BROWN-FORMAN DISTILLERS CORPORATION
In early July 1978, W. L. Lyons Brown, Jr., president and chief executive officer of BrownForman Distillers Corporation, faced an important acquisition decision. The principal owners of
Southern Comfort Corporation had approached Brown in May with an offer to sell the company at
a price of $94.6 million. In preparing his response, Brown was evaluating the feasibility of the
asking price and the likely effects of the acquisition on Brown-Forman’s share price.
As a leading producer, marketer, and importer of wines and distilled spirits (including the
well-known Jack Daniel’s brand), Brown-Forman ($457 million net sales) was the fifth-largest
distiller in the United States, after National Distillers ($586 million), Seagram ($2,018 million),
Heublein ($839 million), and Hiram Walker ($875 million). 1 How Brown had chosen to position
Brown-Forman among its competitors would affect the appraisal of Southern Comfort.
Brown-Forman: Financial Goals and Performance
In 1977, Brown-Forman’s management adopted new long-range financial goals
regarding: (1) hurdle rates for investment; (2) size of the capital budget through 1980; (3) target
capital structure; and (4) dividend payout. The primary objective of these goals was to “increase
the value of the stockholders’ investment.”2
The dividend payout ratio (all dividends paid divided by net income) was targeted at a
range of 30% to 35%. Planned investment during the 1978 to 1980 period included $86 million
for advertising and promotion, $39 million in barreled-whiskey inventory, and $19 million in
new plant and equipment. Regarding capital structure, the ratio of total debt to total tangible
capital,3 26.6% at the end of 1977, was viewed as offering “considerable flexibility in financing
Net sales figures for all firms are from wine and distilled-spirits business lines only.
1978 Annual Report, p. 3.
“Total tangible capital” defined as the sum of all...