DEALTALK-Treasury Wine set for radical overhaul under KKR-led bid

Mon Aug 11, 2014 5:00pm EDT

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* KKR teams up with Rhone Capital for $3.1 bln takeover offer

* TPG has matched KKR-Rhone offer - source

* KKR plans to offload vineyards, brands - bankers

* KKR May relist revamped company in U.S. under Penfolds name - banker

By Denny Thomas and Stephen Aldred

HONG KONG, Aug 12 (Reuters) - A KKR & Co-led takeover of Australia's Treasury Wine Estates Ltd would likely lead to a long and drastic overhaul, resulting in a much smaller but more profitable company, bankers familiar with the matter said.

KKR, which has teamed up with Rhone Capital for its $3.1 billion proposal, will also look at a U.S. listing for the revamped business which would be centred on upmarket labels and would likely be renamed Penfolds for its flagship brand, one person said.

The KKR-Rhone bid was matched this week by a rival private equity firm, which a source with direct knowledge of the matter has said is TPG Capital Management LP. But KKR-Rhone have put in far more work, bankers say, and Australia media have reported the group has secured financing for the deal - giving them a significant head start.

Treasury Wine, one of the world's largest wine companies with 83 brands, has seen profits slump in the past three years, hurt by a global wine glut that pushed down prices and led to the costly destruction of some U.S. inventory.

Given the challenges, bankers do not expect KKR, if successful in its bid, to fully exit the business in 6-7 years, which is its average holding period for an investment.

"This is not a short-term play, there are a lot of challenges to overcome," a separate banker said. "They have to patiently go through the restructuring, sell vineyards and brands to make it work. It is not going to be easy," the person added.

The competing bids are for A$5.20 per share. KKR this month roped in fellow buyout firm Rhone Capital to help sweeten by 11 percent a rebuffed April offer. That persuaded the company, which has been working on its own restructuring steps under new CEO Michael Clarke, to open its books.

The bid was then matched by TPG on Monday, pushing the vintner's shares to A$5.33, 44 percent higher than levels seen just before KKR's first proposal.

KRR and Rhone declined to comment on plans for the company if a takeover went ahead. TPG's plans for Treasury Wine were not immediately known. An external spokeswoman for TPG declined to comment.

Treasury Wine's corporate affairs director, Roger Sharp, told Reuters that Clarke "is confident that the strategic roadmap laid out by the company is the right one and will be strongly supported by whoever owns the company."

ON THE CHOPPING BOARD

Bankers said some underperforming brands as well as some vineyards in Australia would likely be sold off but the company would retain higher margin labels. Some of its better known brands include Beringer, Lindemans and Wolf Blass.

KKR and Rhone would also be looking to capitalise on opportunities to sell more wine in China, where consumption has climbed 136 percent in the past five years and where growth in e-commerce is expected to continue to boost demand from second and third-tier cities.

VATS Liquor Chain Store Management Co, China's biggest distributor of alcoholic beverages, in which KKR has an undisclosed stake, would help manage sales, the people said.

Clarke, who took over on March 31, has embarked on restructuring that includes a A$260 million impairment charge on the value of its wine brands. The company will also separate out management of its lower-end brands from its more prestigious ones in Australia as it has begun to do in the United States.

A food and beverage industry veteran of more than 20 years who led a significant turnaround at Britain's Premier Foods Plc , Clarke also advised KKR last year on a $2.5 billion bid for GlaxoSmithKline's Lucozade and Ribena soft drinks.

But he has so far disappointed analysts who have long been calling for the company to spin off either Penfolds or Penfolds and other upmarket labels into a separate company.

Morningstar analyst Daniel Mueller said spinning off the better part of the portfolio - which accounts for around 15 percent of Treasury Wine's sales - could leave the rest of the listed business without sufficient support. But he added that private equity would have more leeway.

"KKR...might have potential buyers lined up for all the different pieces. Its U.S. business has struggled for a number of years and there may be a logical buyer," he said.

"There are so many ways it could be chopped up into private hands." (Reporting by Denny Thomas and Stephen Aldred. Additional reporting by Byron Kaye in Sydney; Editing by Edwina Gibbs)