Professional Documents
Culture Documents
By
Ken Freeland
Bob Gabruk
Kim Laidlaw
Jonathan Levine
Matt Michaels
Greg Schramm
May 4, 1998
I. Corporate Governance Analysis
Balance of Power
Of the six beverage companies we have chosen for our valuation, only Molson (which is
managed by CEO E. James Arnett) is not family operated. For example, Brown-Forman is run by
Owsley Brown II and Anheuser-Busch is overseen by August A. Busch III, the CEO for the past
21 years. Excluding Anheuser-Busch, the managing families also own a significant portion of
Moreover, incumbent management maintains its power primarily through their boards of
directors. Generally, the composition of the boards of directors include a Fortune 500 CEO and
at least one member of the originating family. Many directors are insiders (current executives,
former executives, or family members) or have close ties to the controlling families.
compositions of our companies. Of the eight members of the directors of Robert Mondavi, four
are employees and members of the Mondavi family, and they own a combined 48% of the
outstanding shares. The remaining four directors hold very little stock in comparison, only 3.8%
of the outstanding shares, and have no discernable connection to the company. One is the CEO
of Netscape and on the board since 1996, while another is the CEO of Medical Data Company
(on the board since 1989). The board of Brown-Forman is comprised of four insiders and five
outsiders. Of the four insiders, three are related to the CEO and have been on the board for more
than 26 years. The fourth is the Vice-Chairman of Brown-Forman and has been on the board for
27 years. The remaining five board members are or have been senior executives at other firms.
They include the former CEO of British-American Tobacco Company Ltd. and the former CEO
The CEO’s of the companies we analyzed all receive generous compensation packages,
although Coors offers a considerably less lucrative package of approximately $300,000. Owsley
Brown II (CEO of Brown-Forman) earned more than $1,900,000 ($657,000 salary, $523,000
bonus, $605,000 in stock options and $114,000 in stock gains) last year, while August A. Busch
III received more than $8.6 million in compensation, including stock options. Robert Mondavi
earned more than $400,000 in salary, $75,000 in other benefits and options to buy 50,000 shares
salary of $263,500 (he was named CEO on May 9, 1997), a bonus of $190,000, $3,500 in other
compensation and 50,000 stock options. The financial situation surrounding Nick Caporella, the
CEO of National Beverage Corporation (NBC), is interesting. He was compensated via his
management company, which received $3,854,000 in fees from NBC last year. These fees also
Managerial Performance
As shown below, the stocks of the companies we studied performed well over the past
few years, with the exception of Molson. The best performers were Mondavi and National
Beverage Corporation, the only two companies that do not derive the most of their revenues from
the very competitive brewing business. Mondavi, which has only been public since 1994, and
National Beverage Corporation posted average rates of returns of 50% and 30%, respectively.
The voting shares of the companies we analyzed are mostly family owned; therefore, the
marginal investors have very little power with respect to corporate management. For example,
only common shareholders of National Beverage Corporation have voting rights and CEO owns
almost all the common stock (77.17%). Also, only Class “B” common shareholders of Molson
stock have voting rights, and the Molson family owns nearly 50% of these shares. Voting rights
for Mondavi shares is a little more complex in that both Class “A” and Class “B” shareholders
having voting privileges. However, Class “A” shareholders are entitled to one vote for each share
of Class A common stock they own, while Class B shareholders are entitled to ten votes for each
share of Class B common stock that they own. Class B common stock is held almost exclusively
Half of the six companies are followed extensively by research analysts (e.g. nineteen
and nine analysts follow Anheuser-Busch and Coors, respectively). This extensive coverage
should ensure accurate information exchange between these companies and their investors. Two
of our companies, Molson and National Beverage Corporation, are not followed to any
significant extent, perhaps due to the lack of trading volume (see Section II).
With the exception of NBC, all of the companies manufacture and distribute alcoholic
beverages. For this reason, they are often targets of public criticism. However, most of the
companies have reputations for being good corporate citizens. For example, Molson has earned a
good reputation due to its involvement in AIDS-related benefits and charities in Canada. In
addition, Molson created the Molson Companies Donation Fund. In Fiscal 1997, the Fund
donated $1,285,928 to a variety of charities, including the United Way, public education
programs, community centers, Youth groups and environmental concerns. In addition, Molson
owns the Montreal Canadian NHL hockey team, which has one of the most storied histories in
all of professional sports. This certainly adds to the popularity of the Molson name in Canada.
