Agenda

Agenda• Business Overview• Industry Overview• SWOT Analysis• Macroeconomic Analysis• Financial Position• Competitor Analysis• Multiples Valuation• Management Assessment• Pro-forma Assumptions• DCF• Recommendation

Business OverviewBrown-Forman Corporation was founded in 1879 and engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands.

• Jack Daniel’s Tennessee Whiskey • Southern Comfort• Finlandia Vodka • Herradura • El Jimador Tequila

Sales mainly in the US and Europe. Expanding in Asia, Australia and penetrating the European market even more.

Industry Overview• The global alcoholic beverage industry is a multi-billion dollar a year

business. • Growing shift away from mature markets in North America and Europe to

newer regions such as China, Australia and Russia.• There is a plethora of small producers, however, M&A are very common.

There have been four waives of consolidation in the industry: 1950-1960 in UK, 1968-1972 in Europe, 1985-1988 especially in the US and 1998 worldwide.

• The industry has been incorporating concerns regarding health-related aspects and social issues in the last two decades

• Production is heterogeneous and includes a number of stages

SWOT AnalysisStrengths:•Effective managements with increasing margins and cautious strategy•J.D. is the largest selling whiskey in the world•No shortage in supply. Large number of raw material sources

Threats:•Drinking age regulation•Taxation in liquor•Uncertainty of sales of smaller brands in new markets

Weaknesses:•Exposure to currency risk•High dependence of revenues on JD•Very limited target group of some of the brands

Opportunities:•Expansion to new markets like China and Australia•Further penetration in the European market•Lower drinking age limitations outside the US

Macroeconomic Analysis

Drinking ages around the world

Population is expected to increase at a higher rate than in the previous years and the percentage of the younger people will decrease.

Population is expected to get older on average and it is possible that brands targeting older people will experience higher demand in the long run.

Macroeconomic Analysis

Macroeconomic Analysis Corn prices are expected to fall since supply will keep increasing.

• The department said U.S. farmers last year produced a record 13.2 billion bushels of corn, up 8.8% from 2008.

• 2010 corn estimate is "an astoundingly huge number," said Jack Scoville, VP of Price Futures Group in Chicago.

Historical inflation and projections

Wheat prices are pretty low right now due to the large supply and are expected to fall even more in the long run.

Inflation is estimated to stabilize in the short run and slightly increase in the long run.

Macroeconomic Analysis

Wheat prices

Corn prices

Financial Position

• Organic growth

• Conservative in expansion

• Increasing Efficiency

Profitability

Net Profit Margin 　 　 　 　Company Name 2005 2006 2007 2008 2009

Brown Forman17.3% 16.5% 17.5% 17.0% 17.5%

Fortune Brand 9.0% 9.7% 8.9% 4.1% 3.6%

Diageo plc 20.1% 26.3% 19.9% 18.8% 17.4%

Liquidity

Current Ratio　 　 　 　 　

Company Name 2005 2006 2007 2008 2009

Brown Forman

2.06

2.83

1.21

1.48

1.88

Fortune Brand

1.13

1.56

1.81

2.91

2.65

Diageo plc 1.31 1.45 1.24 1.20 1.56

Solvency

Interest Coverage Ratio 　 　 　 　

Company Name 2005 2006 2007 2008 2009

Brown Forman 34.2x 129.8x 36.9x 16.7x 21.1x

Fortune Brand 7.5x 4.7x 4.7x 1.4x 2.3x

Diageo plc 36.6x 37.2x 34.3x 15.7x 5.7x

Long-term Efficiency

Interest Coverage Ratio 　 　 　 　

Company Name 2005 2006 2007 2008 2009

Brown Forman 34.2x 129.8x 36.9x 16.7x 21.1x

Fortune Brand 7.5x 4.7x 4.7x 1.4x 2.3x

Diageo plc 36.6x 37.2x 34.3x 15.7x 5.7x

DuPont Analysis

Competitor Analysis

• Diageo (DEO), registered in UK– Largest , Mkt Cap $43.94B– Famous brands: Johnnie Walker, Guinness, Bailey,

Smirnoff, Hennessy

• Fortune Brand (FO), registered in US– Closest competitor, Mkt Cap $8.03B– Famous brand: Jim Beam

Competitor Analysis

• Campari (CPR), registered in Italy– Larget in Italy, Mkt Cap $2.2B– Famous brand: SKYY

• Pernod (PER), registered in France– Largest in France, Mkt Cap $17.4B– Famous brands: Absolut Vodka, Malibu, Chivas, Ricard

