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VIEWS: 265 PAGES: 40

									The Beverage Industry: This One’s on the House!


                  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

their companies’ publicly traded stock.

       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.

       Robert Mondavi and Brown-Forman provide representative examples of the board

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

of Kraft General Foods.

        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

of stock at an exercise price of $28.50. E. James Arnett’s compensation included a pro-rated

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

included payments to another employee supplied Caporella’s management company.

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.

STOCK PERFORMANCE (1993 – 1997) – Rate of Return (ROR)
                        Anheuser   Brown-       Adolph      Molson      Robert      Nat'l Beverage
         Year            Busch     Forman       Coors       Co. Ltd.    Mondavi      Corporation
         1993             -16%        6%          -2%           0%       N/A             11%
         1994               4%        5%           3%        -30%         19%             8%
         1995              31%       20%          32%         15%        140%           -10%
         1996              22%       25%         -14%          -7%        32%          235%
         1997              10%       21%          75%         20%         34%            13%
5-year Cumulative          53%      101%         102%        -10%        406%**        273%
5-year Annual Average       9%       15%          15%          -2%        50%**          30%
**4-year numbers
Stockholder Reaction

       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

by the Mondavi family.

Firm and Financial Markets

       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).

           Company               Number of Analysts
Anheuser-Busch                          19
Brown-Forman                             5
Adolph Coors                             9
Molson Co. Ltd.                          1
Robert Mondavi                           7
National Beverage Corp.                  0

Firms and Society

       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


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

approximately 2% of the outstanding stock.

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

each hold slightly more than 4%.

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

held by the Ontario Municipal Employees Retirement Fund.

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

likely to be domestic institutional investors.
National Beverage Corporation: Institutional investors own 4.7% of the stock, while insiders

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

George R. Bracken (VP and Treasurer).

* See the following table for a detailed breakout of major stockholders.

        Company (Ticker)         Number of Shares     % of Outstanding
Anheuser-Busch (BUD)
Nationsbanc                         18,730,000             3.85%
BZW Barclays Bank                   13,086,000             2.69%
Putnam Mgmt.                        10,846,000             2.23%
Barrow Handley                      10,430,000             2.14%
Fayez Sarofim                        8,829,000             1.82%
Brown-Forman (BF/B)
National Asset Mgmt.                 9,165,000            23.00%
T Rowe Price                         2,089,000             5.24%
BZW Barclays Bank                    1,778,000             4.46%
David L. Babson & Co.                1,668,000             4.18%
State Street Corp.                     900,309             2.26%
Coors (ACCOB)
Coors Family                        18,978,000            54.19%
BZW Barclays Bank                    1,361,000             3.89%
State Street Bank                      785,604             2.24%
Bankers Trust                          716,888             2.05%
NY State Teachers                      649,700             1.86%
Molson (MOL/B)
Molson Family                        4,953,000            38.55%
Ontario Mun. Empl.                   1,156,000             9.00%
La Caisse                              435,344             3.39%
Cundill & Associates                    24,000             0.19%
Toronto Dominion                         6,200             0.05%
Mondavi (MOND)
Capital Guardian                       729,300             9.13%
Fidelity Mgmt.                         687,500             8.61%
Wellington Mgmt.                       659,920             8.27%
Capital Research & Mgmt.               566,700             7.10%
Mass Financial                         341,900             4.28%
National Beverage Corporation (FIZ)
Nick Caporella                      14,267,000            77.17%
Dimensional Fund                       307,960             1.67%
BZW Barclays Bank                      302,330             1.64%
O'Shaughnessy Capital                  133,503             0.72%
Vanguard Group                          71,840             0.39%
Stock Listings

       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

with most of the outstanding shares owned by the managing families.

                       Anheuser     Brown-       Adolph      Molson      Robert      Nat'l Beverage
                        Busch       Forman       Coors       Co. Ltd.    Mondavi      Corporation
Trading Volume         927,799      52,410      225,417        8393       54,421         8947
                                           III.          Risk & Return

A Top-Down Beta Estimate

       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

companies have grown steadily over the past five years.

       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


























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

throughout our calculations.