Anheuser-Busch has also worked hard to build a positive reputation within society. For
example, the company initiated “Family Talk about Drinking”, a consumer awareness program
aimed at preventing underage drinking through education between parents and their children. So
far, more than 2 million parents and educators have received “Parent Talk” materials. The
company also sent 5 million cans of drinking water to flood victims in 1997 and protects
endangered species at its Busch Gardens’ theme parks throughout the country. The remainder of
our companies also provide community services but to a far lesser degree.
II. Stockholder Analysis
Composition
Anheuser-Busch: Although there are more than 64,000 shareholders (including some foreign
investors), 61.2% of the stock is held by institutional investors. Insiders own approximately 20%
of the stock, with Nationsbanc – who has a representative on the Board of Directors – having a
claim on 3.85%. Barclays Bank PLC, Putnam Management, and Barrow Handley each own
Brown-Forman: There are 3,156 voting shareholders and 5,054 non-voting shareholders. Seven
insiders (all family members) claim 70.9% of the stock in the company. National Asset
Management owns 23% of the Class B common stock, much more than that of the next largest
institutional investor, T. Rowe Price, which owns 5.24%. Barclays, David Babson & Company
Coors: The family holds all voting stock in a trust for the family and 54% of the non-voting
shares in different trusts. They are the only insiders of the company and exert virtually complete
control. Institutional investors hold 41% of the remaining outstanding non-voting shares.
Molson: Members of the Molson family own nearly 50% of the voting shares (Class B common
stock). Of the remaining shares outstanding, institutional investors hold 32.41%, of which 9% is
Mondavi: The Mondavi family owns most of the Class B Common Stock, which contain the
majority control of voting rights. Of the Class A Common Stock outstanding, there are 78
institutional holders of the stock, representing more than 86% of the outstanding shares. Capital
Guardian owns nearly 9.13% of the stock, while Fidelity Management and Wellington
Management each own more than 8% of the stock. The marginal Mondavi stockholders are
hold 78.4%. The insiders include Nick A. Caporella, Joseph G. Caporella (Executive VP,
Corporate Secretary and Director), Samuel C. Hathorn (Director), S. Lee King (Director) and
With the exception of Molson and Brown-Forman, the companies are only listed on U.S.
stock exchanges. Molson is listed in Canada on the Montreal, Toronto and Vancouver Stock
Exchanges, while Brown-Forman’s non-voting stock is traded on the London Stock Exchange
and the New York Stock Exchange (NYSE). Coors and Mondavi are traded on the NASDAQ,
Anheuser-Busch is traded on the NYSE and National Beverage Corp. is traded on the American
Stock Exchange (AMEX). The table below presents the average daily trading volume for the
companies. Anheuser-Busch is by far the heaviest traded company, while Molson and National
Beverage Corporation are the least traded. The data come at no surprise since Anheuser-Busch
has the most shares outstanding and, on percentage basis, the least number of shares that are
family owned. Moreover, the Molson and National Beverage Corporation are smaller companies
In analyzing the risk and return factors for the beverage industry (both alcohol and non-
alcohol) we first looked at past performance. While the industry itself has entered a mature
growth phase, international opportunities are still prevalent. In the U.S., growth in alcohol
consumption is projected to grow at only 1%, whereas in countries such as England and Japan,
there are still tremendous growth potential. The stock prices and earnings for most of the
Four of the companies’ betas are under 1, hovering around 0.7, signaling a stable, less
volatile stock price relative to the market (refer to graph below). The company that caught our
attention was Mondavi, a wine-retailer that continues to experience high growth. Mondavi has a
levered beta of 1.52 and an unlevered beta of 1.3, which are considerably higher than the
industry averages of 0.67 and 0.59, respectively. Mondavi resides in the premium wine category,
which has a significantly different risk profile than the rest of the alcoholic beverage industry.
Unlevered Betas
1.4
1.2
1
0.8
0.6
0.4
0.2
0
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Since the Mondavi is relatively young and actively reinvesting to grow in this market, the
company carries unique risk characteristics. Therefore, we used the regression beta for Mondavi
To calculate the Jensen’s Alpha, we used a monthly risk-free rate of 0.45%, which we
annualized to determine excess annual returns for all five firms relative to the market.
