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Penfolds' parent hits troubled waters

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It’s been a wild ride in recent weeks for investors in global winemaker Treasury Wine Estates (TWE), owners of key South Australian brands Penfolds, Wolf Blass, Seppelt and Saltram.

Share prices have plunged more than 20 per cent with some of the world’s biggest investment houses buying in – and selling out.

More than 100 million shares have been traded in the last five days with the company coming off its high of $6.57 eight months ago to yesterday’s closing price of just $3.51.

Industry body, Wine Grape Growers Australia, is “viewing the situation with great concern” as growers feel the pinch from low prices being offered for their 2013-14 harvest.

Consumers may well be the beneficiary as TWE re-thinks its late-2013 decision to stay out of deep discounting deals with Woolworths and Coles liquor outlets.

The company’s recent profit downgrade reflected that decision and the resulting loss of sales volume.

It was the second bump in the road for TWE: in September it made $160 million worth of writedowns in its US operations, which included pouring $35 million worth of wine down the drain.

It sacked its CEO David Dearie.

Interim chief executive Warwick Every-Burns then embarked on the strategy to stay out of aggressive promotions and discount deals during December.

Last month TWE issued a profit downgrade, citing the December drop in sales volume, problems flowing from the US wine lake and a reduced forecast for sales into China. The downgrade sparked a share price plunge.

TWE’s fortunes are felt across South Australia, from the consumer in the bottle shop to the growers whose grape prices get squeezed if the company lowers its margin.

Wine Grape Growers Australia’s Adelaide-based executive officer, Lawrie Stanford, told InDaily the industry has great concerns.

“Without a doubt growers are becoming increasingly concerned about the prices on offer for their grapes,” Stanford said.

“The average national grower is being offered prices that are less than the cost of production and that’s not sustainable.

“As people get into their harvest this year we are hearing that yields are down.

“Normally, lower yields would lead to higher prices but we’re not hearing that message from the buyers.

“We view the situation that’s enveloped TWE with great concern.

“Fundamental issues of supply and demand need to be addressed.”

TWE also owns iconic Hunter Valley brands Rosemount and Lindemans among 54 global brands that makes it one of the largest listed wine groups in the world.

In recent months US funds manager Blackrock moved in to increase its stake in TWE.

Blackrock is regarded as the world’s biggest investment funds manager (it controls investments totalling US$4.1 trillion).

The company bought 32.4 million shares across November and December giving it a 5.01 per cent stake in TWE.

It hasn’t stayed long in the TWE wine-bar however, selling off part of its holding and taking a loss.

“It’s hard to know what they’ve done when they dip below the substantial holder level (5 per cent),” Prescott Securities analyst Travis Adams told InDaily.

“They might have seen a bit of value in TWE, but maybe not so much now.

“The big institutions buy in and buy out for a range of reasons.

“What we know about TWE, though, is that there is now a lot of uncertainty about their value.

“Wine’s a difficult game.

“The cycles of growth and pull-back can be very long.

“TWE is currently trading at around its book value, but whether that’s matched by its cash value is another question.

“They have lots of wine and if you can’t sell it, then it’s a problem.”

That’s where consumers might be the beneficiary; if stocks build then deep discounting will return.

One early sign came this week when Dan Murphy’s advertised Penfolds 2008 Koonunga Hill at a special delivery only price of $59.40 for a case of six; that an discount of almost 50 per cent on the $17.99 per bottle [price.

While Blackrock appears to have cooled its heels, another US-based investment house has decided to buy in at the current low price.

New York-based Wellington Management has spent $25 million in recent days and is now one of Treasury’s biggest shareholders.

It advised the stock exchange Tuesday it now holds 5.73 per cent of Treasury Wines.

Lawrie Stanford said growers have had a good relationship with global owners.

“We don’t have an issue with who owns the shares; global players have a good record in protecting the Australian industry’s value.

“The vines are rooted in Australian soil and our experience is that global owners are keen to protect the value of that relationship.”

Blackrock, meanwhile, has another strong interest in South Australia. The investment giant has built up a substantial holding in SkyCity Entertainment, owners of the Adelaide Casino.

It advised stock exchanges in late January that it had built a substantial holding in SkyCity in the period since September.

Blackrock’s invesmtent decisions can impactive; when it bailed out of BHP in March 2012, selling off some $800 million in shares it sent a clear signal to BHP management.

Its mining funds manager Catharine Raw told analysts at the time that BlackRock was wary of BHP’s costly, long-term expansion of the Olympic Dam copper-gold mine in South Australia.

The signal was missed by the State Government and many local industry enthusiasts, until the bad news was confirmed in August 2012.

Blackrock’s sudden loss of interest in TWE is not a good sign for SA’s wine sector.

Whatever reasons it had for buying in in late 2013 have diminished.

Just what happens to TWE and its ability to market and sell key South Australian products such as Penfolds will be felt up and down the main roads of Tanunda, Nuriootpa and McLaren Vale.

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