Australia's Treasury Wine tests tricky US market with $900 million purchase

File photo of bottles of Penfolds Grange, made by Australian wine maker Penfolds and owned by Australia's Treasury Wine Estates, on a shelf for sale

By Byron Kaye, Roushni Nair and Peter Hobson

(Reuters) -Top Australian wine producer Treasury Wine Estates has agreed to a $900 million buyout of U.S. rival DAOU Vineyards, increasing its exposure to a market that it has long struggled to dominate amid uncertainty about stalled exports to China.

Treasury, owner of the Penfolds and Wolf Blass labels, said it was buying the Paso Robles, California, private company to fill a gap in its luxury offering, defined as bottles retailing for $20 to $40.

The deal builds on the Australian firm's plan to take its portfolio upmarket, where it said demand and margins are higher, but puts Treasury deeper into a geographic segment that has proven difficult even as it adjusts its product offer.

A decade ago, Treasury destroyed thousands of bottles of low-end wine it could not sell in the U.S. after aggressive expansion. In 2021, as China imposed crippling tariffs, Treasury paid $315 million for California's Frank Family Vineyards, calling it a luxury brand, but profit from Treasury's U.S. business declined in the year to June 2023.

"I'm not accountable for the last 20 years. I'm accountable for the last three," said Treasury CEO Tim Ford, who started in the role in 2020, on an analyst call.

Treasury is going ahead with expansion in the U.S. even as it awaits a review recently announced by China into the tariffs which stopped that country being Treasury's biggest market.

"I don't see why we would wait for China," Ford said on the call.

"If China does come back at the end of this review process, this is just going to open up a new opportunity," he said.

Shares of Treasury were in a trading halt as the company asked investors to buy A$825 million worth of new shares at a 10.7% discount to the stock's last closing price, to help fund the deal. But analysts expressed caution about the decision given Treasury's record in the U.S.

"The concern investors will have is that TWE Americas has been underperforming in recent times," E&P Capital analyst Philip Kimber said in a client note.

Treasury expects the deal - the second-largest by an Australian company of a U.S. entity this year, showed data from Dealogic - to close by the end of 2023 and contribute earnings before interest and taxes of $23 million to $25 million in the second half of 2024.

($1 = 1.5699 Australian dollars)

(Reporting by Byron Kaye in Sydney, Peter Hobson in Canberra and Roushni Nair in Bengaluru; Editing by Sonali Paul and Christopher Cushing)