The analysis suggests that most companies have performed better than expected. For
example, Mondavi and National Beverage Corporation have both had significantly better than
expected returns; National Beverage exceeded expectations by more than 36% over the past five
years. The only company to return worse than expected is Molson, which under-performed the
Although it may be an anomaly specific to these six companies, we note that there seems
to be a correlation between how well, or poorly, a firm performed to the amount of market
specific risk it holds. Molson had the highest R-Squared (0.27), but also the lowest Jensen’s
Alpha, suggesting poor past performance. Based on this analysis, it is not surprising that
Anheuser-Busch had the second highest R-Squared (0.20), and the second lowest Jensen’s
Alpha. However, when looking at National Beverage, we find that it has no risk due to market
factors (R Squared = 0) and the highest excess return. These findings suggest that the higher the
firm is subjected to market risk, the lower the excess annualized return. Thus, there is a negative
For most of the companies, we found that the top down beta carried too much noise (a
high standard error). Therefore, we calculated and applied a bottom up beta for all firms except
Mondavi. To estimate a bottom-up beta, some firms were separated into their respective business
divisions. The tables below present the various business sectors that some of our companies are
evolved in. For example, Anheuser-Busch is involved in entertainment activities that include
amusement parks. Brown-Forman actually is involved in household good sales, and Molson’s
businesses include alcoholic beverages and retail. Subsequently, the overall unlevered betas for
these companies were calculated from a weighted average of the business betas.
Brown-Forman
Business Estimated Unlevered Division Weight Weight Beta
Value Beta
Alcohol Beverages $3,060.7 0.59 73% 0.43
Household Goods $1,132.0 0.67 27% 0.19
Firm $4,192.7 100% 0.62
Molson
Business Estimated Unlevered Division Weight Weight Beta
Value Beta
Alcohol Beverages $807.9 0.59 58% 0.34
Entertainment $118.4 0.57 9% 0.05
Retailing $459.7 0.74 33% 0.24
Firm $1,393.0 100% 0.63
Coors, National Beverage, and Mondavi are involved solely in the beverage industry, so
their betas are calculated directly from their respective beverage betas. To lever up the betas of
our companies, we determined their market values of debt and equity with the following
formulas:
Market Value of Equity = Pstock * Shares
where Pstock = Stock Price
Shares = Number of Shares Outstanding
and
Market Value of Debt = Expint* PVA(i,n) + BV of Debt * PV(i,n)
where Expint = Interest Expense
PVA = Present Value of Annuity Factor
PV = Present Value Factor
i = Cost of Borrowing
n = Average Maturity of Debt
From the market values of equity and debt, we computed the debt and equity ratios, which are
120.00%
100.00%
80.00%
60.00% Debt Ratio
40.00% Equity Ratio
20.00%
0.00%
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To determine the cost of equity, we used a riskfree rate of 6% and a risk premium of
lies above the industry average for cost of equity. Their cost of equity is 14.36%, while the
Business Unlev. Beta D/E Ratio Levered Beta Riskfree Rate Risk Cost of
Premium Equity
Alcohol 0.59 22.00% 0.67 6.00% 5.50% 10.35%
Non- Alcohol 0.73 37.00% 0.9 6.00% 5.50% 11.67%
Entertainment 0.57 61.00% 0.8 6.00% 5.50% 11.01%
Retail 0.66 71.00% 0.74 6.00% 5.50% 9.26%
Adolph Coors 0.58 23.09% 0.67 6.00% 5.50% 9.73%
Anheuser-Busch 0.59 19.38% 0.66 6.00% 5.50% 9.63%
Brown-Forman 0.61 8.09% 0.64 6.00% 5.50% 9.52%
Molson 0.63 22.72% 0.83 6.00% 5.50% 9.28%
Mondavi 1.3 26.47% 1.52 6.00% 5.50% 14.36%
National 0.73 31.75% 0.88 6.00% 5.50% 10.84%
To estimate the cost of debt for the different companies, we first ascertained the current
ratings of the companies. If the company was not rated, we used its interest coverage ratio to
determine a synthetic bond rating and a corresponding spread. We based cost of debt calculations
on a long-term Treasury bond rate of 6%, and added the respective spreads for each company to
this rate. To calculate the after-tax cost of debt, we used the following formula:
The marginal tax rates for each company depended on where they conducted business,
and added percentage points to the statutory tax rate of 35%. For example, Anheuser-Busch
conducts business primarily in the U.S., yet must also look at any tax issues in other countries.
Therefore, we used a 40% tax rate in determining the after-tax cost of debt for Anheuser-Busch.
On the other hand, Adolph Coors has less international penetration than Anheuser-Busch, and
thus a marginal tax rate of 35% is more appropriate for determining their after-tax cost of debt.
To calculate the cost of capital, we used a weighted-average of the cost of equity and
The cost of equity, after-tax cost of debt, and cost of capital are given below both in tabular and
graphical form.
