CASE 51: BROWN-FORMAN DISTILLERS CORPORATION
1. Why is Brown Forman accordingly buying Southern Comfort?
As a requisite action, chafferer and dealer of wines and distilled spirits, Brown-Forman (BF) was the fifth-largest distiller in the United States. In the tardy 1970’s, the whiskey chaffer unprosperous and this introduceed BF behind a while augmentation challenges in a grown chaffer. BF’s defense to chaffer pressures and race was to aggressively attack into other faster growing divisions of the alcohol beverage chaffer which insist-upond to enlarge its development cords. The association intentional to augmentation advertising of $86 favorite to massively excite its alcoholic development cords. The association so realized that coming augmentation was very hanging on it gaining access to alien chaffers. Due to those obstacles, Southern Comfort (SC) seems to be an captivating dull merit for BF behind a while the subjoined advantages and disadvantages. Advantages:
20% of the SC sales were balanceseas. Its exports chaffer so had the prominent 5-year combination augmentation rebuke compared to other chaffers The association open a eminent disgrace behind a while submissive customers SC substance a liqueur does not demand to age and can be executed and sold considerable faster than the oral whiskey cord. Behind a while an merit, distributeholders prize earn guide to an augmentation in twain earning per distributes and the distribute prize. Brawny et subterfuge behind a while preferable than moderation sales/property harmony of 2.49 in 1977, the association has elevate desirable property that can generebuke elevate rights by minimizing the urban insist-upon per part as a development of preferable developmention levels. SC is a desirable association behind a while a emolument/sales harmony as noble as 7% on par behind a while BF. BF has a low default/equity harmony; balance the elapsed few years the fast has placed itself in an ungathered financial position, which has brought encircling the preferable levels of default that they can use to finance new merits and other siege opportunities. Similarly, SC was never sold at a allowance by its manufacturer and was considered a very brawny disgrace behind a whilein the liquor assiduity. Disadvantages:
SC is not listed and wants to be smitten balance at $94.6m but the work prize in 1977 was exact $16.7m. SC may be balanceestimated at this appreciate. This
merit should be elevate investigated elevate as a strategic merit, and insist upon the association’s post-performance. The hurdle rebuke is too noble import that BF is very unrepealed to effect the solidness. Thus the association should exexchange this hurdle rebuke; differently they could misunderstand out on momentous opportunities such as SC. BF may run out of liquidity if the association uses a momentous sum fee spending in advertising to chaffer SC disgrace elevate captivatingly. 2. What is Southern Comfort admonish?
SC produces choice liquor, which is partial by a privy formula and has scientific rights that keep a large synergic cheerful to the introduce BF development mix-cord offerings and disgrace equity. SC has invigorateed channels of alien classification and novel disgrace augmentation in 1977 compared behind a while antagonist disgraces in the identical development cord. SC is not widely chaffered and that it is improperly positioned chaffer accordingly they conceive it is a whiskey. If adscititious, SC could import in the alien insight capabilities and known-how to BF. If brawnyly chaffered and repositioned SC could add a large extra prize to BF. SC so has a polite honorable disgrace offering and the superintendence is effectual and fertile, thus the merit of SC would fit polite in BF title of superintendence philosophy. SC so has new-fangled equipment that is to invigoadmonish the property of BF and could be used in the continued developmention of SC behind a whileout replacing asset in the foreseeable coming and/or tries to adexact the developmention of SC to BF development cord systems and standards. Thus the operational strategic competitive position of BF could be improved. That could so better spirituality or gain instrument that are important to coming cheerful-fortune of the SC in feature and BF in public. SC has a calculate of material and inmaterial instrument that earn discourse the gaps in Brown Foreman augmentation strategies through an merit. From a material issueions perspective, its plants is equipped behind a while new-fangled equipment, it has brawny financials as involved by its net emolument edge 7% in 1977. Its brawny inmaterial instrument and capabilities are its privy recipe to enlarge Brown Forman’s development cord. Estimation of FCFF, marginal prize and allowance rebuke:
Estimate insist-upon of equity by using CAPM:
Re = Rf + ?(Rm – Rf) = 8% + 1.1*5.7% = 14.27%
Estimate insist-upon of default:
Rd = Tax rebuke*Interest rebuke = 49%*8.75 = 4.29%
WACC = = 65%*14.27% + 35%*4.29%*(1-49%) = 10.04%
FCFs and marginal prize:
3. To which assumptions is the valuation most perceptive?
Both FCFF and WACC are the most perceptive to the valuation. Increasing the augmentation rebuke of the capital progress or reducing the WACC earn guide to the prize discipline. BF has accustomed a allay augmentation rebuke of their capital progress so it may be reserved to gain joined augmentation. Therefore WACC is a key atom that BF should be standpoint on by now, inferior WACC and sustain the insist-upon rebuke of retaliate to augmentation the distributeholders’ prize. It should be the most perceptive atom in this fact. Augmentation Rebuke examination: In Exhibit 9 the SC is showing a cheerful moderation vicious emolument augmentation rebuke of 7% which earn improve the distributeholder prize behind the merit, chronicled postulates shows shipments of Southern Corporation’s 5-year combination augmentation is 13% and 20-year combination augmentation is 13.45%. The deccord of augmentation could be achieved to the grown class of lifecycle. The development could keep reached ripeness and earn demand elevate newfangledness.
4. What should Brown do?
Based on factors mentioned balancehead, it is recommended that BF may attain SC. The fast prize is adapted $90.0m that is inferior than $94.6m; hence BF should thoroughly excite the merit accordingly the Southern Comfort Corporation seems to be balancevalued Exhibit 10 has shown a lessen in stock
appreciate from 6/16/78 to 6/30/78, which could denote not-absolute anxiety in the chafferplace touching an merit. The default to equity harmony of Brown Forman is 24.7% and Assiduity moderation is 55%. Therefore the association can try finance elevate default to use balance this merit as polite as receiving the joined tax fall cheerfuls (currently tax is a very noble at 49%) As considerable as superintendence has experiment behind a while other merits, this does not necessarily moderation that this feature negotiation earn be seamless. BF should perform to impair the appreciate in ordain to effect the skilled negotiation.