below is the attached case study file and the rubric requirement file. Also, there is an attached word docs as a reference on how to write on each section (you may use the ideas from the word docs, or copy some of them). I also need to see the full workings (how you got the final number, formula workings).UVA-F-0541
Rev. Jun. 19, 2012
BROWN-FORMAN DISTILLERS CORPORATION
In early July 1978, W. L. Lyons Brown, Jr., president and chief executive officer of BrownForman Distillers Corporation, faced an important acquisition decision. The principal owners of
Southern Comfort Corporation had approached Brown in May with an offer to sell the company at
a price of $94.6 million. In preparing his response, Brown was evaluating the feasibility of the
asking price and the likely effects of the acquisition on Brown-Forman’s share price.
As a leading producer, marketer, and importer of wines and distilled spirits (including the
well-known Jack Daniel’s brand), Brown-Forman ($457 million net sales) was the fifth-largest
distiller in the United States, after National Distillers ($586 million), Seagram ($2,018 million),
Heublein ($839 million), and Hiram Walker ($875 million).1 How Brown had chosen to position
Brown-Forman among its competitors would affect the appraisal of Southern Comfort.
Brown-Forman: Financial Goals and Performance
In 1977, Brown-Forman’s management adopted new long-range financial goals
regarding: (1) hurdle rates for investment; (2) size of the capital budget through 1980; (3) target
capital structure; and (4) dividend payout. The primary objective of these goals was to “increase
the value of the stockholders’ investment.”2
The dividend payout ratio (all dividends paid divided by net income) was targeted at a
range of 30% to 35%. Planned investment during the 1978 to 1980 period included $86 million
for advertising and promotion, $39 million in barreled-whiskey inventory, and $19 million in
new plant and equipment. Regarding capital structure, the ratio of total debt to total tangible
capital,3 26.6% at the end of 1977, was viewed as offering “considerable flexibility in financing
investment opportunities with either debt or equity.”4 Finally, the target hurdle rate, calculated as
1
Net sales figures for all firms are from wine and distilled-spirits business lines only.
1978 Annual Report, p. 3.
3
“Total tangible capital” defined as the sum of all interest-bearing debt, deferred income taxes, preferred
equity, and common equity less intangible assets.
4
1977 Annual Report, p. 15.
2
This case was prepared by Professor Robert F. Bruner. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright © 1983 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.
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UVA-F-0541
the return on total capital employed,5 was set at 14% for new capital projects in the distilling
industry and 12% for investments in projects already in place.
The 1977 annual report declared:
While we are pleased with our 1977 results, in order to improve our return on
total capital employed, we will be selective in pursuing new capital projects and
will concentrate our efforts on improving the profitability of our present business.
Management will actively pursue investments in new capital projects that have an
anticipated return of at least 14% after taxes on the capital employed. At the same
time, we will continue our efforts to expand the most profitable operations of the
company. With respect to other areas of our business, your management is taking
steps through price increases and closer attention to asset management to improve
profitability. If the returns of these operations do not attain a higher level,
management will consider channeling the capital supporting them into more
profitable projects, products, and acquisitions.
Exhibit 1 compares the financial performance of Brown-Forman with its largest
competitors. The company had a relatively larger profit margin, higher growth rates, and stronger
balance sheet than its major competitors. The 1978 annual report noted:
The Company’s balance sheet is strong due to continued close attention to asset
management. Our low debt/equity ratio and the excellent financial performance in
recent years places the company in a favorable position to assume higher levels of
debt to finance acquisitions and other investment opportunities.
Value Line identified Brown-Forman as the “premier liquor company in the United
States,” and noted that the firm’s major brands continued to grow despite a flat industry growth
trend.6 The company was expected to earn $2.45 per share in 1978 and to add another 15% to
earnings per share in 1979.
Brown-Forman’s income statement and balance sheet for the year ending April 30, 1978,
are given in Exhibits 2 and 3. In 1978, two classes of stock existed for the company: Class A
stock had the exclusive voting right and was listed on the American Stock Exchange; Class B
common had no voting rights, but was also listed. The Brown family held 74% of the Class A
stock and 40% of the Class B, and also provided certain senior officers and directors of the
company some of the Class A stock.
5
“Return” defined as the sum of net income (excluding extraordinary items), the after-tax cost of interest, the
increase in deferred income taxes, and the amortization of intangible assets during the year. “Average total capital
employed” defined as the sum of all interest-bearing debt, deferred income taxes, and preferred and common equity
averaged at year-end.
6
This and following quotes are from Value Line April 14, 1978, p. 350.
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UVA-F-0541
Brown-Forman: Product Market Strategy and Performance
“The production of distilled spirits is a relatively straightforward task. It is marketing
skill that is critically important to the survival and growth of firms in this industry,” said William
Street, senior vice-president. Brown succinctly stated Brown-Forman’s product-market strategy
in a presentation to the New York Society of Security Analysts on June 29, 1978:
The company’s marketing philosophy is to produce and sell high-quality products
which retail at prices generally at the upper end of the price scale within whatever
category the product is sold. The company is a strong believer in heavy
advertising support in order to build brands which have long life cycles with
generally higher margins than are found on brands whose consumer appeal is
based on price and shorter life cycles.
Brown-Forman’s product line included many well-known brands, which were categorized into
three groups (see Exhibit 4).
