Brown Foreman Report

Topics: Southern Comfort, Brown-Forman Corporation, Stock market Pages: 11 (3079 words) Published: March 15, 2011

Brown-Forman Board Report|
Potential Acquisition of Southern Comfort Corporation|
This board report summarizes the arguments for why it is believed that the acquisition of Southern Comfort Corporation (including Caligrapo Inc.) is a strategic fit that will increase shareholder value through increased sales and profitability| |

Vinny Perumal|


1.Executive Summary2
1.1An Industry Analysis3
1.1.1A Mature Industry3
1.1.2Key Success Factors3
1.1.3Competitor Analysis5
3Qualitative Analysis7
3.1.1Strategic Analysis7
3.1.2SWOT Analysis7
3.1.3Strategic Fit8
4Quantitative Analysis9
4.1Comparison of Southern Comfort to its peers*9
4.2Increasing Shareholder Value10
4.2.1Return rate (Gross Profit)10
4.2.2The Earnings per share10
4.2.3Share Value10
4.2.4Asset/Equity Ratio10
4.2.5Cash Flows10
4.2.6Cost of Capital (WACC)11

1. Executive Summary

In 1978, Brown-Foreman Corporation was a successful producer and marketer of alcoholic beverages operating mainly in the United States market. The company through the acquisition of brands such as Jack Daniels, Bolla and Canadian Mist expanded its premium product lines. The company spent large sums of money advertising premium brands and significantly less on low profit brands. In the late 1970’s, the whiskey market declined and this presented Brown Foreman with growth challenges in a mature dwindling market. Brown-Foreman’s response to market pressures and competition was to aggressively move into other faster growing segments of the alcohol beverage market which required it to expand its product lines. The company also intended to increase its advertising spend to $86 million to aggressively promote its alcoholic product lines. The company also realised that future growth was very dependent on it gaining access to foreign markets quickly. The company was presented with an interesting offer to purchase Southern Comfort for an amount of $94.6m. This report supports the view that Southern Comfort is an attractive horizontal acquisition for Brown-Foreman and provides the following value if acquired; * One fifth of the Southern Comfort sales were overseas. Its exports market also had the highest 5 year compound growth rate of 37.8% than its other channel markets * Much like the Jack Daniels brand, the company developed a distinctive brand with loyal customers * Southern Comfort being a liqueur does not need to age and can be produced and sold much faster than the traditional whiskey line * Southern Comfort is a profitable company with a profit/sales ratio as high as 7% on par with Brown-Foreman * With an acquisition, shareholders value will increase with the earnings per share earnings per share will increase 16% from 2.45 to 2.82 and the share value increases increase from $16.9 to $18.2. * Southern Comfort has a higher than average sales/assets ratio of 2.49. This may be an indication of efficiency and could be impacted by factors such as economies of scale where much larger sales of a single line product may be able to gain the economies by minimising the fixed cost per unit as a result of higher production levels. 2. Background

An Industry Analysis
A Mature Industry
The distiller industry is in the maturity phase of its industry life cycle (which is the supply side equivalent of the product life cycle model). The increasing market saturation has caused tapered demand, replacement products and fierce competition in the industry. As there is limited market growth, the increase in demand for one product line is at the expense of others. Cost efficiencies are increasingly being sort through capital intensity, scale efficiencies and lower input costs.

Increased market saturation in developed markets has caused the Distiller industry to focus its attention on developing markets. As...
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