Is Brown-Forman Set to Sell?

I never knew Jack Daniel's was a top-selling whiskey as I was growing up. I only knew my dad drank it. And, I was fascinated when he told the waitress, "Black Jack Manhattan." Sounded like some kind of pirate drink.

And now, following the sale of Jim Beam  (NYSE: BEAM  ) , another best-selling American whiskey, I wonder if Diageo  (NYSE: DEO  )  can stay happy with their Tennessee and bourbon brands, which are fairly sparse, if market share is lost to Suntory and Beam.

Will the growth opportunity, particularly in the American Whiskey category, presented by acquiring Brown-Forman (NYSE: BF-A  ) and its Jack Daniel's brand be too tantalizing to resist?

A primer on Tennessee Whiskey
Though similar, Brown-Forman's Jack Daniel's is not technically bourbon, but Tennessee Whiskey, primarily because it's made in Tennessee – not Kentucky. Also, some distillers filter the Tennessee whiskey through charcoal before aging it in barrels, which produces a mellower flavor.

Why Jack Daniel's makes Brown-Forman worth buying
Brown-Forman's Jack Daniel's was the top-selling whiskey in the U.S. in 2012, selling 4.82 million cases, while runner-up Crown Royal, a blended Canadian whisky owned by Diageo, sold 4.16 million. Beam was in third place with 3.15 million cases sold, but if you add in Beam's Maker's Mark, which was ninth with 1.19 million cases sold, Beam sold a combined 4.34 million cases.

Jack Daniel's also leads global sales with 10.7 million cases sold in 2012, a 1% increase over 2011 sales. Jim Beam follows with 6.3 million cases sold in 2012, but grew 7% over the course of 2012. Diageo's Crown Royal placed third with 5.2 million in case sales, a 4% increase from 2011.

The big boys
Diageo or Pernod Ricard, the one and two biggest global alcohol beverage companies, seem like logical suitors for Brown Forman. Diageo has a strong Scotch portfolio, including the world's number one selling Scotch Whisky blend Johnnie Walker, and number 5 ranked J&B Rare. It also has an award winning single malt, Talisker.

Diageo professed to be satisfied with their own whiskey portfolio, when they moved away from buying Beam. But it seems lacking for a company that has such strong brands in other categories. The current American whiskey portfolio includes Bulleit Bourbon (Bourbon), George Dickel (Tennessee), and 7 Crown (American Blend).

The lone bourbon
Bulleit is growing steadily. In November, Diageo's Chief Executive Ivan Menezes told reporters it would likely reach 600,000 cases sold in 2013, and eventually reach one million cases. Diageo is also launching two new ultra-premium bourbon brands this year. First, Orphan Barrel should come out in the first quarter of this year. Limited quantities will be sold for $75 to $100 a bottle. Then, Blade & Bow will be released down the road in 2014.

Diageo has already earned 23% of the North America market with this group of whiskeys, and is the market co-leader along with Brown-Forman. But if it purchased Jack Daniel's parent company, it would also have access to three new bourbons, Early Times, Old Forester and top-shelf Woodford Reserve.

Family Ties
One large obstacle that may stand in the way of a Suntory-Beam type deal for Diageo or Pernod is the fact that Brown-Forman is family controlled. A desire to stay independent could cause it to spurn any overtures from the "Big Two." But some analysts believe Bacardi is a possibility since it is also family owned and has a distribution relationship with Brown-Forman.

Deal or no deal
In the end, the fear of antitrust issues may also deter Diageo and Pernod from pursuing another large whiskey company and instead lead them toward smaller companies, such as Campari, which owns Wild Turkey bourbon. Another option is family owned distilleries with well-known bourbons, including Buffalo Trace (Owned by Sazerac) with Buffalo Trace, Eagle Rare, George T. Stagg and Pappy Van Winkle, or Heaven Hill with Evan Williams and Elijah Craig.

Or, maybe Brown-Forman decides to become a buyer and not a seller. 

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