Treasury Wine Estates (ASX:TWE) (Australia), the world’s largest listed wine company, also significantly contributed to performance for the year (and quarter). As we indicated in our last letter, the company reported what we consider strong fiscal-year results in August, and they successfully resolved inventory issues in North America, allowing management to focus on growing the business. As a result, during the fourth quarter, the company announced they were acquiring wine assets from Diageo in the U.S. and Europe. The U.S. business acquired was the primary motivation for the deal. That acquisition brings a large inventory of wine, more than half of which comes from luxury and masstige grapes that generate 83% of the revenue in the U.S. These cases were sold under a number of brands that will also transfer to Treasury, and the company can now additionally use some of that high quality fruit to blend into its existing brands and expand capacity and margin. Another appeal of the U.S. business is that it is capital-light, as Treasury will own only 2% of the agricultural assets used to produce the fruit with the rest coming from long-term leases and grower contracts. In addition, the company expects to achieve cost synergies of at least $25 million and avoid $80 million of capital expenditure that would have been needed for a new bottling facility in the U.S. We believe this transaction will create additional shareholder value over time.
From David Herro (Trades, Portfolio)'s Oakmark International Small-Cap Fund fourth quarter commentary.