Outside observers suggested that Brown-Forman’s special competence was in building
brand franchises. For example, the company purchased the Canadian Mist Brand from Barton
Brands, Inc., in 1971, “Because we had no significant brand in the Canadian Whiskey market
and perceived significant growth in that market,” said Brown. By 1978, it was Brown-Forman’s
largest brand and grew 11.5% during 1977 versus 3.1% for all Canadian whiskeys. A second
example would be the company’s investment in the Bolla and Cella brands of Italian wines. The
preeminent example of the firm’s ability to build premium brand franchises was, however, Jack
Daniel’s Tennessee whiskey. Brown commented:
Jack Daniel’s’ compounded annual growth rate over the last five years has been
between 10% and 15% and yet we know from tests in certain markets where
we’ve allowed free supply both this year and last, that the growth has jumped to
between 25% and 40%. I believe we can state without equivocation that Jack
Daniel’s has the strongest and most loyal consumer franchise of any product in
the industry.
What are the reasons for this phenomenal success? Number one, it has been our
long-term marketing philosophy that top quality deserves the highest price, and
over many years, Jack Daniel’s has been the highest priced American whiskey of
any significant volume on the market. The brand is probably the only one which
by policy has never granted quantity discounts of any kind. The fact that there has
been a supply shortage from time to time has added to the mystique surrounding
the label, and no doubt has been a factor contributing to long-term sales growth
… Jack Daniel’s is a unique product…. Our advertising over the years has
emphasized the character of the distillery and the whiskey it produces…. Finally,
the most exciting thing for us for the long term is that the big increase in demand,
which is on the top of the normal 10% to15% compounded annual growth, is
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UVA-F-0541
coming primarily from the youth market … the corporation sees a very healthy,
long life cycle ahead for this brand.
A new marketing thrust on the Jack Daniel’s brand had been to increase penetration of foreign
markets. This campaign would require an expanded marketing organization overseas.
Whereas skillful branding and product positioning could improve the sales performance
of a particular product or product group, another factor, product-line mix, would also affect the
sales growth of the company in the long run. Exhibit 5 suggests how demand for distilled spirits
had changed during the previous ten years. Regarding the near future, Value Line expected
sluggish industry growth overall, although “mystique” brands such as Jack Daniel’s would
continue to grow:
The spirits companies are beset with a number of problems. While the shift to
non-whiskeys is firmly entrenched, the white goods (vodka, gin, rum, and tequila)
aren’t as profitable…. Since the overall liquor market hasn’t gotten significantly
larger, sales penetration by any one product type has come at the expense of
another category.
Retail liquor prices have advanced about 15% over the last decade while the
consumer price index rose 75%. Plainly, the industry has been reluctant to raise
prices and has preferred to absorb cost increases because of the sluggish volume.
Southern Comfort
The object of Brown-Forman’s acquisition interest was Southern Comfort Corporation
(Consolidated) and Caligrapo, Inc., producers of Southern Comfort, a unique liqueur. By
industry definition, a liqueur is a distilled spirit that contains more than 2 1/2% sugar by volume.
Generally, a liqueur is produced by adding a syrup or concentrate to an alcohol base. The
concentrate gives the liqueur its distinctive flavor. Southern Comfort’s concentrate was mixed by
a secret formula owned by Caligrapo Inc. Caligrapo sold the concentrate to Southern Comfort,
which purchased alcohol and mixed, bottled, and marketed the liqueur. Southern Comfort
employed 22 salespeople; its sales in 1977 were about $64 million (see Exhibits 6 and 7).
Southern Comfort was owned by the estate of Francis E. Fowler, Jr., while Caligrapo was
owned directly by his heirs, principally his sons, Francis G. Fowler, III, and Philip F. Fowler.
Francis E. Fowler, Jr., had owned Southern Comfort for many years until his death in 1975. 7 His
sons managed the St. Louis company largely from California, where both they and their father
had chosen to live in recent years. Despite absentee management, the company was regarded as
well-run and efficient. Plant visits by Brown-Forman employees revealed modern equipment.
7
Following the death of Francis E. Fowler, Jr., an independent appraisal in 1977 deemed the fair market value
of the common stock of Southern Comfort to be $120 per share for estate and inheritance tax purposes.
-5-
UVA-F-0541
Southern Comfort had enjoyed above-average growth in shipments (see Exhibit 8),
which was consistent with the general rise in the consumption of liqueurs shown in Exhibit 5,
but surprising in light of market surveys that over half of Southern Comfort’s consumers viewed
it as a whiskey. Thus, compared to the slow growth of whiskey as a class, Southern Comfort’s
performance was arresting. It was attributed in part to rock and roll singer Janis Joplin, who
preferred Southern Comfort. Strengthened channels of foreign distribution also accounted for
growth in export sales. Among marketing professionals, it was considered a very strong brand.
Southern Comfort had never been sold at a discount by its manufacturer. Its performance
notwithstanding, Brown believed that the brand had not been aggressively marketed.
Through an intermediary, the Fowler brothers had approached Brown-Forman to solicit
their interest in buying Southern Comfort Corporation and Caligrapo, Inc, for $94.6 million.
Subsequently, Brown-Forman learned that, in recent years, two other major distillers had
entertained the possible acquisition of Southern Comfort and had rejected it at that price. At the
time of approaching Brown-Forman, the Fowlers were discussing acquisition with no other
potential buyers. They seemed sincerely interested in selling to Brown-Forman, primarily
because of a perceived fit of Southern Comfort with the Brown-Forman product line. Also,
Brown-Forman resembled Southern Comfort in broad outline: a family-run business with a
Southern heritage and a record of superior performance.