        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.

                           Adolph       Anheuser     Brown-      Molson      Mondavi       National
                           Coors         Busch       Forman                                Beverage
Slope                            0.67         0.63        0.51        0.83        1.56          -0.17
Intercept                        0.44         0.24        0.49       -0.89        0.52           3.61
Jensen's α, monthly(%)           0.28         0.07        0.25       -0.98        0.78           3.07
Jensen's α, annually(%)          3.51         0.84        2.98      -11.09        9.36          36.84
R-Squared(%)                     7.00        21.00       10.00       27.00       16.00           0.00

        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

market average by 11%.

        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

correlation between the two.
A Bottom-Up Beta Estimate

       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.

Companies with Different Businesses (All $ values in millions)
     Business        Estimated Unlevered Division Weight      Weight Beta
                       Value     Beta
Alcohol Beverages      $21,933.6      0.59          80%                 0.47
Entertainment           $5,483.4      0.57          20%                 0.11
Firm                   $27,417.0                   100%                 0.59

     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

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

        Market Value of Equity = Pstock * Shares
         where Pstock = Stock Price
              Shares = Number of Shares Outstanding
        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

The results are shown below.

                           Adolph Anheuser      Brown-      Molson      Mondavi         National
                            Coors    Busch      Forman                                  Beverage
Market Value of Equity     $1,186.0 $22,966.0    $3,879.0     $1502.3     $622.9              $191.8
Market Value of Debt         $273.9  $4,450.0      $313.7      $341.3     $164.9               $60.9
Total Market Value         $1,459.9 $27,416.0    $4,192.7    $1,843.6     $787.8              $252.7

From the market values of equity and debt, we computed the debt and equity ratios, which are

plotted in the following chart.

                                  Debt and Equity Ratios

         60.00%                                                                    Debt Ratio
         40.00%                                                                    Equity Ratio








                      do Re



















        To determine the cost of equity, we used a riskfree rate of 6% and a risk premium of

5.5% with the following equation:

        Expected Return = Rf + Beta*Rp
        where Rf = Riskfree Rate
               Rp = Risk Premium
       Consistent with the top-down beta calculations, Mondavi is again the only company that

lies above the industry average for cost of equity. Their cost of equity is 14.36%, while the

industry average remains below double digits at 9.36%.

    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%

Cost of Debt and Cost of Capital

       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:

       After-Tax Cost of Debt = (LT bond rate + Spread)(1-tax rate)

        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

after-tax cost of debt, as shown in the following formula:
       Cost of Capital = Cost of Equity(Equity Ratio) + A-T Cost of Debt(Debt Ratio)

The cost of equity, after-tax cost of debt, and cost of capital are given below both in tabular and

graphical form.

    Business           Equity    Cost of    Debt Ratio   A-T Cost of   Cost of Capital
                        Ratio    Equity                     Debt
Alcohol                83.72%    10.35%       16.28%        4.28%          9.36%
Non- Alcohol           88.91%    11.67%       11.09%        5.30%         10.96%
Entertainment          69.17%    11.01%       30.83%        3.93%          8.82%
Retail                 85.61%    16.35%       14.39%        4.43%          9.26%
Adolph Coors           84.50%     9.73%       15.50%        4.88%          9.39%
Anheuser-Busch         85.00%     9.63%       15.00%        4.20%          8.86%
Brown-Forman           92.52%     9.52%        7.48%        4.42%          9.32%
Molson                 81.38%     9.28%       18.62%        4.07%          9.35%
Mondavi*               81.00%    14.36%       19.00%        4.80%         12.36%
National               76.00%    10.84%       24.00%        4.71%          9.37%
*We computed a bottom-up beta for Mondavi although a top-down beta was used here after.

                         Cost of Equity / Cost of Capital

    10.00%                                                               Cost of Equity
     8.00%                                                               Cost of Capital




                        ow sch














                  An lph






       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.

       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

         The following table breaks down project characteristics by division.