18.00%
16.00%
14.00%
12.00%
10.00% Cost of Equity
8.00% Cost of Capital
6.00%
4.00%
2.00%
0.00%
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After analyzing the previous aspects of the company’s financial situation, it is also not
surprising that both Mondavi and Coors have the highest cost of capital. Mondavi is confronted
with a high cost of capital due to its very high cost of equity combined with their 81% equity
ratio. Their cost of capital is 12.36%, versus an industry average of 9.36%. Consistent with the
fact that Adolph Coors has a low rating of BBB, the company has the highest after-tax cost of
debt (4.88%), which is 0.6% higher than the alcoholic beverage industry. Coors also has the
second highest cost of capital (9.39%), due in part to the high cost of debt and low debt ratio.
However, this cost of capital is in line with the industry average, which suggests that the current
BBB rating does not increase their cost of capital by an extreme amount.
Analysis
In summary, we have analyzed the companies and calculated the betas from both a top
down and a bottom up approach. Based on this analysis, we used bottom up betas since they
provide a more accurate picture of firm risk and less noise in the information. The exception was
Mondavi, where we used the top-down beta because of its unique risk and return characteristics.
Furthermore, we see a wide range in the cost of equities for our companies, from a low of 9.28%
for Molson to a high of 14.36% for Mondavi. The wide range persisted in the cost of capital
comparisons with a low of 8.86% for Anheuser-Busch and a high of 12.36% for Mondavi. In the
next section, we perform a more comprehensive analysis of the hurdle rates that each company
needs to achieve, as well as how they have performed over the past few years.
IV. Measuring Investment Returns
Project type characteristics of these companies are predominantly long term. Characteristics vary
Comparing return on equity (ROE) to the cost of equity and the return on capital (ROC)
to the cost of capital shows the effectiveness of project selection. These values are presented in
EquityReturnSpread/CapitalReturnSpread
25.00%
EquityReturnSpread
20.00%
CapitalReturnSpread
15.00%
10.00%
5.00%
0.00%
Adolph Coors
Anheuser Busch
Brown Forman
Molson
National Beverage
Non-alc. Beverage
Robert Mondavi
-5.00%
-10.00% Ind.
Based upon these results, it appears that Busch, Brown-Forman, and National Beverage
select good projects, but Adolph Coors and Molson choose poor ones. Depending on which
perspective we choose – that of an equity investor or that of a firm investor, Robert Mondavi
Economic value added applies the equity spread and the capital spread to the book value
of the firm. The results of our calculations are represented in the following table.
Company Equity EVA (in $MM) Firm EVA (in $MM)
Adolph Coors ($25.54) ($34)
Anheuser-Busch $778 $787.07
Brown Forman $93.93 $95.81
Molson ($95.16) ($107.42)
National Beverage Company $5.54 $6.42
Robert Mondavi $20.71 ($13.95)
The EVA analysis mirrors that of ROE and ROC. Robert Mondavi has mixed results based upon
the perspective of the investor. Adolph Coors and Molson have made poor project choices. Last,
Anheuser-Busch, Brown Forman, and the National Beverage Company are earning returns on
There are a variety of challenges facing the beer industry going forward, specifically for
Coors and Molson. Forecasts for the beer industry are not optimistic, the industry faces stiff price
competition and decreasing margins. The companies with the best fundamental performance in
this category appear to be Anheuser-Busch and Brown Forman, who are diversified in a variety
of different industries including theme parks, crystal and luggage. National Beverages is in a
healthy position to take advantage of an anticipated 5% increase in world wide soft drink
operations and is ever more exposed to the vagaries of California weather. The 1997 grape
harvest was extremely strong, which threatens to trigger price competition in the premium
Anheuser-Busch
Type of Financing Dollar Amount Interest Rate on Books Maturity
Commercial Paper $591.9M 5.5% Varied
Medium Term Notes $62.5M 5.5%-8.0% 1-3 years
Sinking Fund Debentures $68M 8.5%-8.625% 1-20 Years
Medium Term Notes $250M 8.75% 2 years
Long Term Notes $1,200M 6.75%-7.125% 4 – 20 years
Foreign Denominated Notes $675.2M 4.1%-5.1% 2-4 years
Long Term Debentures $1,000M 6.75%-9% 11-29 years
Industrial Revenue Bonds $198.4M 5.625%-7.4%
ESOP $282.1M 8.3%
Other L/T Debt $37.5M Varied Varied
Total $4,365M 8 years
Brown-Forman
Type of Financing Dollar Amount Interest Rate on Books Maturity
Commercial Paper $155M 5.6% 1 year
Medium Term Notes $30M 6.82%-7.38% 8 years
Long Term Notes $17M Variable 29 years
Other Notes $22M 11.25% 2 years
Total $224M 5.75 years
Coors