The Fowlers indicated a willingness to accept cash for the two companies. Through an
intermediary, they also suggested two other features of the acquisition. First, Southern Comfort
Corporation owned some real property unrelated to the operations of the company. The Fowlers
offered to repurchase that property at book value, about $5.9 million, after the acquisition.
Second, they proposed that the acquisition be consummated after January 1979, when they
expected Congress to lower the tax rate on capital gains.
Brown contemplated financing $20 million of the purchase price with cash and financing
the balance with bank debt. He estimated that up to $70 million could be borrowed at a nominal
rate of 8 3/4% repayable over seven years semiannually, starting the following year. The
company would be required to maintain an average compensating balance of 7% on the amount
to be borrowed.
Because the proposed transaction would be taxable to the Fowlers, Brown-Forman could
write up the value of the assets to the purchase price paid. Brown-Forman’s finance department
estimated that the purchase price could be allocated as follows:
$55.0 million
12.2
27.4
$94.6 million
Intangible assets (amortized over 40 years)
Property, plant and equipment (depreciated over 20 years)
Current assets
Asking price
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UVA-F-0541
Fundamentally, however, the attractiveness of the acquisition would rely on the strength
of the cash flow from operations. A small team of executives developed a series of revenue, cost,
and volume assumptions, which are summarized in Exhibit 9. The recent price history of
Brown-Forman’s common stock is given in Exhibit 10.
-7-
UVA-F-0541
Exhibit 1
BROWN-FORMAN DISTILLERS CORPORATION
Comparative Financial Data, 1978
American
Distilling
BrownForman
Heublein
1.41
1.10
1.71
.79
1.63
1.04
.65
.30
.50
.49
.47
.40
.46
.50
Debt/Equity
1.14
.247
.55
.34
.84
.53
.20
Debt – Cash
Total capital
.50
.11
.28
.16
.44
.32
.12
Assets/Equity
2.46
1.37
2.16
1.65
2.04
1.76
1.43
Sales/Assets
1.66
1.46
1.80
1.35
1.49
1.22
1.04
Beta
Marginal
Tax rate
Profit/Sales
Price/Earnings
.012
9.4
.073
8.2
.035
9.6
National
Distillers
.052
6.5
Publicker
Industries
.005
NMF
Seagram
.038
8.8
Hiram
Walker
.069
7.7
Dividend
Yield at 4/14/78
NIL
.043
.056
.08
NIL
.042
.062
Self-sustaining
Growth rate
.049
.102
.053
.079
.015
.041
.054
1978 expected
Sales growth
.02
.09
.06
.08
.04
.07
.06
Market value
Book value
.46
1.26
1.53
.79
.63
.75
.77
Notes: (1) The long-term geometric mean risk premium (calculated as the difference between the return on the market
portfolio and the long-term return on government bonds) was 5.7%. The arithmetic mean risk premium was
8.7%.
(2) The yield to maturity of 10-year U.S. Treasury bonds (a proxy for the ex ante risk-free rate) was 8%. The yield
on 90-day U.S. Treasury bills was 7.08%.
Source of market premium: R. G. Ibbotson and R. A. Sinquefield, Stocks, Bonds, Bills, and Inflation: The Past
(1926-1978) and the Future (1978-2000) (Charlottesville: Financial Analysts Research Foundation, 1977), Exhibit 28.
Source of financial ratios: Value Line, April 14, 1978.
Source of betas: “Security Risk Evaluation,” Merrill Lynch Pierce Fenner & Smith, Inc., April 1978.
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UVA-F-0541
Exhibit 2
BROWN-FORMAN DISTILLERS CORPORATION
Consolidated Statements of Income
(Expressed in thousands except per share amounts)
Years Ended April 30,
Net sales
Cost of sales
Gross profit
Selling, advertising, administrative,
And general expenses
1977
1978
$396,176
$457,071
274,733
310,539
121,443
146,532
69,714
76,395
–
(2,300)
1,760
1,314
53,489
69,151
6,249
5,804
47,240
63,347
23,500
32,100
$ 23,740
$ 31,247
$ 1.85
$ 2.45
Other income (expense):
Write-off of intangible asset
Miscellaneous, net
Earnings before interest and taxes
Interest expense
Income before taxes
Taxes on income
Net income
Earnings per common share
Source: 1978 Annual Report.
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UVA-F-0541
Exhibit 3
BROWN-FORMAN DISTILLERS CORPORATION
Consolidated Balance Sheets
(In thousands of dollars)
April 30
Assets
Cash
Short-term money market investments
Accounts receivable, trade
Inventories
Other current assets
Total current assets
Investments in associated companies
Property, plant, and equipment, at cost:
Less accumulated depreciation
Net property, plant, and equipment
Other assets
Goodwill, franchises, brands, and
Trademarks
Total Assets
Liabilities and Stockholders’ Equity
Current portion of long-term debt
Accounts payable and accrued expenses
Accrued taxes
Deferred income taxes
Total current liabilities
9.3% serial notes, less current portion, $5,000
Due each September 1, 1979-1988
Deferred income taxes
Total liabilities
Stockholders’ Equity
Capital stock:
Preferred 40¢ cumulative, 1,177,948 shares
Authorized and outstanding
Class A common stock, voting, issued shares,
4,020,634
Class B common stock, non-voting, issued shares,
8,888,105
Capital surplus
Retained earnings
Less common treasury stock, at cost (Class A,
61,742 shares; Class B, 261,377 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
Source: 1978 Annual Report.
