand for premium wines due to a Chinese government clampdown on liquor that is expensive and a global over-supply of wine.

The most evocative of their problems was the devastation of millions of Gallons of wine from the United States and a sudden change at the beginning of January to the discounting of premium brands.

Private equity ownership is a stricter approach to this line of thought since the funds are private diversifying investors that seek to earn a rapid return without connection or interest to the business.

There are fears that this type of ownership will keep the current devaluation of brands if they fail to protect precious wineries and their historical roots, thereby threatening the quality and variety of wine glass products in the country – as well as globally wine glass.

“Safe” and not-so-safe brands

According to a report published in The Australian Financial Review, KKR is being backed by other bidders. The business press has not reported on its impact on the Australian sector of wine, the consumers, as the communities that are home to the rich history and tradition of lesser-tier brands.

TWE does not provide individual reports on the brand’s profitability. Still, there are brands such as Penfolds, Lindemans, Saltram, Seppelt, Wolf Blass, Wynns, Heemskerk, and Coldstream that all are based on genuine historical stories in their marketing, and also the value of their terroirs, are likely to be in good hands.

Rosemount, which has been diminished as a quality wine brand because of the massive discounts at British supermarkets, isn’t included on the “safe” list of TWE assets. It’s not safe either when KKR is in control and thinks that wines are similar to luggage, toys, and Oreo cookies. These include Annie’s Lane, Jamieson’s Run, and Ingoldby.

The prospects for Australian wine were less important to the consumers of our country earlier in time; our status as a wine-drinking country and an exporter of wine has been transformed. There was also news on the market for wine this week when the United States announced it has, for the first time, surpassed France in the category of “the biggest internal market in the world in terms of volume.” Australia came in ninth place on the same type of global consumption of wine.

The root of the concerns about the repercussions of a merger with TWE is the fact that certain goods and services can be a good candidate for corporatization while others do not. It is the case that the wine industry has adamantly stated their products fall within the second category. However, whether KKR will be willing to admit this is a question.


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