Treasury Wines faces ‘elevated risk’ of bankruptcy

A controversial $1.3 billion acquisition of a luxury vineyard at the top of a mountain between Los Angeles and the Napa Valley in California is threatening to upend Australian winemaking giant Treasury Wine Estates.

Shares in the ASX-listed winemaker behind the iconic Penfolds Grange, Wolf Blass, Lindeman’s, and Wynns brands have sunk 63 per cent over the past year, as hedge funds lift bets its $1.9 billion debt pile spells more trouble ahead.

In February, Treasury’s management team cancelled its dividend and flagged a near $1 billion pre-tax write-down to the value of its US winemaking and premium brand assets, just a few years after it paid more than $1.7 billion for California’s Daou Vineyards and Frank Family Vineyards.

This week, the $3.4 billion Plato Global Alpha Fund warned it thinks Treasury Wines could go bankrupt as its debt problems meet a general economic downturn from rising interest rates and sinking consumer confidence.

“We have a model to estimate the probability of a company going bankrupt, and this is particularly elevated for Treasury Wines,” warned Plato. “This concern is even more acute with interest rates rising and the macro outlook deteriorating.”

The Plato Fund stands to profit if Treasury’s share price falls and therefore its views are likely aligned to its motives, although other professional investors are also betting heavily against Treasury with 12.9 per cent of its shares shorted as at March 25.

A spokesperson for Treasury dismissed the idea it needs to raise money to fix its balance sheet debt.

“We’re comfortable with our current funding position and have ample liquidity,” the spokesperson said.

From Beirut to California’s Daou Vineyards

Some of the winemaker’s worsening troubles can be traced back to a decision under old management to pay an upfront $US900 million ($1.32b) for California’s Daou Vineyard in October 2023.

“This was either one of the strangest over-spends in corporate history or the winery, or wine brand, or wine location that it bought must be something stupendously special,” wrote Campbell Mattinson, the former editor of Halliday Wines.

“From nothing other than its [Daou Vineyard’s] land value to $1.6 billion in 16 years is — in the wine industry, no less — an eye-watering rate of value build.”

Treasury rose $825 million from its existing shareholders at $10.80 per share to fund the acquisition of the Californian vineyard, which makes premium cabernet-sauvignon style red wines touted as California’s answer to South Australia’s Penfolds.

“It’s located on a particularly glorious site – in pure scenic terms it’s one of the most stunning vineyard’s in the world,” said Mr Mattinson. “Daou is or was an incredibly savvy wine business built on one of the most compelling tragedy-to-triumph stories you could ever hope to encounter.”

The story behind the vineyard’s founders is of two Lebanese-born brothers named Georges and Daniel Daou.

The exclusive vineyard’s website tells how the brothers’ family fled war-torn Beirut in 1975, after suffering injuries from missile fire.

From Beirut, the brothers went to France where they learned about winemaking and later California, where they started a technology business named Daou Systems that listed on the US stock market in 1997.

The business was later caught up in years of litigation amid allegations it violated US GAAP accounting principles by recognising revenues early to allegedly artificially inflate the tech company’s valuation.

Daou Systems always denied the allegations and the case was settled in 2008.

Some professional Australian investors doubted Treasury’s deal for Daou at the time, although The Nightly doesn’t suggest its valuation was artificially inflated. Others defended the deal and price tag.

However, all of Treasury’s Americas businesses posted EBIT (earnings before interest and tax) of just $44 million over the six months to December 31, versus the $1.7 billion, or more, it spent on US acquisitions since 2021. Treasury’s net debt of $1.87 billion is now nearing its market cap of $2.8 billion in a warning sign its balance sheet is not in good shape.

On Tuesday, Treasury insisted its due diligence on the Daou deal was sound and the spawling winemaker has previously blamed the US downturn on soft market conditions and other operational hiccups.

Mr Mattinson gave no reasons to doubt the flamboyant Daou brothers. On the contrary, he suggested they were among the premium wine industry’s greatest entrepreneurs and salespeople, who’d risen from war torn Lebanon to the heart of California’s billionaire society.

“Daou was worth less the day the brothers exited the property,” he said. “Few wine producers sold the sizzle better than Daou. Its direct-to-consumer and overall customer experience performance was astonishingly good.”

The wine expert suggested Treasury’s biggest problem now is not the US acquisitions, but fact that they distracted management from its core Australian businesses.

“Penfolds’ wines are still as good as they ever were.” he said. “[But] the most unfortunate aspect of the Daou purchase, especially since it was coupled with the $434 million spend on [the US] Frank Family Vineyards, is that these purchases were made when Treasury’s Australian wine assets – which are or should be excellent – are crying out for attention.

“Devil’s Lair in Margaret River and Coldstream Hills in the Yarra Valley, for instance, have both been marched past by their competitors when, really, they should be the leaders in their respective regions. That is, Treasury made the mistake of buying high, at the top of the market, which now inhibits their ability to spend where funds are actually needed.”

Other listed Australian winemakers have struggled over the past years as consumers drink less and face cost-of-living pressures. Australian Vintage Group, the business behind South Australia’s McGuigan, Nepenthe, and Tempus brands has seen its shares slump 89 per cent in five years to just 8.2 cents on Wednesday.

It also has a balance sheet problem with net debt of $110 million, versus a market cap of just $27 million. It has blamed part of its problems on consumers drinking less heavy or bold red wines, in favour of lighter styles such as white, rose and sparkling varietals.