By Jeffrey Goldfarb
The angel’s share is the portion of spirit that evaporates from a barrel as it ages. For one that takes about five years to mature, like Jack Daniel’s Old No. 7, the forfeiture can be around 10%. The whiskey's maker, Brown-Forman NYSE:BF.A, has lost more than six times that much in market value over the same amount of time. It leaves the family-controlled company’s independence in greater doubt.
Like many of its peers, Brown-Forman was caught off-guard by changing drinking habits. Pre-mixed cocktails and zero-alcohol options have surged in popularity. Such shifts are especially dangerous for a company so reliant on a single product.
The clan that controls Brown-Forman entertained the idea of a tie-up, which offered a diversification lifeline. Merger talks with Pernod Ricard EURONEXT:RI, the equally embattled bottler of Absolut and Glenlivet, ended without an agreement in April, however. The company also rejected an unsolicited $15 billion takeover bid from privately held Sazerac, which produces Fireball Cinnamon Whiskey and single-serve Buzzballz.
Proceeding alone will be a challenge, even for a distiller that survived Prohibition. Unlike Sazerac, with its 500 or so labels, Brown-Forman depends overwhelmingly on one: Jack Daniel’s. Although brand extensions like a blackberry-flavored version show early promise, they remain tethered to the same out-of-favor spirit. There's scope to expand internationally, where the best-selling Tennessee whiskey is less known, but it will be a painstaking process with no guarantee of success in markets that favor other tipples, like tequila or baijiu.
Fifth- and sixth-generation descendants of founder George Garvin Brown also recently reshaped the company’s U.S. distribution network to help capitalize on the ready-to-drink market. They're juggling a lot, though, largely to ensure that precious dividends keep getting paid. Brown-Forman slashed its advertising budget, always risky for a consumer business. Moreover, analysts expect the company's working capital and capital expenditure to drop below their usual proportion of sales. Curbing investment today jeopardizes profit tomorrow. Add in the stock’s 63% drop since 2021, and the chances of a dynastic schism grow.
Brown-Forman’s quirky governance makes it difficult, but not impossible, for a suitor to exploit any fissures. The family pools its super-voting stock in a partnership structure overseen by seven board members who represent different factions. Although it takes six directors to bless a change in control, three yes votes can dissolve the general partnership. The company’s ever-shakier prospects might well stir unhappy clan members to action, before their dividend money has a chance to follow the whiskey into thin air.
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CONTEXT NEWS
Brown-Forman rejected a $15 billion takeover bid from rival U.S. spirits producer Sazerac, Reuters reported on May 12, citing an unnamed source, after the Jack Daniel’s distiller had said on April 28 that it ended talks to merge with European peer Pernod Ricard.
The company said it intends to focus on its own strategic priorities, which “includes unlocking future growth by expanding our geographic footprint, continuing to build brands that resonate with consumers, and enhancing operational efficiency.”