Foster's Board Approves Demerger - So What's Next?

FILED APRIL 29, 2011

Dear Client:

Did you hear that? It's the sound of Foster's splitting its beer and wine operations. As expected, shareholders approved Foster's demerger plan last night, which means Treasury Wine Estates will be listed separately on the Australian Securities Exchange beginning May 10 under the code "TWE." The demerger is expected to be implemented on May 20.

HOW DOES THIS EFFECT TREASURY AMERICAS? Nicole Carter, vp of corporate communications for Treasury Wine Estates told WSD: "As you are aware the results of yesterday's vote is an important step for the future of Treasury Wine Estates and there is one more approval that must transpire before demerger is complete. That said, today it is business as usual as it will be tomorrow."

TREASURY CHIEF DISPELS BERINGER RUMOR. As we predicted yesterday, Treasury chief David Dearie denied speculation that the company would spin off or sell Beringer. Also interesting, David told reporters that they are interested in selling more California wines in international markets, such as Europe and Australia. That makes sense because the weaker US dollar would makes prices and therefore the brands more attractive overseas.

POSSIBLE OUTCOMES. In addressing the crowd, chairman David Crawford said the board believes the demerger will "maximize" long term value or lead to "a possible sale or an initial public offering of the wine business."

After the split, Treasury will have $2.1 billion in revenues. You may recall that Foster's was approached by private equity firm Cerberus last year, who reportedly offered roughly $2.5 billion for Treasury. However, Foster's rejected the offer, which they deemed as too low. Months later Constellation Brands sold 80% of its Australian and British wine operations to CHAMP. What does that mean? Well it suggests that private equity firms are looking at the wine industry, which could result in a Treasury acquisition. Other names being thrown around are Kohlberg Kravis Roberts & Co and TPG, who were rumored to have looked at Foster's businesses last year. The biggest problem, however, is the high Australian dollar. Foster's has valued the wine business at $3.4 billion (A$3.1 billion), which some say is too steep given currency problems, continued Australian grape oversupply and waning demand for its Australian brands in foreign markets. But a US private equity firm might be able to swing the strong Aussie dollar better than others (A$1 = $1.09). Not to mention that Treasury's US business makes up roughly half of the company's sales and profits. Do you have an opinion on the matter? Ping us at megan@winespiritsdaily.com or on our Confidential News Hotline: http://www.winespiritsdaily.com/hotline.php

WOWSA - BIG ACCUSATIONS BEING LOBBED AT NEBRASKA DISTRIBUTOR

The Nebraska State Patrol reportedly raided Sterling Distribution Company of Omaha last week because the company allegedly "produced fraudulent invoices during the month of December 2010" to Diageo in order to win promotions, reports local news site WOWT.com. Diageo said it paid Sterling $172,140 in incentive payments. The news station had received tips that "Sterling created bogus sales to show retail sales of 30,000 gallons of spirits for the month and that there was a $250,000 bonus on the line for meeting quotas." In order to get the bonuses, NSP alleges Sterling created fake invoices on products it never sold. According to the affidavit, a confidential informant told investigators that "'fake invoices are created all the time and then later they are shown returned to stock.'" Specific brands mentioned include Ketel One and Yellow Tail. Meanwhile, Sterling claims they have sold spirits and sent invoices to Bakers, Costco, Hy-Vee, No-Frills, Bag 'N Save and B & R, but the retailers claim they saw neither. So far no charges have been filed in this case.

ARE SUPER PREMIUM SPIRITS DEAD?

I'm sure the likes of Grey Goose, Patron and a number of other super-premium spirits brands would say no, and we would have to agree, but a great article in Bloomberg raises some valid points.

"After a decades-long march of absurdly expensive 'ultra-premium' and 'super-premium' vodkas (Belvedere, Grey Goose, Chopin)," a new category of "absurdly cheap 'premium' vodkas" has emerged, known as the affordable luxury category, while lower priced offerings like Popov and Gordon's have dropped off after initially peaking in the beginning of the recession.

The strategy is displaying "ultra-premium" on the label but selling it at a low price point. Many of the brands, which include Sobieski, Wodka and Svedka, are also taking aim at the higher priced, luxury category. Svedka's cmo Marina Hahn makes a great point: "Vodka is odorless, colorless, tasteless, and highly mixable. You need a strong image because it's fairly commoditized." The articles goes on to say: "Therein lies Big Vodka's dirty little secret: There isn't much difference between the absurdly expensive and the absurdly cheap." And that's where brands like Sobieski come in with their "Truth in Vodka" marketing message that directly targets the luxury category. "We have so much fun busting the myths of competitors that say, 'Our vodka is distilled from the water of pure icebergs,'" says Chester Brandes, ceo of parent company Imperial Brands. "Instead we're over-delivering on quality at an affordable price, which, by the way, is something Wodka has copied."

