Brown

4242 Words May 11th, 2015 17 Pages
UVA-F-0541

Graduate School of Business Administration

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University of Virginia

BROWN-FORMAN DISTILLERS CORPORATION

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In early July 1978, Mr. 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 Mr. Brown in May with an offer to sell the company at a price of $94.6 million. In preparing his response, Mr. Brown was evaluating the reasonableness of the asking price and the likely effects of the acquisition on Brown-Forman’s share price. No

As a leading producer, marketer, and importer of wines and distilled spirits (including the well-known “Jack Daniel’s” brand),
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The company had a relatively larger profit margin, higher growth rates, and stronger balance sheet than its major competitors. The 1978 annual report noted:

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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.

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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 $2.40 per share in 1978 and to add another 15 percent to earnings per share in 1979.
Brown-Forman’s income statement and balance sheet for the year ended 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, while Class B common had no voting rights but was also listed. The Brown family held 74 percent of the Class
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1977 Annual Report, p. 15.
“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

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