1977
1978
$ 9,354
36,171
40,446
148,794
1,380
236,145
6,494
74,229
38,384
35,845
4,716
$ 8,875
20,797
59,759
167,142
1,030
257,603
6,554
81,010
41,709
39,301
6,360
21,671
$304,871
18,787
$328,605
$ 5,000
32,213
6,659
2,759
46,631
$ 5,000
39,361
11,475
1,650
57,486
60,000
1,226
107,857
50,000
2,894
110,380
11,779
11,779
1,206
1,206
2,667
91,146
94,138
2,667
91,146
115,349
(3,922)
(3,922)
197,014
$304,871
218,225
$328,605
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UVA-F-0541
Exhibit 4
BROWN-FORMAN DISTILLERS CORPORATION
Product Line Information
Share
of Market
American Spirits (53% Brown-Forman sales)
1977
Industry
% Sales
Growth 1977
NA
3%
NA
7.2%
Jack Daniel’s Tennessee Whiskey
Old Forester Bottled in Bond Bourbon Whiskey
Old Forester Kentucky Straight Bourbon Whiskey
Early Times Kentucky Straight Bourbon Whiskey
NA
+4.4%
NA
2.0%
NA
2.9%
2.9%
2.9%
+11.5%
NA
NA
NA
NA
NA
+3.1%
+0.2%
+0.2%
NA
NA
NA
+32.5%
+77%
NA
NA
NA
NA
11%
NA
NA
+37%
+37%
NA
NA
NA
NA
NA
+15.21%
+9.0%
Sales
Growth
Imported Spirits (24% B-F sales)
10.5%
NA
NA
NA
NA
NA
Canadian Mist Canadian Whiskey
Ambassador Scotch Whiskeys
Usher’s Green Stripe Scotch Whiskey
Pepe Lopez Tequila
Old Bushmill’s Irish Whiskey
Martell Cognacs
Wines & Specialties (23% B-F sales)
4.6%
3.3%
NA
NA
NA
NA
3.2%
6.1%
NA
1
Bolla Italian Wines
Cella Italian Wines
Cruse French Wines
Veuve Clicquot French Champagnes
Noilly Prat Vermouths
Anheuser German Wines
Korbel California Champagnes
Korbel California Brandy
Bols Liqueurs and Brandies
5-year percentage increase, 1971 to 1976.
Sources: Company estimates and Liquor Handbook (New York: Gavin-Johnson Associates, 1982), p. 74.
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UVA-F-0541
Exhibit 5
BROWN-FORMAN DISTILLERS CORPORATION
Consumption Changes by Types
Of Distilled Spirits
Case Shipments
Product type
1966 to 1971
%
Change
Total distilled spirits
American whiskeys
Blends
Straights
Bonds
Other
Scotch
Canadian
Gin
Rum
Brandy
Cordials, liqueurs
Vodka
Prepared cocktails
Other
+22.2
−4.6
−7.3
+ 0.9
−29.1
−26.2
+54.5
+70.6
+18.9
+77.1
+41.3
+44.1
+51.6
+30.3
+328.9
Source:
1971 to 1976
%
Change
+ 9.8
−21.9
−29.2
−14.7
−36.4
+106.7
+ 8.2
+31.5
+ 4.3
+43.2
+15.2
+45.5
+55.1
+116.5
+97.7
Liquor Handbook, Gavin-Johnson Associates, 1982, pp. 44 & 74.
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UVA-F-0541
Exhibit 6
BROWN-FORMAN DISTILLERS CORPORATION
Southern Comfort Corporation and Subsidiary
Income Statement
(For the years ended December 31)
1976
Net sales
$ 57,308,426
$ 64,183,392
40,909,265
45,814,353
16,399,161
18,369,039
9,446,120
10,193,517
6,953,041
8,175,522
329,804
(186,210)
(141,457)
(5,237)
(3,100)
6,949,941
355,940
(62,283)
111,329
2,466
407,452
8,582,974
3,453,400
4,211,512
3,496,541
4,371,462
Cost of sales
Gross profit
Selling, administrative, and general
Expenses
Income from operations
Other income (expense):
Royalties on Canadian sales
Interest
Rental property, net
Other, net
Income before income taxes
Provision for income taxes
Net income
Earnings per common share
Source: Annual Report.
1977
$
59.67
$
79.95
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UVA-F-0541
Exhibit 7
BROWN-FORMAN DISTILLERS CORPORATION
Southern Comfort Corporation and Subsidiary
Consolidated Balance Sheets, December 31
Assets
Current Assets:
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property, at cost:
Less: Accumulated depreciation
Investment in rental property, less accumulated
Depreciation of $171,996 and $106,878
Total property, net
Display Silver, at cost
Liabilities and Stockholders’ Equity
Current Liabilities
Notes payable to bank, unsecured
Current portion of long-term notes payable
Federal spirits and rectification taxes payable
Accounts payable and accrued expenses
Dividends payable
Income taxes
Total current liabilities
Long-Term Notes Payable, less current portion
Deferred Compensation Payable, less
Current portion
Stockholders’ Equity:
Preferred stock, no par redeemable at $10,
$.50 cumulative outstanding 33,374 and
33,974 shares
Common stock, $1 par, authorized 170,000
Shares, issued 120,000 shares
Retained earnings
Less: treasury stock, at cost, 66,214
And 65,437 common shares
Source: Annual Report.
