Unwanted Advances

Earlier this week, reports surfaced that Constellation Brands has approached Brown-Forman with an unsolicited offer to purchase the company.  If this transaction were to occur, it would transform the spirits market in a significant way, by bringing together two of the industries biggest players.

As of the time of this post, Brown-Forman (maker of brands as diverse as Jack Daniels and Korbel) has a market capitalization (i.e., the total number of shares outstanding multiplied by the current trading price) of about $21 billion and Constellation has a market capitalization of about $35 billion.  So assuming a 1:1 relationship between the value of the two companies as independent entities and the value they would have in the market as a combined entity (which assumption is almost certainly incorrect – but this is still a good yardstick) a Constellation/BFC merger would create a new $56 billion player.  Big – but it wouldn’t be the biggest; Diageo’s current capitalization is about $76 billion.

So will the deal happen?  Well, everything has a price.  But my impression is that it isn’t too likely to occur.  For detail on why – let’s go to BFC’s most recent Annual Report filed with the Securities and Exchange Commission.  Specifically, let’s go to the “Risk Factors” section of the Report:

The Brown family has the ability to control the outcome of matters submitted for stockholder approval.

We are considered a “controlled company” under New York Stock Exchange rules. . . .  A substantial majority of our voting stock is controlled by members of the Brown family, and collectively, they have the ability to control the outcome of stockholder votes, including the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate transaction. . . .  We desire to remain independent and family-controlled, and we believe the Brown family stockholders share these interests. However, the Brown family’s interests may not always be aligned with other stockholders’ interests. By exercising their control, the Brown family could cause the Company to take actions that are at odds with the investment goals of institutional, short-term, non-voting, or other non-controlling investors, or that have a negative effect on our stock price.

Historically, the Brown family has indicated it has no desire to sell.  And assuming that remains the case, Constellation’s offer will likely go nowhere.  In fact, Wall Street seems to have concluded (at least on an interim basis) that is the case – since the value of Brown Forman stock is now trading below its trading price on the day prior to news of Constellation’s apparent bid.  [Note: the trading price of Brown Forman stock jumped about 10% on the day of the news reports.]

Of course, just because the Brown family controls the company doesn’t mean that other shareholders might not prefer the Company take the deal.  What about their interests?

BFC is a corporation incorporated in Delaware.  And under Delaware law a company’s board of directors has the ability to “just say no” to a potential acquirer. Generally, if the board is not actually considering selling the company, they have no duty to consider an unsolicited bid.  So Constellation might reasonably expect that its offer will receive little attention by the BFC board.

But there is a wrinkle here worth noting.  This “just say no” defense may not apply if either (i) the company is actually considering selling the company (in which case the board has a duty to try to maximize the value to be received by stockholders and probably needs to consider the unsolicited offer as part of fulfilling that duty) or (ii) it appears that the board may not be acting in good faith.

Is BFC trying to sell?  There is little evidence of such an effort – so the first prong above is probably irrelevant.

Is BFC’s board acting in good faith?  That is an interesting question.   BFC’s board does not simply represent the Brown family – it represents all of the company’s stockholders. But since the Brown family controls the majority of the voting stock, it effectively has the ability to hire and fire the directors sitting on the board.  That would make any director think twice before doing something contrary to the family’s wishes.