UPDATE 1-Australia's Treasury Wine profit warning, share slide may lure predators

Wed Jan 29, 2014 9:17pm EST

* FY operating profit forecast cut to $166 mln-$184 mln

* Treasury shares tumble almost 18 percent

* Seen vulnerable to predators amid market pick-up (Adds analyst comments, details on share slump)

SYDNEY, Jan 30 (Reuters) - Australia's Treasury Wine Estates Ltd warned weak demand in China and stiff competition at home will cut deep into earnings this year, triggering a share sell-off that leaves it vulnerable to predators as the country's wine business improves.

The world's second-largest wine maker saw its shares tumble almost 18 percent on Thursday after it sliced nearly a fifth off its full-year earnings forecast.

The downgrade comes just months after Treasury, owner of the Penfolds and Beringer labels, sacked Chief Executive David Dearie for presiding over an ill-judged push into the United States that resulted in millions of dollars worth of cheap wine being destroyed.

Treasury cut its operating earnings forecast to between A$190 million to A$210 million ($166 million to $184 million) from a previous range of A$230 million to A$250 million. First-half earnings would be in the range of A$42 million to A$46 million, compared to A$73.4 million a year ago, it said.

The company said a decision to increase prices of some of its wines and restrict promotional activity over the Christmas period, combined with strong competition, had resulted in steeper-than-expected sales volume declines.

"A lot of the issue last year stemmed from control of inventory, especially in the U.S., and it does look like they're still struggling to turn around their U.S. business," said Julia Lee, an equities analyst at Bell Direct. "In China they've seen an impact in term of sales especially with their premium wines."

Treasury's shares slumped on the update and were down 17.4 percent at A$3.76 in midday trade, after dropping as low as A$3.73. The stock has fallen from a record closing high of A$6.33 in May 2013.

Analysts said Treasury could be a cheap takeover target for Chinese buyers looking for a foothold in Australia, or a private equity firm seeking a turnaround project as the country's focus on higher-value exports begins to pay off.

The average value of Australian bottled wine exports last year grew 3 percent to the highest level recorded in five years, even as the total volume of exports decreased by the same amount, according to industry body Wine Australia.

Treasury could be tempted to sell off some of its underperforming U.S. assets, analysts said.

"I think some of its U.S. assets are vulnerable but I think its also a difficult market to be selling wine assets into," said Bell Direct's Lee. "It would very much be a buyer's market ... any sale we see of assets could also result in write-downs."

Treasury declined further comment ahead of its first-half earnings statement, scheduled on Feb. 20.

($1 = 1.1425 Australian dollars) (Reporting by Jane Wardell and Thuy Ong; Editing by Kenneth Maxwell)