Why the Treasury Wine Estates Share Price Blew Up Today

By MoneyMorning.com.au

What Happened to the Treasury Wine Estates Share Price?

Shares in winemaker Treasury Wine Estates Ltd [ASX:TWE] exploded to the upside this morning, gaining almost 18% over the day. The stock has regained all of its year-to-date losses in just one trading day.

Why Did this happen to the TWE Share Price?

This morning TWE’s management announced that they had rejected an offer from US private equity firm KKR and Co. L.P. [NYSE:KKR] to buy TWE for $3.05 billion.

KKR’s bid valued Treasury at $4.70 per share. On the day TWE rejected the takeover approach nearly five weeks ago, its shares were trading at $3.70, so KKR’s proposal would have represented a 27% premium.

Speculation about mergers and acquisitions can push stock prices up with tremendous momentum…particularly when an offer comes in cash, like KKR’s bid for TWE. The prospect of a bidding war for their company has got TWE shareholders excited today.

What now for Treasury Wine Estates?

Long-suffering TWE investors should rightly be cheered by today’s price action. But you should recognise that buying any stock because it’s viewed as a potential takeover target is a high risk strategy. Potential suitors can get cold feet very quickly if financial markets turn sour.

You’ve also got to factor in a bruisingly competitive market, with crucial Chinese demand dampened by austerity measures. The company told us as much this morning when it admitted that ‘trading conditions in Australia continue to be difficult, underpinned by intense competitor activity and a challenging retail environment.’

And lest we forget, this company has form when it comes to failing to meet investors’ profit expectations.

Enjoy their products if you like, but there may be better opportunities for your investment dollar elsewhere.

Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator

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By MoneyMorning.com.au