1976
$
750,108
12,305,064
6,554,342
59,218
19,668,732
1977
$
1,341,190
12,118,758
7,365,841
35,952
20,861,741
4,933,708
2,105,195
2,828,513
5,556,624
2,439,268
3,117,356
1,673,585
4,502,098
152,297
$ 24,323,127
1,614,633
4,731,989
152,297
$ 25,746,027
$ 2,350,000
858,461
4,933,465
1,489,093
8,493
572,571
10,212,083
1,297,894
$
-62,067
7,096,549
1,076,973
8,343
738,279
8,982,211
35,827
51,200
—
169,870
166,870
120,000
19,011,274
19,301,144
120,000
23,363,049
23,649,919
6,539,194
12,761,950
$ 24,323,127
6,921,930
16,727,989
$ 25,746,027
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UVA-F-0541
Exhibit 8
BROWN-FORMAN DISTILLERS CORPORATION
Historic Data: Case Shipments
Of Southern Comfort Corporation
Calendar Years
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
20-year compound growth
5-year compound growth
U.S.
Domestic
Export
Canada
109,347
123,928
145,667
149,998
168,063
182,220
210,331
269,687
332,719
381,457
443,993
524,171
541,832
617,201
684,115
716,798
829,341
850,778
904,993
1,047,896
2,380
2,528
2,621
2,778
3,409
4,746
5,569
9,662
8,937
12,253
16,024
15,945
20,784
39,031
61,184
190,678
232,795
189,123
291,185
303,916
5,635
6,000
6,707
7,166
7,505
8,225
9,600
12,540
15,518
18,408
19,484
23,334
26,923
36,129
48,478
61,828
70,407
85,141
95,070
111,566
117,362
132,456
154,995
159,942
178,977
195,191
225,500
291,889
357,174
412,118
479,501
563,450
589,539
692,361
793,777
969,304
1,132,543
1,125,042
1,291,248
1,463,378
11.9%
8.8%
27.44%
37.8%
16%
18.2%
13.45%
13%
Source: Southern Comfort Corporation records.
Total
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UVA-F-0541
Exhibit 9
BROWN-FORMAN DISTILLERS CORPORATION
Assumptions Used in Southern Comfort Cash-Flow Forecast
In dollars except for case volumes [in units] and expenses [in $000]
1978
Profit per case
U.S. domestic
Revenue
Cost of goods
Advertising
Selling
Regular
Transition
Export
Revenue
Cost of goods
Advertising
Brokerage
Selling exp.
Canada
Royalty
Concentrate
Profit
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
$49.62
33.52
4.07
$50.62
34.10
4.01
$51.42
34.75
3.80
$52.42
35.41
3.68
$52.92
36.14
3.83
$53.92
36.93
3.89
$54.92
37.78
3.92
$55.92
38.70
3.97
$56.92
39.70
3.33
$57.92
40.77
3.18
$58.92
41.93
3.37
.55
.71
.58
.34
.59
.15
.60
.61
.62
.63
.63
.65
.67
.70
19.21
20.32
21.50
22.55
7.08 and increases at 8% annually thereafter.
1.44
1.38
1.37
1.37
2.75
2.76
2.75
2.85
.05
.05
.05
.06
23.21
23.80
25.16
26.15
27.15
28.15
29.15
1.37
2.72
.06
1.36
2.69
.06
1.37
2.68
.06
1.37
2.67
.06
1.37
2.67
.07
1.37
2.67
.07
1.37
2.67
.08
3.48
3.48
3.48
3.48
3.48
3.48
4.00
4.00
4.00
4.00
4.00
1.55
1.55
1.55
1.55
1.55
1.55
1.55
1.55
1.55
1.55
1.55
Case volumes (in thousands)
U.S.
Export
Canada
1,140
325
115
1,225
350
125
1,315
380
138
1,410
405
150
1,510
425
160
1,615
445
170
1,725
463
180
1,835
480
190
1,923
490
200
1,984
500
210
2,015
500
220
Corporate level1
G&A Expense
Transition
Settlements
Interest expense2
1,665
430
400
113
1,800
380
400
122
1,944
180
400
132
2,100
2,268
2,449
2645
2,857
3,086
3,332
3,599
400
142
154
166
179
194
209
226
244
1 For forecasting purposes, investment to maintain plant and equipment could be expected to be offset by depreciation expense, but there would be some additional investment
in working capital as sales grew.
2 On seasonal borrowings for working-capital financing. Analysts at Brown-Forman viewed this item as virtually an operating expense and considered including it in their
forecast of free cash flows.
Source: Brown-Forman Distillers Corporation estimates.
-16-
UVA-F-0541
Exhibit 10
BROWN-FORMAN DISTILLERS CORPORATION
Stock Price Data
Brown Forman
Class A
Class B
S&P 500 Index
1/3/78
2/1/78
3/1/78
4/3/78
5/1/78
6/1/78
19.875
19.750
20.500
21.875
23.500
24.750
20.000
19.375
20.500
21.250
23.750
24.875
93.82
89.93
87.19
88.46
97.67
97.35
6/2/78
6/9/78
6/16/78
6/23/78
6/30/78
24.875
25.625
26.375
26.000
25.625
25.000
26.375
27.000
26.500
24.875
98.14
99.93
97.42
95.85
95.53
Source: ISL Daily Stock Price Record, Standard & Poor’s Corporation.
