Hangover Alert

Bacardi Spikes the Punch Bowl

Its takeover of Patron calls attention to whiskey maker Brown-Forman's overpriced stock.
Photographer: Scott Olson

Bacardi Ltd.'s takeover of Patron tells us two things: 1) the market for premium alcoholic beverages is hot, and 2) so much so, that one of their publicly traded peers may be overheating. 

Cheers

Brown-Forman climbed 53% last year for its best annual return since 1989, but unless the whiskey and tequila maker is for sale, shareholders may be too optimistic

Source: Bloomberg

Bacardi, a family-owned company, announced on Monday that it's acquiring Patron in a transaction that values the privately held tequila maker at $5.1 billion. This will give Bacardi a much larger piece of the tequila market, which particularly at the higher end has been growing faster than rum and vodka, Bacardi's mainstays. 

More important for public investors, the deal calls attention to Brown-Forman Corp., the owner of Jack Daniel's whiskey. Its shares have been on a tear despite the $26 billion company summarily rejecting a takeover offer early last year from Constellation Brands Inc. News of the Bacardi-Patron deal lifted Brown-Forman's stock further on Tuesday, but analysts are recommending shareholders cool it. 

Sobering Up

Only one of the 20 analysts covering Brown-Forman recommends investors buy the stock, the fewest number since the U.S. recession

Source: Bloomberg

Valued at about 23 times future 12-month Ebitda, Brown-Forman is now more expensive than nearly all its peers in the booze industry and broader beverages space. While its growth remains attractive following an 8 percent increase in organic sales last quarter, this is already baked in to Brown-Forman's share price, which is trading near a record high. The market is also becoming more competitive amid a wider variety of alcohol products being sold at retailers and bars, where innovation, price and words like "craft" are becoming the distinguishing factors for customers. 

Gulp

Brown-Forman is commanding a valuation that's 18% higher than its historical two-year average and well above many of its peers

Source: Bloomberg

Chairman Geo. Garvin Brown IV, a descendant of Brown-Forman's founder, and CEO Paul Varga, who started as an intern there more than 30 years ago, made it clear in their statement last May that they have no interest in selling the company. But if there was ever a time for them to change their minds, it's now with the stock likely topping out here. 

Brown-Forman reportedly explored a merger with Bacardi about nine years ago, and so I wonder if the potential is still there. It would seem to make sense now more than ever to gain such scale. In North America's spirits category, Bacardi had a 6.4 percent share in 2016 (the most recent data available), versus Brown-Forman's 4.5 percent, according to Euromonitor International. The leader, London-based Diageo Plc, had almost 18 percent. 

I've also explained before why Constellation Brands may be seen as a welcoming home for family-run liquor businesses such as Brown-Forman. CEO Rob Sands -- whose brother and father both ran Constellation before him -- hasn't altered the brands that the company has acquired all that much and offers competition stateside to the world's dominant brewer, Anheuser-Busch InBev SA. 1

Bacardi's interest in Patron helps validate Constellation's strategy of buying premium beer, wine and spirits brands. (It's also begun investing in cannabis.) The company's latest spate of acquisitions have centered on craft beer, which has fueled margins in that division. The wine and spirits unit could use a similar boost, and Constellation's approach to Brown-Forman last year signals that it's heading in that direction, should it find amenable candidates.

If Brown-Forman is firmly not for sale, then its stock price is probably too rich. In contrast, Constellation is still serving up an intoxicating cocktail of small and potentially large deals.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. If not Brown-Forman, I do think Jim Koch could eventually be persuaded to sell his Boston Beer Co. to Constellation.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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