Job losses are expected in South Australia’s wine industry after Treasury Wine Estates, owner of the Penfolds, Wolf Blass and Beringer brands, announced a $35 million cost-cutting program.
In a series of statements today the company also confirmed it had been the subject of a hostile takeover bid, which it had rejected.
The cost cutting is the first play by new chief executive Michael Clarke, appointed in February by the TWE board following the axing of former boss David Dearie and a massive fall in profit.
Details of office closures, job losses and contract changes will be made at a conference call at 4pm this afternoon.
It’s taken just seven weeks for Clarke to take the view that TWE needed a major overhaul.
Clarke came from UK-based Premier Foods with a mandate to reverse the global winemaker’s collapsing earnings.
Having led a turnaround of Premier, he was expected to make some swift changes at TWE.
Today he announced a two-pronged approach.
The first part is a 50 per cent increase in the consumer marketing budget; the second is to fund that increase with across-the-board cuts within the business.
“TWE’s brands have suffered from a lack of consumer-facing marketing investment and we will address this in fiscal 2015 by increasing consumer marketing spend in fiscal 2015 by circa 50 per cent relative to the prior year,” Clarke said in a statement to the stock exchange this morning.
“It is imperative that our marketing and sales capabilities are more in line with the Company’s ability to make outstanding wines across all categories.”
Paying for that strategy will involve job losses, contract reductions and office closures across the group.
“Following a detailed review of the company’s operating structure, an overhead and cost reduction initiative is being implemented as another important step to returning TWE to sustainable growth,” Clarke said.
“TWE expects to generate $35 million in cost savings in fiscal 2015.
“The cost savings will be generated substantially from a reduction in full time roles (impacting all regions and functions) and associated costs such as office space rationalisation, leased IT equipment and service contracts as well as a reduction of all non-essential overhead costs and discretionary expenditure.”
Clarke said the aggressive marketing policy required tough decisions to be made.
“Despite the continuation of challenging trading conditions in the second half of the year, I am determined to act upon opportunities to drive sustainable top-line momentum and margin expansion while at the same time, improving TWE’s brand equity and connections with consumers, retailers and distributors.
“We must take the tough decisions to fund the step up in consumer marketing by reducing overheads.
“Over the last three years, overhead costs have increased at the expense of investing in our brands; a situation which is simply not sustainable and which we are now addressing.
“TWE is now in the midst of its most crucial trading period, with the 2014 Penfolds luxury and icon wine collection released earlier this month.
“Having now been in my role as CEO of TWE for seven weeks, I continue to be encouraged by the quality of TWE’s assets, its brands and its people. But there is a lot of work to be done in order for TWE to sustainably deliver on its commercial targets and I, together with my team, are firmly focussed on driving improved performance and importantly, a step-up in execution.”
In February this year TWE’s pre-tax earnings slid 37.6 per cent to $45.8 million, while revenue remained flat, up only 1.6 per cent to $864.2 million.
Its Australian and New Zealand wine division recorded a 4.5 per cent drop in volumes and a 32.2 per cent fall in earnings to $24.4 million.
Heavy trading in TWE shares recently sparked speculation it would be the subject of a takeover bid by Constellation Brands.
Last week the company responded to that speculation saying it “has not been approached by, and is not in discussions with, Constellation Brands regarding the vompany’s US business”.
Today the board announced that it has rejected a “preliminary, indicative, non-binding and conditional proposal to acquire all of the shares of TWE at a price of $4.70 cash per share from Kohlberg Kravis Roberts & Co. L.P. (“KKR”) by way of a scheme of arrangement”.
TWE shares are trading today at $4.07.
TWE’s Board said it had agreed to KKR’s requested that the proposal be kept confidential, adding that “premature disclosure would be contrary to the interests of TWE shareholders, especially given the highly conditional nature of the proposal.”
“Since the proposal was received on 16 April 2016, TWE has held preliminary and confidential discussions with KKR.”
It learnt last night that KKR had discussed the proposal with one of TWE’s shareholders, so the confidentiality was lifted today.
“The board of TWE, together with its advisors, has carefully reviewed the proposal in the context of renewed plans for the company under the executive management team.
“While these plans may drive potential asset impairments, they are fundamental to a turnaround in TWE’s short term performance and the company’s ambitions to deliver long-term sustainable growth.
“The board has considered the KKR proposal in the context of these renewed plans and concluded that the proposal does not reflect the fundamental value of the Company and it is therefore not in the best interests of shareholders.”
