Shot or a Beer

Brown-Forman Should Rethink Spurning a Boozy Hook-Up

Constellation Brands may be giving the wine-and-spirits maker a chance to go out on top.
Photographer: Picture Post/Hulton Archive/Getty Images
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As you break out the Korbel at brunch this Memorial Day weekend, here's something to ponder: The $21 billion company that sells the sparkling-wine brand appears to have attracted unwanted takeover advances. So what will its suitor do next? 

According to a CNBC report Tuesday afternoon, Brown-Forman Corp. -- which also makes Jack Daniel's whiskey, Herradura tequila and Chambord liqueur -- has received an offer from Constellation Brands Inc., one of the busiest acquirers lately in the alcoholic beverage space. Brown-Forman is a family-controlled company and one said to not be interested in selling.

Exit Opportunity

Constellation Brands may be offering Brown-Forman the chance to sell as its stock trades near a record high and the company confronts a sales slowdown:

Source: Bloomberg

But now that word of the spurned approach has leaked out, pressure will be on Brown-Forman, even if its minority shareholders don't have much say in the matter. The Class B non-voting shares tanked more than 3 percent Tuesday in protest.

Over the years, Constellation has swallowed a variety of brands across alcohol categories, including Robert Mondavi wines, Svedka vodka, Corona's U.S. beer business, Casa Noble tequila and California craft brewer Ballast Point. It's known to be on the hunt for premium-priced, high-margin products and Brown-Forman would definitely fit the bill. Its margins are industry tops:

Strong Profits

Brown-Forman converts more revenue into operating profit than most of its American and European peers, which adds to its takeover appeal:

Source: Bloomberg

Note: Figures as of latest filings.

That said, buying a spirits producer as large as Brown-Forman would run counter to remarks by Constellation CFO David Klein at February's Consumer Analyst Group of New York conference:

I think we'll still stay focused on tuck-in acquisitions in spirits. And I'm not thinking of anything here today, but the pace may accelerate just because we want to build some critical mass there. But there aren't any scale players that would make sense for us. They're either way too big or they're simply not available at this point, right.

Perhaps by "not available" he was referring to Brown-Forman. The question now is whether Constellation brings more heat or moves on. There's at least one other mega-deal candidate that may appeal to the company: Boston Beer Co., the maker of Sam Adams. I've flagged it as an option for Constellation in the past, as its premium beer offers the fat margins Constellation is seeking, while its share-price decline has made Boston Beer more vulnerable. Similar to Brown-Forman though, Boston Beer is controlled by reluctant seller Jim Koch. 

Brown-Forman's shares surged to a record high on Monday ahead of the news, presumably amid takeover chatter among traders. Its board and family shareholders need to consider that Constellation would be offering them a chance to sell at the top. The company's ratio of enterprise value to forward 12-month Ebitda is about 21, which far exceeds a five-year historical average of 17. And selling now would mean fetching nearly the highest valuation among industry acquisitions of size announced in the past decade, according to data compiled by Bloomberg.

Take the Money and Run?

Neither Brown-Forman nor Boston Beer is interested in selling itself. But as analysts and investors turn increasingly pessimistic, the companies should at least hear out any suitors:

Source: Bloomberg

For Constellation, buying Brown-Forman would have a big financial impact: The company's net debt already stands at 3.4 times its trailing 12-month Ebitda, and it would need to find cost savings in order for the transaction to be accretive to earnings. But revenue would immediately jump by 40 percent.

Both Brown-Forman and Boston Beer should keep in mind that they now have more sell ratings from analysts than buys. It may not be the time to dig their heels in if Constellation is offering an attractive exit. 

(An earlier version of this story was corrected to clarify in the second paragraph that Brown-Forman handles Korbel's marketing and sales, but doesn't own the brand.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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