Type of Financing Dollar Amount Interest Rate on Books Maturity
Unsecured Medium Term Notes $88M 8.63% - 9.05% 1-3 years
Unsecured Senior Notes $100M 6.76%- 6.95% 6 & 9 years
Industrial Dev. Bonds $5M 4.3% 17 years
Total $193M Approx. 5 years
Molson
Type of Financing Dollar Amount Interest Rate on Books Maturity
Construction Loan $117.2M 4.88% 5 year
Term Loan $157.7M 7.5% 5 years
Debentures $160M 8.2%-9.1 6-21 years
Land Lease Obligations $50M Prime rate 99 year lease
Other $17M
Total $501.9M Approx. 8 years
National Beverage Corporation
Type of Financing Dollar Amount Interest Rate on Books Maturity
Unsecured Notes $50M 9.95% 3 years
Unsecured Term Loan $16.6M 1.25% above Libor Current
Capital leases $.268 8% 1-2 years
Total $66.9M Approx. 1.5 years
Robert Mondavi
Type of Financing Dollar Amount Interest Rate on Maturity
Books
Fixed Rate Secured Loans $19.2M 6.33%-10% 1-8 years
Fixed Rate Unsecured Loans $89M 7.39% - 8.92% 2-10 years
Capitalized Lease Obligation $5.9M 6.96% - 8% 5-13 years
Total $114.4M
Although the total debt balances vary by company within the sector, the composition of
the debt is quite similar, with the exception of Anheuser-Busch, which has the most sophisticated
debt arrangements of the group. The companies are primarily using a combination of unsecured
notes and term loans to provide financing as well as revolving credit agreements.
Bankruptcy Costs
Company Bankruptcy Costs
Anheuser-Busch Anheuser-Busch has had free cash flow (FCF) of less than $100M, on EBITDA of $2,053,
over the last three years. However, they have taken on good projects in the past and their
operating income has continued to rise which should help in stabilizing their cash flows. The
bankruptcy risk should be fairly low given these factors and the size of the company.
Brown Forman Brown-Forman has historically taken on good projects. They have FCF of approximately $50M
on EBITDA of $337M. The company has had very consistent earnings as well as cash flows.
Additionally they have been able to handle higher levels of debt in the past. The bankruptcy risk
should be fairly low given these factors.
Coors Coors has taken on bad projects over the last few years. Their FCF has fluctuated and has not
been that strong. Their earnings have also fluctuated from ($42M) to $78M over the last 10
years or so. The company has moderate to high bankruptcy cost and should be wary of taking
on any new debt.
Molson Molson’s net income has been decreasing over the past few years and this, in turn, is reducing
their FCF. Nonetheless, they did have a relatively high income balance each of last five years.
With an exception of 1996 which is an anomoly. This company has a low risk of bankruptcy.
National National Beverage has had stable earnings that have ranged from about $18M-$20M over the
Beverage last five years. Overall, cash flows have been positively stable. This company has a low risk of
bankruptcy.
Robert Mondavi Although Mondavi’s earnings have been stable, their FCF’s have continued to erode to a
negative position. They should not be taking on any more debt and present a moderate
bankruptcy risk.
A Qualitative Judgement
Based on the above analysis, Brown-Forman and National Beverage appear to have some
excess debt capacity and are in a position to take on new debt if necessary. Anheuser-Busch
should maintain its debt position since its debt ratio appears to be about right. Robert Mondavi
and Coors should be not taking on any new debt, and Coors should begin to reduce its debt due
betas and the cost of debt from the estimated bond ratings. We then used a debt ratio weight to
calculate the cost of capital. With the exception of Robert Mondavi, the costs of capital fell
within a narrow range. Mondavi’s higher hurdle rate is due mainly to company’s higher cost of
equity.
Cost of Capital
Debt Ratio Anheuser- Brown- Coors Molson National Robert
Busch Forman Beverage Mondavi
0% 9.24% 9.39% 9.25% 9.74% 10.01% 13.15%
10% 8.91% 9.08% 11.43% 9.40% 9.67% 12.77%
20% 8.74% 8.90% 12.63% 9.16% 9.47% 12.74%
30% 8.85% 8.89% 13.83% 9.04% 9.25% 13.08%
40% 9.20% 9.12% 15.03% 9.38% 9.45% 15.02%
50% 10.41% 9.70% 16.23% 9.59% 9.64% 15.92%
60% 12.11% 10.83% 17.43% 11.17% 10.25% 16.82%
70% 13.01% 12.69% 18.63% 13.10% 10.32% 17.72%
80% 13.91% 13.59% 19.83% 14.05% 12.23% 18.62%
90% 14.81% 14.49% 21.03% 15.00% 12.98% 22.31%
The optimal debt ratio varies significantly within the industry. For example, Coors has a
0% optimal debt ratio while at the high end, National Beverage, Molson and Brown-Forman all
realize their optimal ratio at 30%. It is unlikely that Coors will move to the 0% ratio, since it
currently has outstanding debt that is rated BBB and will need to continue to use debt to help
finance the activities of the company, and Coors is unlikely to be willing to give up any control.
