Brown-Forman Distillers Corporation

Question 1 As a leading producer, marketer and importer of wines and distilled spirits, Brown-Forman was the fifth-largest distiller in the United States. But the company spent huge amount 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 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 realized that future growth was very dependent on it gaining access to foreign markets. This case supports the view that Southern Comfort is an attractive horizontal acquisition for Brown-Foreman with the following pros and cons.
PROS
20% of the Southern Comfort sales were overseas. Its exports market also had the highest 5 year compound growth rate than its other markets 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 lead to an increase in both earning per shares and the share value. Southern Comfort has a higher than average sales/assets ratio of 2.49 in 1977. It means the company has more profitable assets that can generate more earnings by minimizing the fixed cost per unit as a result of higher production levels. .
CONS
Southern Comfort is not listed, the Brown Forman wants $94.6m for the company but the book value in 1977 was $16.7m. The Southern Comfort may be overvalued for this price. This