   Company                 Division                             Project Type Characteristics
Adolph Coors        Beer Manufacturing        •   Long term
                                              •   Dollar denominated
                                              •   Non-cyclical
Anheuser-Busch      Entertainment             •   Long term
                    Theme Parks               •   Dollar denominated
                                              •   Cyclical
Anheuser-Busch      Beer Manufacturing        •   Long term
                                              •   Mixed financing – U.S., Mexico, Japan, and Great Britain
Brown Forman        Distilled Alcohol         •   Long term
                    Manufacturing             •   US and Canadian dollar denominated
                                              •   Non-cyclical
Brown Forman        Crystal Manufacturing     •   Long term
                                              •   US dollar denominated
                                              •   Cyclical
Brown Forman        Luggage Manufacturing     •   Long term
                                              •   US dollar denominated
                                              •   Cyclical
Brown Forman        Wine Manufacturing        •   Long term
                                              •   Variable due to weather/ environmental conditions
                                              •   Mixed currencies, Italian, French, Chilean, and US
                                              •   Cyclical
Molson              Entertainment/            •   Long term
                    Theme Parks               •   Dollar denominated
                                              •   Cyclical
Molson              Beer Manufacturing        •   Long term
                                              •   Canadian Dollar Denominated
Molson              Building Materials        •   Long term
                    Retailing                 •   Canadian Dollar Denominated
                                              •   Cyclical
National Beverage   Soft Drink                •   Long term
                    Manufacturing             •   Domestic
                                              •   Non-Cyclical
Robert Mondavi      Wine Manufacturing        •   Long term
                                              •   Variable due to weather/ environmental conditions
                                              •   Cyclical
                                              •   Primarily dollar denominated w/ French and Chilean exposure

Project type characteristics of these companies are predominantly long term. Characteristics vary

by division with regards to cyclicality, currency, and unique characteristics.

         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

following table and chart.
         Company                                          ROE                  Cost of            Equity                  ROC               Cost of                         Capital
                                                                               Equity             Return                                    Capital                         Return
                                                                                                  Spread                                                                    Spread
Adolph Coors                                               6.16%                 9.73%               -3.57%                5.47%                           9.39%               -3.92%
Anheuser-Busch                                            28.90%                 9.63%               19.27%               14.65%                           9.47%                5.18%
Brown Forman                                              23.54%                 9.52%               14.02%               19.78%                           9.32%              10.46%
Molson                                                     2.53%                10.57%               -8.04%                1.65%                           9.36%               -7.71%
National Beverage Co.                                     20.61%                10.84%                9.77%               12.71%                           9.37%                3.34%
Robert Mondavi                                            17.50%                14.41%                3.09%                8.90%                          12.36%               -3.46%
Alcoholic Bev. Ind. Avg.                                  11.30%                 9.70%                1.60%                9.25%                           8.86%                0.39%
Soft Drink Ind. Avg.                                         34%                   11%               23.00%               20.47%                           9.66%              10.81%




                   Adolph Coors

                                         Anheuser Busch

                                                                Brown Forman


                                                                                                      National Beverage

                                                                                                                                             Alc. Beverage Ind.

                                                                                                                                                                   Non-alc. Beverage
                                                                                                                           Robert Mondavi


   -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

may or may not be selecting good projects.

        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

their investments more than the capital and equity invested.

       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

demand in 1998. Mondavi faces a variety of uncertainties. It is aggressively expanding its

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

category of California wines.
                                   V. Capital Structure Choices

Current Financing Mix

        The following is a comparison of the different financing arrangements and their

maturities across the various business sectors of our companies.

      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

  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

       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

  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
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.

Trade-offs on Debt versus Equity

         As shown below, a comparison of the advantages and disadvantages of debt relative to

other companies in the industry shows many common characteristics.