Surname 1
Student’s Name
Instructor’s Name
Course Title and Code
Date
Case_58_Brown_Forman_Fo541
Introduction
The production of high-quality products is every company’s marketing philosophy.
Brown-Forman was the fifth largest producer and importer of distilled spirits and wines in the
United States, with a revenue of $457 million net sales (Bruner 1). It faced stiff competition from
National Distillers, Hiram Walker, Seagram, and Heublein (See figure 1). In order to maintain its
position among the competitors, the company adopted a planned investment approach during the
1978 to 1980 period, in which a large amount of money ($86 million) was allocated to
promotions and advertisements. It established various financial and performance goals
concerning dividend payout, size of the capital budget through 1980, target capital, hurdle rates
for investment, and target capital structure. The primary objective of these goals was to increase
the value of stockholder’s investment. However, its positioning strategy during that time would
affect the appraisal of the Southern Comfort. The hurdle rate was so high that it challenged the
decision to purchase Southern Comfort. Besides, it invests much money in the promotion of
Southern Comfort products, which affects its liquidity. Nevertheless, assessing the company’s
financial outcomes, performances, and approaches helps determine the right decision regarding
the purchase of Southern Comfort.
Background
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Southern Comfort and Caligrapo Inc. producers have approached Brown-Forman Company
intending to sell Southern Comfort and give its shareholders an acceptable value of shares. The
producers were motivated by the product line of the Brown Company as well as its
organizational structure and superior performance. The unique liqueur was the object of interest
in the Brown-Forman’s acquisition. Its sales in 1977 were approximately $64 million, with
above-average shipments (Bruner 4). The performance at the time of acquisition was very
attractive, even in the midst of the slow growth of whiskey. This performance was facilitated by
strong foreign distribution channels, which contributed greatly to its growth in export sales. As
such, it was regarded as a strong brand that would influence the general performance of the
Brown-Forman Company. As described by Gomes et al., focusing on a brand in the B2B process
is crucial as the brand act as a product differentiator that promotes sustainable competitive
advantage (193). In other words, the brand is a strategically good fit with a strong growth
trajectory and similar origins. If Brown-Forman adopts a similar strategy it uses on Jack Daniels,
the Southern Comfort brand could conceivably perform better in the future than it has in the past.
The company only needs to evaluate the marketing, distribution, and production strategies to
improve its performance. Therefore, this acquisition is meant to provide a variety of unique
products to customers to improve market share and competitive advantage of the Brown-Forman.
The main decision that Brown needs to make is that it should opt to buy Southern Comfort.
ALTERNATIVES
In order to buy Southern Comfort, Brown-Forman needs to apply the following
approaches in valuing the Southern Comfort.
Price-To-Earnings Ratio Valuation Model
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This approach analyses whether a stock is a good investment by comparing the company
against its own historical records or other companies in the same sector. The earning per share is
derived by dividing the net profit by the total number of shares after interest and tax have been
deducted. Even though this method can reveal the stock’s valuation in comparison to its industry
group, it relies on past performance to show the dollar amount investors will pay for $1 of stock’s
current earnings (Khatin et al. 135). This means that investors commit money based on past
earnings. For instance, the Brown-Forman performance is analyzed based on the current stock
price, as shown in exhibit 10 (Bruner 16). However, the Southern Comfort past earnings do not
signal its future behavior, especially due to the fact that its marketing has been less attractive. It
should, therefore, adopt a valuation approach that is based on future projections.
Asset-Based Approach
This approach adopted when determining the company’s net asset value in relation to the
market value of its assets and liabilities. Assuming this approach is used in the case of the
Southern Comfort brand, the shareholders would demand a premium over their share price if it is
to be sold. This is due to its positive market reputation with a strong brand and high sales margin.
This valuation approach will, therefore, be costly to Brown-Forman owing to the fact that it
needs to spend a lot of money on the promotion of the product.
Dividend Discount Model
This is another alternative valuation method that can be adopted for the case of the
Southern Comfort. This approach is based on the assumption that current stock price is equal to
the sum of all its future dividend payments. D’Amico et al. emphasize that stockholders expect to
receive cash flows in terms of dividends; therefore, cash flows are usually represented by
dividend streams (2). In this case, if the approach is used as an alternative approach to decide
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whether Southern Comfort should be purchased or not, they should consider if it can deliver line
with the target hurdle of 14% of investment in perpetuity. If it can, then it should purchase
Southern Forman.
Proposed Solution
Strategic marketing capability (SMC) is the best solution in the valuation of Southern
Comfort. Kim et al. state that the SMC approach to a new product enables the firm to make
investment decisions based on organizational capabilities and new planning (5644). Based on
this fact, the best solution to the valuation of South Comfort should be based on the present value
of the expected future cash flows from exports, sales in Canada, and the US, as shown in graph
1. This solution is based on Free Cash Flow model, which assumes that the net operating profit
after tax, re-investments, and including non-cash items, shows the amount available for the
stockholders (Yeo 113). Calculation of the net present value should be conducted on the basis of
those flows. Fixed and financing costs should be excluded. Other assets purchased by Fowlers
after the sale will not be included since it may not come to pass. The Cost of Equity for BrownForman Ra= Rf +x(Rm -Ra) = 8 + (11)(5.7) = 14.27%
The cost of debt is 8.75% currently
Since the current capital structure for Brown-Forman is 33.6% debt and 66.4% equity, the
WACC is (14.27) (0.644) + (8.75) (0.336) =12.4. This is near the previous hurdle rate, and
therefore the current hurdle rate of 14% is reasonable and can be used because it is riskier and
would cause faster growth in the company upon purchase of the Southern Comfort.