• Remy (RMYI), registered in France– Mkt Cap $2.1B– Famous brand: Remy Martin

Multiples ValuationCurrent Market Multiples DEO CPR PER RMYI FO

P/E 18.55 16.46 16.46 25.40 30.93P/B 7.27 2.15 2.08 1.97 1.46P/S 2.98 2.23 2.48 2.68 1.11

EV/EBITDA 13.72 12.13 13.72 16.28 15.21

  Median AverageP/E 18.55 21.56 P/B 2.08 2.99 P/S 2.48 2.30

EV/EBITDA 13.72 14.21

  Median Average Weight Median AverageP/E 53.26 61.8988 0.20 10.65 12.38 P/B 26.64 38.2507 0.05 1.332 1.91 P/S 30.01 27.7816 0.05 1.5 1.39

EV/EBITDA 60.13 62.2914 0.40 24.05 24.92 DCF 50.25 50.25 0.30 15.08 15.08

Fair Value       52.61 55.67

Management Assessment Quite accurate most of the times in EPS estimation. In 2006 : Claimed 3.10 – 3.30 Result 2007 : EPS = 3.26 In 2007 : Claimed ESP ↓ by 0.2 Result 2008 : EPS ↓ by 0.4

CAPEX estimation always higher than the realized one. 2008 : 65-75M 2009 : 49M 2007 : 70M 2008 : 41M

Good Brand Managers Diversified portfolio of products.

Assumptions  HISTORICAL     FORECASTED

2005 2006 2007 2008 2009 2010 2011 2012 -2019Historical

Avg

REVENUE ASSUMPTIONS                

% Revenue Growth 10.2% 9.9% 16.3% 17.0% -2.7% - - -

Growth From Acquisitions - - 3% 7% - - - -

Core Growth 10.2% 9.9% 13.3% 10% -2.7% 2.00% 5.00% 8.00% 8.1%

Long Term Growth                

OTHER ASSUMPTIONS I/S                

COGS / Sales 28.3% 26.4% 26.3% 27.0% 28.3% 27.0% 27.0% 27.0% 27.3%

SG&A / Sales 32.5% 32.8% 31.9% 30.7% 28.8% 31.0% 30.8% 30.5% 31.3%

D&A / Gross PP&E 5.5% 5.3% 4.8% 5.2% 5.4% 5.2% 5.2% 5.2% 5.2%

Tax Rate 32.7% 29.3% 31.7% 31.7% 31.0% 32.5% 32.5% 32.5%

OTHER ASSUMPTIONS B/S                

Cash&Equivalents / Sales 16.6% 24.4% 12.8% 4.6% 13.7% 10.0% 10.0% 10.0% 14.4%

Accounts Receivable / Sales 13.5% 13.4% 14.4% 13.8% 11.5% 13.0% 13.0% 13.0% 13.3%

Accounts Payable / COGS 12.7% 14.0% 16.0% 14.5% 10.6% 13.0% 13.0% 13.0% 13.6%

Inventory / COGS 75.6% 80.3% 94.2% 77.2% 72.1% 76.3% 76.3% 76.3% 76.3%

WACC CalculationCAPM Cost of Debt

Cost of equity (Ke) 7.80% Cost of debt (Kd) 7.27%Beta 0.62 Debt 509Market risk premium 6% Interest Expense 3710-year yield 4.10%CAPM+ Alpha 14.10% Tax Rate 32.50%ROE 8.60%

Weights Return on Equity Market Cap. 8,610 ROE 40%Total Capital 9,119 CAPM 60%Debt-Value ratio 5.58% Return on Equity 10.32%Equity-Value ratio 94.42%

WACC 10.02%

WACC Calculation

Weights Market Cap. 8,610Total Capital 9,119

Debt-Value ratio 5.58%

Equity-Value ratio 94.42%

CAPM Cost of equity (Ke) 7.80%

Beta 0.62Market risk premium 6%

10-year yield 4.10%CAPM+ Alpha 14.10%

ROE 8.60%

WACC 10.02%

Mkt Return 1.18%Mkt Premium -2.92%CAPM return 2.30%Alpha 6.30%

Cost of Debt Cost of debt (Kd) 7.27%Debt 509Tax Rate 32.50%

Return on Equity ROE 40%CAPM 60%Return on Equity 10.32%

Correlations

BFB correlationsWAG 42.09%JKHY 41.52%MCD 35.22%DO 35.11%

AEO 31.84%MOS 30.37%WFR 29.48%

Recommendation

• Based on the fundamental analysis and after incorporate the most significant factors:– DCF Model: $50.25– Multiples: between $26 to $62

• Recommendation: Watch List