(For further information on control of shares by the family, see Section I). Of the remaining
companies, only Brown-Forman and Molson currently operate far from their optimal debt ratios.
The following are the formulas for the calculations in the ensuing table:
The above table shows that by moving to the optimal, Brown-Forman, Coors, National
Beverage and Molson can all increase their firm value. National Beverage will only be able to
increase their firm value by about $13M while Brown Forman will be able to increase their firm
value by $389M. Therefore, moving to the optimal has very different effects on each company
and, while it makes sense for Brown-Forman, National Beverage, Coors and Molson to move to
their optimal, it is unclear whether these companies would since they maintain control through
family ownership and probably value flexibility. Since Mondavi and Anheuser-Busch currently
operate very close to their optimal debt ratio, we did not calculate new values for these firms.
little effect on the optimal debt ratios, except for Mondavi and Molson. However, since both
Mondavi and Molson have experienced sharp trends in operating income (although in opposite
directions) over the past four years, we decided to use the optimal debt ratios calculated in the
Ratings Constraint
Rating constraints are given in the table below. Most of the companies would probably be
able to move to their optimal debt ratio without needing to impose a rating constraint. As all of
these companies are family operated, they do not need the control afforded by debt. However,
the companies may also be willing to finance with greater debt ratios, since they are not as
concerned with the other stockholders and may not be concerned with debt ratings.
Half of the companies have debt to equity ratios that are comparable to the industry
average of 22%, with the exceptions of Brown-Forman at 8.09%, Molson at 53.61%, and
companies, performing regressions with multiple variables would not provide a statistically
significant information. The average debt to equity ratio for the overall marketplace is 24.28%,
which is above that of Coors, Anheuser-Busch, and Brown-Forman but below that of National
Summary
The above analysis indicates that the companies’ optimal debt ratios are insensitive to
“outlier years” since the results do not change when normalized incomes are applied (except as
noted with Mondavi and Molson). It is unlikely that Coors will change its debt ratio since the
potential change in firm value and the need for manager control are relatively small. However,
Brown-Forman would be wise to move to the optimal since even with a ratings constraint the
company can significantly increase firm value. National Beverage and Molson are also
underlevered, however, not to the same degree as Brown-Forman. Thus, we do not anticipate a
substantially change in leverage for these firms. Finally, Mondavi and Anheuser-Busch appear to
be properly levered and will most likely not change their debt ratios.
VII. Mechanics of Moving to the Optimal
The following table provides information on how our companies should move towards
their optimal debt ratios. Although we provide suggestions on how they should achieve their
optimal debt ratio, we anticipate that only Brown-Forman will change its leverage significantly.
None of the firms are in serious danger of a takeover due to the large number of shares
held by family members or the large size of the firm. Adolph Coors and Robert Mondavi are the
firms with the lowest ratings but are in little risk of bankruptcy. Anheuser-Busch, Brown Forman
and National Beverage should continue to expand using debt since they are choosing good
projects. They should use debt to take on additional projects because they are all below their
optimal debt ratios and they can maximize firm value by approaching the optimal debt ratios.
The following table provides the project cash flow characteristics and types of financing
Most of the projects in these sectors are long term and denominated in dollars. More specifically,
the Beverage Sectors have long-term projects that include the introduction of new products and
the building of new production facilities. Home Furnishings and Retail-Building Supply have
medium term projects and have some operating leases. The duration of the debt in these sectors
Looking at the regressions, a general sense of the types of debt that these firms should
use is evident. It appears that the firms should use medium to long duration debt, but as the firm
becomes more stable, the duration should decrease. Robert Mondavi is the best example of a
firm that should use long-term debt, while Anheuser-Busch should use short-term debt.
On average the firms do not appear to be cyclical, with the exception of Robert Mondavi.
They also do not appear to be influenced by fluctuations in the dollar. The majority of the debt
should be issued in dollars and does not need to be shielded from cyclicalities. The exceptions
are Brown-Forman and Robert Mondavi, which have substantial investments internationally and
should issue a portion of their debts in foreign currencies. The firms’ incomes seem to be
effected by the inflation rate; thus, some of the debt should be issued with floating interest rates.
