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Brown-Forman to Issue Notes

Zacks Equity Research

Recently, Brown-Forman Corporation (BF.B) – one of the leading producers and distributors of premium alcoholic beverages in the world – announced that it has completed the pricing of $750 million senior unsecured notes offering. Further, it is anticipated that the debt offering will be completed on December 12, 2012.

According to the company, the notes will be offered in three different tranches having distinct maturity dates. The first $250 million notes, carrying an annual interest rate of 1.00%, will mature on January 15, 2018. Another $250 million worth of senior notes, which will be issued at an annualized interest rate of 2.25%, are due on January 15, 2023. The last $250 million of notes will carry an annual interest rate of 3.75% and maturity date of January 15, 2043.

A consortium of Barclays Capital Inc., Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, U.S. Bancorp Investments, Inc., Deutsche Bank Securities, Inc. and Wells Fargo Securities, LLC are the Underwriters of this issuance.

Management at Brown-Forman stated that the proceeds from the offering along with $100 million of cash on hand will be utilized to pay the special cash dividend of $4.00 per share, which comes to approximately $850 million. The special cash dividend is separate from the company’s regular quarterly dividend. Earlier on Nov 15, 2012, Brown-Forman announced an increase of 9.3% in its regular quarterly cash dividend to 25.5 cents per share, payable on Dec 16, 2012.

The company has a consistent track-record of returning cash to its shareholders in the form of share repurchase and dividend payment. Brown-Forman has paid quarterly cash dividends consecutively for the past 65 years and has been increasing it for the last 29 years. The company’s recent dividend increase and special cash dividend reflects its commitment to enhance long-term value for shareholders. Through this, Brown-Forman also represents its ability to boost the long-term prospects for earnings as well as cash flows.

As of Oct 31, 2012, the company has a cash and cash equivalents of $368.5 million, long-term debt of $501.4 million and shareholders’ equity of $2.305 billion. The current debt-to-capitalization ratio comes to 17.9%. However, after the completion of the debt offering, it will double to 35.2%. We believe that debt-to-capitalization ratio, following the debt offering, will gradually decline in the long run owing to the company’s consistent track-record of generating cash flows, which may be utilize to bring down debt.

Our Recommendation

We believe that Brown-Forman’s strategy of expanding Jack Daniel's market share in developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in the early stages of development, will enhance its top line.

However, apart from macroeconomic headwinds, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by the governments of respective countries. The effect of hike in excise tax in the future may have an adverse effect on Brown-Forman’s financial performance.

Above all, the company faces intense competition from other well-established players in the industry, such as Beam Inc. (BEAM), Constellation Brands Inc. (STZ) and Diageo plc (DEO). Moreover, Brown-Forman encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

Currently, Brown-Forman has a Zacks #3 Rank, which implies a short-term Hold rating. Moreover, we maintain a long-term ‘Neutral’ recommendation on the stock.

Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world. The company has a strong portfolio of more than 25 premium brands, including Jack Daniel’s – the flagship spirits brand – followed by Southern Comfort liqueur, Canadian Mist whiskey, Finlandia vodka as well as Fetzer and Korbel wine brands. Brown-Forman markets its products in more than 135 countries including, the U.S., UK, Australia, Mexico, Poland, Germany, France, Spain, Italy, South Africa, China, Japan, Canada, and the Russian Federation. The Louisville, Kentucky-based company also has 16 production and warehousing facilities spread across the U.S., Europe and Mexico.

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