     Factor                                                   All Companies
Tax Benefit          See Table below labeled “Tax Rates”
Added Discipline     All of the companies are family run businesses and therefore have very significant stakes in
of Debt              their respective companies and do not need the discipline that debt provides. All of the
                     companies, except Molson, have family members managing the day-to-day business activities.
                     The Molson family has three members on the board of directors including the Chairman.
Bankruptcy Cost      See Table below labeled “Bankruptcy Costs”
Agency Costs         The companies are all family run and costs are more likely tracked very closely. Agency risk
                     does not appear to be significant for these companies.
Future Flexibility   This industry is not a high growth industry, but rather a mature industry. The growth has been
                     slow or negative for these companies. All of these companies already have existing beverage
                     facilities and there does not appear to be a significant need to expand further in the near term
                     except Mondavi which is trying to expand its wineries and vinyards. Overall, financing
                     flexibility does not appear to be an overriding factor. All continue to require debt for the
                     continuation of their operations.
Tax Rates
  Company        Anheuser-       Brown            Coors         Molson       National     Robert        Ind. Avg.
                  Busch          Forman                                     Beverage      Mondavi
Marginal Tax     35%           35%             35%            41.9%         35%           35%
Effective Tax    38.1%         38%             42%            40.7%         37%           39%         38.79%

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
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

to its high earnings volatility and debt ratio.
                                VI. Optimal Capital Structure
Current Cost of Capital and Financing Mix
          In Section III, we calculated the market value of equity from the top-down or bottom-up

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


           Company               Cost of Capital – Current
Anheuser-Busch                             8.86%
Brown-Forman                               9.32%
Coors                                      9.39%
Molson                                     9.35%
National Beverage                          9.37%
Robert Mondavi                            12.36%

Comparison of Optimal Cost of Capital at Various Debt Ratios
          The table below presents the cost of capital as a function of debt ratio for each company.

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.

Firm Value at the Optimal Debt Ratio

The following are the formulas for the calculations in the ensuing table:

Annual Cost Before = WACC (Before)*Firm Value
Annual Cost After = WACC (After)*Firm Value
Change in annual Cost = WACC (Before)*Firm Value - WACC (After)*Firm Value

(We assumed an implied growth rate of 5% in firm value over time)

Increase in firm value = Change in annual Cost*1.05/( WACC (After)-.05)
Change in stock price = Increase in firm value/# of shares Outstanding

    Company         Annual Cost    Annual Cost      Change in      Increase in    Change in
                      Before         After         Annual Cost     Firm Value     Stock Price
Anheuser-Busch              N/A            N/A             N/A             N/A             N/A
Brown Forman           $379.6M        $365.2M           $14.4M         $388.7M      $5.54/share
Coors                  $131.8M        $129.8M            $2.0M          $49.4M      $1.41/share
Molson                 $177.4M        $173.2M            $4.2M         $109.4M      $1.87/share
National Beverage        $23.7M        $23.4M            $0.3M           $7.4M      $0.40/share
Robert Mondavi              N/A            N/A             N/A             N/A             N/A

        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.

Operating Income Variability
        As shown below, normalizing operating income by averaging over the past few years has

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

previous subsection with non-normalized income levels.

           Company               New Debt Ratio         Old Debt Ratio
Anheuser-Busch                     20%                       30%
Brown Forman                       30%                       30%
Coors                               0%                        0%
Molson                             30%                       50%
National Beverage                  30%                       30%
Robert Mondavi                    90%                       20%

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.

    Company          Optimal Debt      Optimal Rating       Constrained     Constrained Debt
                        Ratio                                 Rating             Ratio
Anheuser-Busch           20%                BBB                20%                   BBB
Brown Forman             30%                 BB                30%                     BB
Coors                     0%                  D                  0%                      D
Molson                   30%                 BB                30%                     BB
National Beverage        30%                BBB                30%                   BBB
Robert Mondavi           20%                  B                10%           Min. A rating

Industry and Market Analysis

        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

National Beverage at 31.75%. As there is limited historical information on some of the

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

Beverage, Molson, and Mondavi.


       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

Path 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.

