The S&P/ASX 200 Index (ASX: XJO) may be racing higher on Thursday, but the same cannot be said for the Treasury Wine Estates Ltd (ASX: TWE) share price.
In afternoon trade the wine company's shares are down around 1% to $10.50.
Why is the Treasury Wine Estates share price dropping lower?
Today's decline appears to have been driven by a subdued reaction by brokers to its plan to demerge the Penfolds business.
On Wednesday Treasury Wine Estates revealed its intention to consider a demerger of the Penfolds business and associated assets into a separate ASX listed company.
Management believes the demerger of the business would facilitate the creation of incremental long-term value for shareholders. This is by allowing one team to focus on driving the luxury Penfolds multi-country of origin portfolio, while a separate team focuses on accelerating the mix-shift towards Luxury in the "New Treasury Wine Estates" business.
It notes that Penfolds accounts for approximately 10% of its volume, but well over half of its earnings. It also has unique resources and a differentiated execution focus compared to the remainder of the business.
On paper this makes a lot of sense, but one broker that isn't overly enamoured with the idea is Macquarie Group Ltd (ASX: MQG).
According to a note out of the Macquarie equities desk this morning, the broker has downgraded the wine company's shares to an underperform rating from neutral. It has also cut its price target on the company's shares to $9.90. This implies potential downside of approximately 6% from its current share price.
What did Macquarie say?
Macquarie appears a little concerned with the potential demerger of the Penfolds business.
It notes that traditionally the market values diversified alcohol brands at a premium to individual brands. This could mean a lower multiple for the Penfolds business.
The broker also has concerns over its costs. It fears that splitting off Penfolds from the rest could result in negative cost synergies and also higher debt costs.
Analysts at UBS don't appear to agree, though. This morning they held firm with their buy rating and $14.80 price target. While it was surprised by the timing of the announcement, the broker sees potential for the demerger to add value for shareholders.
For me, I would sit in the middle of both brokers at this point and class its shares as a hold. Details are reasonably light and I would suggest investors keep their powder dry until firmer plans are announced.
