Brown-Forman Southern Comfort
Brown-Forman, Southern Comfort Acquisition
The case considers the opportunity for Brown-Forman Distillers of America to acquire the Southern Comfort Corporation (SoCo). The primary concern is of financial matters, but also represents other issues of firm strategy and core competencies.
Price
The asking price of 94.9 million (USD) is evaluated upon a structuring of a mix of cash and debt financing. The initial price includes a real estate holding, unaffiliated with the SoCo product, and is to be sold back to the family shareholders at a price of 5.9 million (USD). It follows that the net price for SoCo is 89 million (USD), with 70 million (USD) borrowed at a rate of 8.75% (Pg. 5). The current debt to equity ratio of 0.247 of Brown Forman is significantly below the average of competitors maintaining a ratio of 0.51. Acquiring SoCo with 70 million (USD) of debt financing implies no issue with the balance of debt to equity, due to the fact that the additional leverage merely aligns the firm with their benchmarked competitors.
Furthermore, the acquisition of SoCo, without any issuance of new equity shares, ensures that current shareholders gain from increased firm value. Increasing assets and cash flow increases the money available for dividends and exerts upward pressure on the stock price.
Hurdle Rate
Brown-Forman is known to adhere...
2). Based upon the 14% hurdle, the SoCo acquisition is advisable from a cash flow prospective. The initial outlay of 89.9 million (USD) recaptures 109.7 million utilizing the forecasted sales figures for SoCo 1978 through 1988.
NPV Operating Profits at 14%
$109,667.99
NPV Operating Profits at 12%
$121,046.90
The acquisition of SoCo entails benefits beyond simply cash flows, however the venture does exceed the organization's current investment objective criteria. The product broadens the firm's holdings and diversifies with into another segment that has demonstrated growth.
Strategy and Brand Development
The case notes that Brown-Forman's flagship product, Jack Daniels, has achieved a market leadership position and has experienced occasions of short supply (Pg. 3). The fact that whiskey is a consumable product implies that the current hurdle rate may be set too high for the firm to keep pace with consumer demands, or that an overriding criteria for matters of strategic importance should be implemented. A consumer unable to purchase their preferred brand is likely to purchase another, be it a competitor or alternate beverage. If the firm's products were of both aspirational and of occasional consumption, such as leather handbags or shoes, then intermittent short supply may be of…
