Treasury Wine Estates (ASX: TWE) lately reported for efforts on trimming its portfolio of wines by announcing the sale of 12 commercial wine brands in the USA. Ever since the present chief executive Michael Clarke took charge in March 2014, it has been divesting its commercial wine brands in its attempts to progress up the value chain. The sale of the US brands, at book value, according to the company, represents around 1 million cases of non-commercial wine. The company presently has a portfolio of 45 wine labels compared to around 80 a couple years ago. These include Penfolds, Wolf Blass and Lindeman’s in Australia, as well as a number of US wine labels such as Beringer and Sterling. It recently made a move wherein it said for providing a boost to sales of premium and luxury brands by spending $ 754 million for the wine distribution business in the US and the UK of Diageo.
At the time Mr Clarke took charge of the company in March 2014, it was reporting multimillion dollar losses after getting rid of US stocks of about $ 35 million. At that time, he also informed analysts that he would take a cold approach in analysing and assessing the earnings from all the brands of the company. TWE thus believes that the divestment of 12 non-core brands would be fruitful given the following:
Success from divestment strategy over long term: The above approach along with a more favourable exchange rate led to a successful strategy with the company reporting a profit of $ 77 million for last financial year.
Attaining a streamlined portfolio: The announcement comes at the wake of TWE raising its annual profit guidance following the acquisition of the wine distribution assets of Diageo. Analysts in the market said that they had been waiting for such an announcement in anticipation of a streamlining of the portfolio.
Negligible impact on earnings: The company announced that it expected the sale of brands to have no impact on earnings in FY 2016 and beyond. The company further announced that it expected earnings before interest and tax of between $ 330 million and $ 340 million in FY 2016. The previous guidance for earnings was a range of $ 270 million-$ 290 million, but this estimate did not include profits from the Diageo acquisition.
It said that there would be no material impact on earnings as a result of the depreciation of Great British Pound after the Brexit vote. It also said that hedging strategy would not have any material impact on earnings from the European business in the forthcoming financial year. TWE also does not expect any material change to its fiscal 2017 earnings estimations.
Details of the divestment are yet to be shared by the company.
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