Xanadu moves to scrap tax scheme

A DEAL last week between Xanadu Normans Wine Group and its investors to close down the winemaker’s tax-effective vineyard scheme may give the winery’s new management some much needed breathing space. 

Xanadu’s recent history has been one of management turmoil and a falling share price, a situation which appears to have been underpinned by big costs associated with the managed investment scheme it is now unravelling.

The deal to terminate the MIS, dependent on a $7 million capital raising, is part of a strategy by managing director Sam Atkins to steamline operations at Xanadu.

The MIS arrangements appeared to have committed Xanadu to fruit costs well above current market value.

In a prospectus dated May 14 1999, the purchase price for grapes was based on $2,450 a tonne for all varieties other than cabernet sauvignon, which was priced at $3,000/t.

With CPI adjustments, this meant that Xanadu would be paying $3,203/t of fruit this June.

Sources contacted by WA Business News said market rates currently stood between $1,200 and $1,700/t.

Mr Atkins said if the MIS was not terminated it would make operating the company more difficult.

“We could have continued but it would have made life a lot harder,” he said. “Buying it back gives us a greater opportunity to succeed and the growers understood that we have struggled.”

Xanadu posted a loss of $6.2 million last financial year, which involved the write-down of inventory of $4.2 million, the write-down of goodwill at $1.6 million, and restructuring costs of $1.5 million.

Mr Atkins said more restructuring was taking place this year, including the current downsizing of the Perth office, but the company would be cash positive within six months.

“This six months we are looking to break even, or making a small operating profit,” he said.

Employees at Xanadu’s Perth office are relocating to Margaret River or Adelaide, or have received redundancy packages, with only a few remaining for financial and administrative duties.

Mr Atkins said the office would eventually close.

“In the first six months of this year we saved $800,000 in operating expenses and we expect to save a further $500,000 in the next six months,” he said. 

“We’re not paying exorbitant wages to anyone. We’re definitely back to industry standard; probably below it.”

The staff changes are just some of many to have occurred during the past 12 months.

The unexpected departure of Xanadu managing director Andrew Moore last November came a month after he accepted a position as president of the Wine Industry Association of WA, and after he had sacked about a half a dozen staff members aimed at shaving $1.5 million off its bottom line.

Xanadu requires $3 million to buy out the growers’ interests in the MIS and last week launched a $7 million capital raising.

The winemaker is issuing 78,000,000 shares via a one-for-two rights issue at 9 cents a share.

Xanadu shares are currently hovering just above 10 cents a share, well below its listing share price of 30 cents.

Mr Atkins told WA Business News the additional capital would be used to fund further restructuring, which includes grafting vineyards to produce more white wine. He said the MIS had initially provided the company with capital to grow.

“We needed fruit and the MIS gave us the desired result because the demand and supply situation was different back then,” Mr Atkins said.

“We were fixed in on prices that have now fallen so we were paying about 20 to 30 per cent above the market price.”

Mr Atkins said 79 per cent of the growers voted in favour of the scheme’s termination.

“The other thing this will do is add flexibility,” he said. “We will introduce a grafting program. We’re going to do more sauvignon blanc and chardonnay.

“Currently we have 80 per cent red and 20 per cent white and we want to be at 60 per cent red and 40 per cent white.”

Mr Atkins said the wine group, which includes the Normans and NXG brands, will produce 380,000 cases this year.

“Of that, 100,000 will come from Xanadu,” he said.