October 14, 2015 / 7:40 AM / 3 years ago

Australia's Treasury Wine begins second U.S. tilt with Diageo buy-up

SYDNEY (Reuters) - Australia’s Treasury Wine Estates (TWE.AX), the world’s top standalone winemaker, will buy most of Diageo Plc’s (DGE.L) U.S. and British wine unit for $552 million, making a second tilt at the U.S. market after its disastrous retreat two years ago.

Bottles of Penfolds wine are on sale at a wine shop in central Sydney August 4, 2014. REUTERS/David Gray

The deal is the brainchild of CEO Michael Clarke, brought in last year to rethink the Penfolds maker’s global expansion following its earlier failure to penetrate the United States, when it was forced to destroy thousands of cases of low-end wine and book A$280 million ($202 million) in writedowns.

Clarke has decided to stop chasing volume at the expense of margins and focus on the more profitable “mass prestige” end of the world’s biggest wine market, which consumes more product than it can make. Diageo has a portfolio comprising 80 percent “masstige” and luxury labels from its Napa, California base.

“This acquisition is highly complementary to our premiumisation strategy, not just in the United states but globally,” Clarke told analysts and media in a teleconference, noting the Diageo portfolio included the British Blossom Hill label as well as U.S. brands Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt.

“This is an incredible price. This is cash positive from year one, including one-off costs. There are so many positive ticks to why we should be doing this,” he added, adding that the company was now growing so fast in the United States it needed a new bottling facility.

The deal comes just two months after the company said Asia would soon be its biggest earnings contributor and returned to profit following the U.S. experience.

“Financially, yeah, it stacks up but ... the U.S. has been a graveyard for (Treasury) for 20 years,” Bank of America Merrill Lynch analyst David Errington said on the teleconference.

For London-listed Diageo, maker of Smirnoff vodka, Guinness beer and Johnny Walker whiskey, the sale is part of a broad shakeup under CEO Ivan Menezes, who last week said the firm was selling stakes in two beer brewers to Heineken NV (HEIN.AS) for $780.5 million while buying a 20 percent stake in Guinness Ghana Breweries Ltd from Heineken.

Clarke and Menezes had been discussing the wine deal since November 2014, Clarke said on Wednesday, two months after Clarke rebuffed two takeover approaches for Treasury from private equity firms at A$5.20 per share.

To pay for the Diageo assets, Treasury hopes to raise A$486 million by issuing new shares at A$5.60 each. The shares were in a trading halt on Wednesday, having closed A$6.57 a day earlier.

($1 = 1.3831 Australian dollars)

Additional reporting by Jane Wardell; Editing by Stephen Coates

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