Recommendation
The asking price is estimated from the current market value of the Southern Comfort, as shown
in exhibit 1. Analysis from financial perspective based on exhibit 9 of the case, purchasing
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Southern Comfort will result to positive NPV of over $26 million (Bruner 15). This is strategic
for Brown-Forman. Therefore, it is recommended that Brown-Forman accept the purchase of
Southern Comfort because it comes at a good price and strategic fit. In addition, the qualitative
perspective indicates that Southern Comfort is a food fit for Brown Forman. It has positive
momentum but requires strategic marketing to perform. In order to implement the Free Cash
Flow Model assumption, it should adopt a marketing strategy that is similar to that of Jack
Daniels. This will improve the performance of Southern Comfort to improve the net operating
profit. The marketing strategy and analysis should be done by employing a number of
salespersons for that specific brand. Financial analysts should also be responsible for keeping
track of the returns from marketing.
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Works Cited
Bruner, Robert F. “Brown-Forman Distillers Corporation.” Darden Business Publishing
Cases (2012).
D’Amico, Guglielmo. “Generalized semi-Markovian dividend discount model: risk and
return.” arXiv preprint arXiv:1605.02472 (2016).
Gomes, Mariana, Teresa Fernandes, and Amélia Brandão. “Determinants of brand relevance in a
B2B service purchasing context.” Journal of Business & Industrial Marketing (2016).
Khatin, Kholisma N., Billy Anjaswara, and Siti Rahmi Utami. “The effect of return on asset,
current ratio, price to earning ratio, and stock price on sustainable growth rate of firms in
business-27 index and Sri Kehati Index in Indonesia Stock Exchange.” International
Journal of Advanced Research in Management and Social Sciences 5.8 (2016): 130-144.
Kim, Namwoon, Sohyoun Shin, and Sungwook Min. “Strategic marketing capability: Mobilizing
technological resources for new product advantage.” Journal of Business Research 69.12
(2016): 5644-5652.
Yeo, Hee-Jung. “Role of free cash flows in making investment and dividend decisions: The case
of the shipping industry.” The Asian Journal of Shipping and Logistics 34.2 (2018): 113118.
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Appendices
Exhibit 1
BROWN-FORMAN DISTILLERS
CORPORATION
Comparative Financial Data, 1978
Beta
Marginal tax rate
Debt/equity
Debt-cash/total capital
Assets/equity
Sales/assets
Profit/sales
Price/earnings
Dividend yield at 4/14/78
Self-sustaining growth rate
1978 expected sales
growth
Market value/book value
American
Distilling
——-1.41
0.30
1.14
0.50
2.46
1.66
0.012
9.4
NIL
0.049
0.02
0.46
BrownNational Publicker
Forman Heublein Distilling Industries Seagram
———————————–1.10
1.71
0.79
1.63
1.04
0.50
0.49
0.47
0.40
0.46
0.247
0.55
0.34
0.84
0.53
0.11
0.28
0.16
0.44
0.32
1.37
2.16
1.65
2.04
1.76
1.46
1.80
1.35
1.49
1.22
0.073
0.035
0.052
0.005
0.038
8.2
9.6
6.5
NMF
8.8
0.043
0.056
0.080
NIL
0.042
0.102
0.053
0.079
0.015
0.041
0.09
1.26
0.06
1.53
Figure 1: Brown-Forman’s Competitors
Net Sales (Million Dollars)
Brown Forman
National Distillers
Seagram
Heublein
0.08
0.79
0.04
0.63
0.07
0.75
Hiram
Walker
——-0.65
0.50
0.20
0.12
1.43
1.04
0.069
7.7
0.062
0.054
0.06
0.77
Surname 8
Graph 1: Forecasted Gross Profit for Brown-Forman: Sales in Million Dollars
Analysis in Purchase of Southern Comfort By BrownForman
14
12
10
8
6
4
2
0
1978
1979
1980
Canada
1981
U.S
Export
Exhibit 10
BROWN-FORMAN DISTILLERS CORPORATION
Stock Price Data
1/3/78
2/1/78
3/1/78
4/3/78
5/1/78
6/1/78
6/2/78
6/9/78
6/16/78
6/23/78
6/30/78
Brown Forman
Class A
——-19.875
19.750
20.500
21.875
23.500
24.750
24.875
25.625
26.375
26.000
25.625
Class B
——-20.000
19.375
20.500
21.250
23.750
24.875
S&P 500
Index
——-93.82
89.93
87.19
88.46
97.67
97.35
25.000
26.375
27.000
26.500
24.875
98.14
99.93
97.42
95.85
95.53
1982
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BUS 330A PROJECT GROUPS
OVERVIEW
Below you will find a comprehensive and randomly generated list of working groups for the case study due later this term.
For any questions on the highly scientific method (#ExcelFormula) used to generate these groups, please e-mail
hauck@up.edu.