Writer David Sax spoke with James Dale, the president of Panache Importers, the exclusive importer of Wodka Vodka, who candidly spoke on the subject, even going after the likes of Smirnoff. At the heart of the article is details of James' success in the spirits category, first starting with the introduction of 42 Below in the US that ended with a $91 million buyout by Bacardi in 2007. Later that year one of his colleagues discovered Wodka in a Polish distillery. "We saw psychology change in the U.S. There's a whole generation that's now averse to spending more money than they have to. The whole concept of 'premium' would have to be redefined," he said. Wodka was introduced in the US in 2010. James says Wodka's profit margin averages at about 15% and that the company nets "$1 to $2 for every bottle sold." How do they survive? Currently the company has only 8 employees, keeps costs down by distilling in Poland and largely depends on word of mouth advertising, says the article.

THE EVOLUTION OF ASCENTIA WINE ESTATES

Yesterday we predicted that more wineries would exchange hands in the near future but we had no idea how quickly that would take place. You may have caught our alert last night that Ascentia Wine Estates has sold Buena Vista Carneros to Boissett Family Estates and Gary Farrell Winery to The Vincraft Group. Financial details were not disclosed.

The head of Boisset Family Estates, Jean-Charles Boisset, said, "Buena Vista has been a long-held dream.. The addition of Buena Vista to our portfolio adds further legitimacy to our foundation in terroir-driven wines in California." The company said that Buena Vista would continue its focus on the varietals that have defined it: Pinot Noir, Chardonnay, Merlot and Syrah. And furthermore, Boisset has secured long-term contracts for the Ramal Vineyard Estate in Carneros "in order to perpetuate the high-quality, estate-driven philosophy that guided Buena Vista to prominence."

Meanwhile, The Vincraft Group, has expanded it small portfolio of wine companies, including Kosta Browne, with the Gary Farrell acquisition. "We can't wait to reconnect with customers and the industry to elevate awareness of all that Gary Farrell Winery has to offer," said chief Pete Scott.

Rumors abounded earlier this year that Ascentia may soon go out of business, as it faced angry creditors and was the target of a lawsuit filed by WJ Deutsch & Sons. Needless to say, Ascentia has been on a roller coaster ride since entering the scene 3 years ago. Recall that in June 2008 they acquired 8 Sonoma County and Pacific Northwest wine brands from Constellation Brands, who had purchased those brands and others the year before from Beam Global. Constellation kept only Clos du Bois and Wild Horse. At the time Ascentia was backed by WJ Deutsch and San Francisco-based private equity firm GESD Capital Partners. Soon after the recession hit and Ascentia fell back on payments.

Then in May 2010 Ascentia and Deutsch announced they had ended their exclusive distribution agreement. Soon after it was revealed that Deutsch had filed a lawsuit in Delaware claiming, "Ascentia is insolvent, and its imbalance of assets and liabilities is worsening." The judge sided with Ascentia and tossed out the complaint. Interestingly, Deutsch remains a major stakeholder in Ascentia although it no longer markets its brands.

In recent months Ascentia has undergone a major restructuring, hoping to get out from under the debt it accrued when purchasing the brands. In January Mike Kenton replaced Jim DeBonis as the new ceo and has said he plans to make Ascentia the biggest player in Sonoma. He was previously ceo of Napa's Artesa Winery and Aveniu Brands.

In March Ascentia announced they were moving production for Buena Vista to its Geyser Peak facility, and would begin sourcing its grapes from all over Sonoma rather than just the Carneros sub-AVA. They also reworked the rent for Geyser Peak Winery and Columbia Winery, and reduced Ascentia's staff from 270 to 240 currently.

So what now? Ascentia is focused on its more premium offerings: "Selling these brands will allow Ascentia Wine Estates to reinvest and refocus on the core brands in our portfolio led by Geyser Peak Winery in California, Columbia Winery and Covey Run in Washington State and Ste. Chappelle in Idaho," said Mike.

To read more background on Ascentia's history, click this link: http://www.winespiritsdaily.com/publications_daily.php?id=1211

NC WINE TERRITORY BILL ADVANCES

A North Carolina bill that puts wine territory limits in place has passed both the Senate and the House. Senate Bill 130 does two things. First, it provides that a wine distributor may not sell wine beyond its designated territory. In exchange, wine distributors must generally service its retail accounts without discrimination. Second, the bill provides for limited intra-territory transfers of wine between certain retail accounts. The bill was supported by North Carolina beer and wine wholesalers, N.C. Retail Merchants Association, Total Wine and the North Carolina wineries. Opposition came from the Wine Institute. SB 130 will have to go back to the Senate for final concurrence because of a minor amendment, which was added in a House committee. Then the legislation goes to the Governor's desk.

DRINKS AMERICAS SETTLES LITIGATION WITH LIQUOR GROUP

Drinks Americas says it has prevailed in a binding arbitration between Liquor Group and was awarded $664,659.05. The arbitrator reportedly denied Liquor Group's claims, finding that Drinks Americas did not breach its contract with the company and that it did not interfere with Liquor Group's business. Accordingly, the arbitrator did not award any damages to Liquor Group. Instead, the arbitrator found that Liquor Group's liquidation and failure to pay for Drinks Americas products constituted a breach of contract, according to the company.

WSD BRIEF:

WASHINGTON GOV GREGOIRE has signed a new law that establishes a yearlong pilot project for spirits tastings at liquor stores, beginning September 1.


Until Monday, Megan

"I was born not knowing and have had only a little time to change that here and there."
Richard Feynman

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