Devil’s Advocate: The Billion-Dollar Deal. Did Treasury Overpay?

Robert Joseph takes a level-headed look at Treasury Wine Estates’ latest US acquisition.

Reading time: 3m 30s

Robert Joseph - with horns
Robert Joseph - with horns

The news that Treasury Wine Estates has agreed to buy Daou Winery for $900m – or $1bn, if it hits its profit targets – was predictably met with similar responses within the wine community to the ones seen when Constellation paid over $300m for Meiomi and $285m for the Prisoner. One commentator compared the Prisoner deal to the ‘crazy’ price Facebook had just handed over for Instagram, saying that both demonstrated how out of touch with reality some people with money had become. Of course, N years later those two deals and the Meiomi acquisition have all proved to be canny investments.

Will the same be said of TWE and Daou?

Paul Wagner, a respected industry observer, believes so. Unlike the Constellation purchases, he points out, Daou comes with around 600 acres of vineyards, revenues of over $200m, profits of $63m and impressive annual growth of 20%. There is a highly successful tasting room and DTC business, and steady demand for $25-40 and over-$100 bottles. Australian professionals who have been following the story also point out that Daou’s land and its degree-days are particularly suited to Penfolds’ winemaking preferences, though why this should be relevant, given the stated intention to keep the two brands separate, is unclear.


Australian Treasury Wine Estates, which counts Penfolds among its brands, has purchased Daou Vineyards in California's Paso Robles for approximately $1bn.

Reading time: 1m

Not much competition

Others take a less enthusiastic view. First, it is a fairly open secret that TWE wasn’t fighting off any other suitors. The asking price had apparently been too high for a significant number of possible buyers for as long as the last 18 months. Institutional buyers appear to have shared that reticence because the financing for the deal was 17% (A$139m) under-subscribed. There were also questions over the price-earnings multiple described in the media as 13, but estimated to be closer to a heady 16 if the NPV of tax credits were removed from the equation.

Another key point is that, however attractive the degree-days, the growing fashionability of the Paso Robles region and the spectacular beauty of Daou’s Hoffman Ranch property, land values and wine price premiums in this part of California are a lot lower than in Napa.

A well-informed Californian also suggested that Daou’s sales figures may include rather more stock that is sitting in distributors’ warehouses than current wholesaler depletions might warrant. Even if this were the case, however, it could be argued that TWE has the strength to ease any blockages.

Overriding all other questions for some analysts is why TWE chose to do this particular deal right now. Could they not have achieved similar growth from their existing portfolio of brands? Here, the Australian giant has a patchy history, at best. Apart from Penfolds and its more entry-level brand 19 Crimes, it has not been a great brand-builder. It is easy to forget that it owns once near-ubiquitous Australian labels as Wolf Blass, Lindemans and Rosemount.

The need for luxury

What TWE have lacked – or failed to create outside Penfolds — is a luxury brand, which, whether overpriced or not, is what Daou is going to give them.

As I’ve said quite often in these columns, luxury remains a dirty word in much of the wine industry, especially in Europe, and the former British colonies of Australia, New Zealand and South Africa. Leading critics, Jancis Robinson MW and Eric Asimov of the New York Times have both expressed their discomfort with the term and, as Liz Thach MW, co-author of an excellent book on luxury wine marketing, has noted, many Burgundians hate to see their wines being described in this way.

For my part, I've always taken the 'if it looks like a duck' approach to this question, and bottles of wine selling above $50 (and maybe even above $35) look pretty luxury-like to me, and I’d guess to a very large proportion of the wine-drinking population.

California and Champagne have both understood this perfectly and acted accordingly. Bordeaux has been ambivalent about it, despite seeing its châteaux fall into the hands of men like Bernard Arnaud who are synonymous with luxury – and despite the appearance of Château Angelus in James Bond movies.

The people in the wine industry and elsewhere who scoff at luxury because it doesn’t fit into their lifestyles, cannot deny that enough other human beings seem to appreciate Arnault’s range of LVMH luxuries for him to have become one of the five richest men on the planet.

Arnault has proven that he and the people he employs understand how to acquire and grow luxury brands like Cloudy Bay and Whispering Angel. Constellation has shown the same skills with the Prisoner, as has Gallo with Orin Swift. The jury is still out on whether TWE has done so with Frank Family vineyards, its other recent pricy California purchase. And, of course, Penfolds’ ascent to the front rank of luxury wine brands owes a great deal to China.

Time, and the market, will decide the wisdom or otherwise of this deal, but luxury wines from California or anywhere else are not going away, and this is something Europeans and other non-Californians will have to come to terms with.

Where the Americans have been clever is in building scaleable brands like Daou that offer luxury wines at several price points, and in volume. Antinori, Torres and la Baronie have done so — though Mouton Cadet is not a $25+ product — and so, notably, has Gerard Bertrand and Sacha Lichine in Provence. But these are the exceptions to the rule.


Robert Nicholson, principal of International Wine Associates, advises on merger & acquisition in the wine industry. Most recently, he was involved in the purchase of Château Lascombes by the Lawrence Family. In this exclusive interview Nicholson frankly considers the likelihood of other US buyers buying French wine businesses.

Reading time: 7m 45s



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