Some of the other sectors that the firms are in conflict with the type of debt that should be
used in the Beverage Sector. Each firm should evaluate itself and adjust its debt accordingly.
These regressions were computed using five data points for each economic variable and
produced T-scores that were quite low, indicating that the data did not provide statistically
significant results. Each firm should regress of its value and income and compare to the
macroeconomic data. In general, the data presented here is a good estimate for the sector, but
each firm should be aware of its differences from the sector and make adjustments accordingly.
VIII. Dividend Policy
With the exception of Mondavi and the National Beverage Corporation, the companies
have historically used a mix of dividends and stock repurchase programs to return cash to their
investors. The National Beverage Company initiated its first stock repurchase program in 1997
and has never paid dividends. The tables below summarize the cash returned to shareholders for
companies represented here. Anheuser-Busch and Molson pay the most of their earnings in the
form of dividends. However, it is clear that Molson is paying out more than it can afford.
The following tables provide detailed discussions of the ramifications of the dividend
The mature nature of the beverage industry, predictable earnings, and long-term projects
of these firms suggest that returning cash to investors is a reasonable policy. However, several of
these companies have been paying out more in dividends and stock repurchases than their free
cash flow to equity. For instance, Anheuser-Busch may be repurchasing stock in order to move
to their optimal debt ratio. This suggests that adopting stock repurchase programs might be a
Molson, which has had decreases in earnings but has been obliged to pay dividends to its
shareholders. Many of these firms have been paying dividends consistently for many years, and
investors would be upset if the dividend policy were changed, with the exceptions of Mondavi
and National Beverage Company. Mondavi has been reinvesting in the firm heavily and has not
returned cash to investors, nor has it been able to do so. National Beverage Company has just
instituted a repurchase program to return cash to its investors, but still returns only a minimal
The following tables shows the free cash flow to equity and the actual cash to
On average, the firms could have returned $126 million in cash to its stockholders in
Some of the firms actually returned more to the stockholders in the form of dividends and
stock buybacks than they had in free cash flow to equity, and are thus paying more than they can
afford. This of course will not continue indefinitely. Over the past few years, Adolph Coors,
Molson and Robert Mondavi averaged negative free cash flows to equity. Robert Mondavi did
not return any cash to the stockholders, but Molson and Adolph Coors did. Anheuser-Busch
paid more to the stockholders than it had in free cash flows. This indicates a strong desire by
It appears that the management at these firms take strong interest in the stockholders’
needs because the average payback to stockholders is larger than the free cash flow to equity.
The investors in these firms have come to expect cash paybacks to the stockholders and currently
some of these firms do not have enough free cash flows to pay them. In the short-term, it appears
that the managers of these firms are very committed to the stockholders, which may be due to the
Stock price performance is another indicator of how much these firms should be trusted.
The companies are consistent in their performance in this area, with the exception of Molson –
which has incurred annualized returns of –11%. The rest of the firms have above average gains,
topped by Mondavi and National Beverage Corporation, which have returned over 30% more to
The last criterion is the firms’ investment policies. Below is a five year average of each
companies’ investment returns (i.e., return on equity, return on stock, and required returns).
60.00%
50.00%
40.00%
ROE
30.00%
ROS
20.00%
Required Returns
10.00%
0.00%
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As you can see from the chart, Brown-Forman, National Beverage and Robert Mondavi
all had returns on stock that exceeded their required returns, while only Brown-Forman’s return
on equity exceeded its required returns. On average, Adolph Coors and Anheuser-Busch have
Conclusions
Adolph Coors, Anheuser-Busch, Molson and Robert Mondavi cannot continue to pay
more to equity than they have in free cash flow. Of these companies, Anheuser-Busch is in the
least troublesome position due to its size and the relative difference between the cash flow and
payments to equity. Anheuser-Busch has earned some flexibility in their dividend policy and
should try to reduce their high dividend payout of 46%. Adolph Coors, Molson and Robert
Mondavi, on the other hand, are in precarious positions since they have negative free cash flows
to equity. Mondavi has not made payments to equity and should not until their growth stabilizes.