GROUP 1
Jake Barber
RJ Cayetano
Kathryn Ewing
GROUP 2
Sebastian Black
Eric Huebner
Chris Lathrum
William Hernandez
Emily Melcher
Conner Karsseboom Thomas Padilla
Rose Pflug
Austin-John Tsuhako
GROUP 3
Andrew Douille
Michael Mullen
Cindy Ong
Emma Smith
Ethan Tubby
Jose Velez
Jeff Winarta
GROUP 4
Kaleb Bang
Kevin Cochran
Taylor Edington
David Montanez
Maddie Muhlheim
Chris Severino
Elijah Nishihira
GROUP 5
Caleb Hanson
Rob Hughes
Grace Ritchie
Andres Ruiz
Luke Travins
Val Truong
EXPECTATIONS
Students will work within their designated groups on the completion, presentation, and delivery of the case study. Groups
may collaborate with each other – e.g. ask questions and share ideas, just as you might in a real-world professional
environment. However, each group will submit an original, authentic work product.
CASE STUDY TIMELINE
This is a semester long project that provides students the opportunity to apply corporate financial theory and models to real
firms. The case studies include topics that will be taught throughout the course, so no student is expected to have all the
answers during the first week(s) after receiving their respective cases. Additionally, students are encouraged to
communicate with each other, with other groups, and with the instructor throughout the course. The instructor will dedicate
portions of class time to address case study questions and work through the thought framework behind each.
Below represents a rough outline of the case study timeline; dates subject to change based on class progress:
• Week 2 (August 31st): students receive group assignments and group case studies; students spend next two weeks
reading through cases, taking notes and outlining relevant facts, topics, and problems to address (see below)
o Groups may check in with the instructor at any point
• Week 4 (September 17th): instructor to dedicate part of the lecture to case study outline, approach, and general
discussion
• Week 8 (October 14th): first draft case study due to instructor
• Week 10 (October 29th): groups receive instructor feedback on first drafts
• Weeks 11, 12: students continue to iterate on case study write-up, prepare for presentation
• Weeks 13, 14: students to present case study and findings to the class
• Week 14 (November 25th) final case study due to instructor by EOD PST
CASE STUDY APPROACH
The instructor will assign each group a case study during the second week of class (week of August 31 st); students will
receive a digital copy of the case for use in this course only. All case studies selected offer rich examples covering topics
discussed in BUS 330 and beyond. The case study and analysis performed in this course will not attempt to tackle all
possible topics within a case, but rather focus on those most relevant to course material.
Students should view the assigned case study as a tool to exemplify the application of topics covered in this course to reallife situations. Some elements of the cases presented will be fact or data driven and lead to a ‘correct’ answer. Other
elements of the selected cases will provide context for students to consider, which may lead to multiple possible solutions
or recommendations.
Below, you will find recommendations on preparation and drafting your case study, largely taken from the Ashford
University Writing Center (2013).
Writing Resources | Types of College Writing | Business
Writing. URL: https://awc.ashford.edu/tocw-guidelines-for-writing-a-case-study.html
BUS 330A PROJECT GROUPS
The following represents a possible approach for groups to take when preparing the case study:
•
•
•
•
First, spend enough time reading through the case → take notes, discuss as a group. Cases involve a decision to be
made or a problem to be solved. Make a list of what you believe to be the most relevant topics, facts, problems.
Second, focus your analysis on what you believe to be the two to five key problems or challenges faced. Why do
they exist? How do they impact the organization? Who is responsible?
Third, list possible solutions based on course readings, discussions, outside research, experience.
Fourth, present the best solution. Include supporting evidence, the pros and cons of this solution, and the feasibility
of execution.
The following represents a possible approach for groups to take when drafting the case study:
•
•
•
•
•
Introduction: identify the key problems, formulate a thesis, summarize the outcome of your analysis
Background: provide background information, state relevant facts, and the key issues to be considered (show you
have done your research)
Alternatives: list possible alternate solutions and why each was not selected. Are other alternatives not possible at
this time? If so, why?
Proposed Solution: list your one specific, realistic solution and explain why you chose this solution. Include
evidence (data, facts, financial modeling), reference concepts from class (text, discussion, supplementary reading)
as well as any outside research you’ve done.
Recommendation: what specific strategies or approach should the firm take to implement the proposed solution?
In addition to listing what should be done, propose who should be responsible for doing it.
CASE STUDY WRITE UP
The final copy of the case study should be no more than 4 pages; graphs, tables, financial models, and other appendix
material not included in page count. A general format of the case study would include an introduction to the firm, industry
and economic analysis, firm financial analysis, forecasted financial outcomes, and recommendations.
Case studies will be graded on:
• Timely submission of drafts. This is an iterative process with an initial rough draft due October 14th; you will learn
more by turning in multiple drafts for feedback and revision
• Project must include supporting financial modeling with assumptions explained
• Appearance: no spelling or grammatical errors, numbers correctly formatted, professional structure that allows the
reader an efficient reading experience
• Content: projects are focused on analysis and recommendations rather than simply reporting data
• Original thought: in many case studies, there is no one right answer. Show your ability to provide and defend
recommendations based on your research and analysis
CASE STUDY PRESENTATION
Each group will have 20 minutes to present the case and findings to the rest of the class. Please leave 5 minutes at the end
for questions, so plan to cover up to 15 minutes of content in your respective presentations. Students will use PowerPoint
to present the case and findings to the class; students may use up to 10 presentation slides (agenda, opening slides do not
count) plus supplementary tables in the appendix, referencing the latter as backup only.
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