BROWN-FORMAN DISTILLERS CORPORATION
In early July 1978, W. L. Lyons Brown, Jr., president and chief executive officer of Brown-
Forman 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
1 Net sales figures for all firms are from wine and distilled-spirits business lines only.
,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 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.
2 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.
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.
, 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.
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
6 This and following quotes are from Value Line April 14, 1978, p. 350.
, 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 coming primarily from the
youth market … the corporation sees a very healthy, long life cycle ahead for this
brand.
In early July 1978, W. L. Lyons Brown, Jr., president and chief executive officer of Brown-
Forman 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
1 Net sales figures for all firms are from wine and distilled-spirits business lines only.
,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 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.
2 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.
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.
, 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.
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
6 This and following quotes are from Value Line April 14, 1978, p. 350.
, 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 coming primarily from the
youth market … the corporation sees a very healthy, long life cycle ahead for this
brand.