Coors and Molson are stable firms and need to increase their cash flows to equity if they wish to
respect to free cash flow, and may therefore be more trusted by their stockholders. As a growth
firm, National Beverage should continue with its 0% payout policy until growth subsides, and
should subsequently set their payout ratio close to the industry average of 39%. Brown-Forman
has a consistent dividend policy with a payout ratio of 27%, which is lower than the alcoholic
beverage industry average of 39%. Brown-Forman is now a stable firm and should move the
payout ratio closer to the industry average. Both National Beverage and Brown-Forman have
earned some leeway on their dividend policy due to their high performance with respect to their
Model Selection
stage FCFE discount model since we expect these companies to grow at double-digit rates, but
with no substantial change in debt ratio. Although Anheuser-Busch has realized only moderate
EBIT growth over the past 5 years, the company has gone through some restructuring and is
poised for exceptional growth. Moreover, Mondavi and National Beverage are both relatively
small and do not present high barriers to entry, so we expect their exceptional growth period to
be limited to approximately 5 years. Anheuser-Busch has brand equity as a barrier to entry, but
we feel that the barrier is declining with the heightened popularity of other small and moderately
sized alcoholic beverage companies. Thus, we also used a 5-year exceptional growth period for
Anheuser-Busch.
Brown-Forman
We valued Brown-Forman using a stable growth FCFF model since Brown-Forman has
low expected growth, and we anticipate a change in debt ratio towards its optimal.
We valued Coors and Molson using a stable growth FCFE model because these
companies have low expected growth, and we do not anticipate any significant change in debt
ratio.
Estimation of Inputs
The inputs are summarized for each firm on the pages following this section.
Valuation
A schematic representation of each firm’s valuation is given on the pages following this
The present value of the free cash flow to equity (per share) is added to the present value
of the terminal value (per share) to determine the value of equity per share, which are shown
Brown-Forman:
The present value of the free cash flow to the firm is used to determine the value of the
We next subtracted the market value of existing debt of $313 million from this value to
Finally, we arrived at the value of equity per share by dividing by the number of shares:
value of equity per share, which are shown below for Adolph Coors and Molson.
The current and forecasted stock prices are shown graphically below. Our analysis
indicates that Anheuser-Busch, Mondavi, and National Beverage Corporation are currently
undervalued, while Adolph Coors, Brown-Forman, and Molson are overvalued. On a percentage
basis, National Beverage Corporation is most undervalued (by 23% of the current price), and
Molson is the most overvalued (by 52% of its current stock price).
60
50
40
30
Current
Valuation
20
10
0
National Coors Mondavi Brown- Molson Anheuser
Beverage Forman Busch
Sensitivity to Assumptions
All of these valuations incorporate subjective parameterization, and the appraisal can be
sensitive to these specifications such as the assumed debt ratio changes. For example, the value
of Adolph Coors goes from $29.03 per share to $28.43 per share when the debt ratio changes
from the current value of 15.5% to the optimal of 0%. However, most of our firms (except
Brown-Forman) are near their optimal debt ratio, so the magnitude of debt change effects is
small. The assumed growth rate of the stable growth period has perhaps the most significant
effect on the valuations. The results of a growth rate sensitivity analysis are provided below.
$160.00
$140.00
Adolph Coors
Stock Valuation
$120.00
Anheuser Busch
$100.00
Mondavi
$80.00
Brown-Forman
$60.00
Molson
$40.00
National Beverage
$20.00
$-
1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%
Growth Rate
From the chart, we see that the stock valuations are quite sensitive to the assumed stable
phase growth rate. For example, the valuation of Brown-Forman increases from $39.07 at a
growth rate of 5% (as in our previous analysis) to $62.50 at a growth rate of 7%, as compared
with the current stock price of $55.25. Moreover, the valuation of Molson jumps from $12.44 at
a growth rate of 5% (as in our previous analysis) to $23.76 at a growth rate of 8%, as compared
with the current stock price of $25.75. Likewise, the valuations of the other firms can be made
consistent with the current stock prices by altering the growth rate assumptions.
Summary of Valuation
The previous sensitivity study indicates that valuations are quite sensitive to model input
assumptions. By iterating on input parameters, valuations can altered to provide values that
match the current stock price. Obviously, this procedure invalidates the valuation. In our initial
assumptions to forecast future free cash flows, then discounted the case flows by either the cost
of equity or cost of capital to determine equity value. Although our valuations are much different
than the current stock prices in two cases, we are fully confident in all of our results. For
example, our valuation of Molson indicates that its stock price should be approximately 50% of
the current value. This is a surprising result, however, we believe that the company has been
taking poor projects and, against better judgement, paying dividends far exceeding earnings.
Thus, we feel that the current price is well above what is deserved. The other company that we
growth rate assumption. In our best estimate, however, we believe that Brown-Foreman is
overpriced at the current stock price. All other valuations are close enough to the current stock
prices to conclude that they are reasonably valued in the stock market.