         Company               Actual/Optimal                     Threat of                 How should it move
                                                           Takeover/Bankruptcy              toward the optimal
Adolph Coors              Coors’ current debt ratio is   Rated BBB. It is a family      No new debt or
                          15.5% and the optimal is       owned business and it has      arrangement of debt
                          0%.                            been profitable for over 10    should be taken. If Coors
                                                         years. The firm has            wants to take on projects it
                                                         moderate to high               should use equity to
                                                         bankruptcy costs.              finance them.
Anheuser-Busch            Anheuser-Busch’s current       Rated A. It is below its       Earning above its cost of
                          debt level is 16% and the      optimal debt level but is      capital (8.86%) based on
                          optimal is 20%.                not a likely takeover target   its ROC (14.7%). They are
                                                         because of its large size      currently at their optimal
                                                         $23 billion and because of     level and should try to stay
                                                         the large amount of stock      there.
                                                         held by insiders.
Brown-Forman              Brown-Forman’s current         Rated A+. Not at risk of a     Earning well above its cost
                          debt level is 8% and the       takeover because of the        of capital (9.32%) based
                          optimal is 30%.                large amount of stock held     on ROC (19%). They
                                                         by the family 70%.             should use debt to expand
                                                                                        and invest over the next 5
Molson                    Molson’s current debt          Rated A+. Not at risk of a     Eaving problems earning
                          level is 22.32% and the        takeover because of the        above its cost of capital
                          optimal is 60%                 family ownership of a          recently, but if the firm
                                                         large number of shares.        finds good projects it
                                                                                        should use debt to pay for
National Beverage         National Beverage’s            Rated A- synthetically.        Above its cost of capital
                          current debt level is 24%      Not at risk of a takeover      (9.37%) based on ROC
                          and the optimal is 30%.        because of the large           (15%). They should use
                                                         percentage of shares held      debt to expand and invest
                                                         by the family.                 over the next 5 years.
Robert Mondavi            Robert Mondavi is              Synthetically rated A-. Not    Currently at their optimal
                          currently at their optimal     at risk of a takeover          debt ratio 20%.
                          debt ratio 20%.                because of the large
                                                         percent of shares that the
                                                         family owns. The firm has
                                                         moderate to high
                                                         bankruptcy costs.

         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 Right Financing for Our Firms

        The following table provides the project cash flow characteristics and types of financing

that our firms should use.

Business Sector             Project Cash Flow Characteristics                        Type of Financing
                                 Projects are likely to be:                           Debt Should be:
Beverages         •   long term                                             •   long term
(Alc.)            •   primarily in dollars; some firms w/ foreign incomes   •   dollar denominated but portions
                  •   non-cyclical                                              in foreign currency
                                                                            •   try to link to success of new
                                                                                products introduced
Beverages         •   long term                                             •   long term
(Non-Alc.)        •   primarily in dollars                                  •   dollar denominated
                  •   non-cyclical                                          •   try to link to success of new
                                                                                products introduced
Entertainment     •   long term                                             •   long term
                  •   primarily in dollars                                  •   dollar and Canadian dollar
                  •   cyclical                                                  denominated
Home              •   medium term                                           •   medium term
Furnishings       •   primarily in dollars                                  •   in dollars
                  •   cyclical
Retail-Building   •   medium term (tied to store life)                      •   in the form of operating leases
Supply            •   primarily in dollars
                  •   cyclical

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

should match the length of the project.
Influences of Macro-Economic Variables on Firm Value and Operating Income

       Macro Variable              Company/Results of Regression               Implications for Financing
Long Term Interest Rates                                (1)    (2)        Although some of the individual
Regression Coefficients for:   Adolph Coors           -10.20  17.80       regressions show some signs of long-
(1) Firm Value                 Anheuser-Busch          -1.99  17.30       term duration, on average the
(2) Operating Income           Brown-Forman             0.68  -3.96       combined averages do not show signs
                               Molson                   2.34   1.20       of long term duration. It appears as
                               National Beverage        3.80  -7.10       the firms become stable, they should
                               Robert Mondavi          69.00 -11.40       use short-term duration debt.
                               Average           0.6 (-1.07)   2.31
Real GDP Growth                Adolph Coors            -8.00  30.50       On average, it appears that these
(1) Firm Value                 Anheuser-Busch          -9.02   9.30       firms are non-cyclical. The firm
(2) Operating Income           Brown-Forman             2.23  -6.77       values seem to be influenced by
                               Molson                  -7.68  10.90       cyclicalities on average, but when
                               National Beverage       12.50 -11.90       Robert Mondavi’s outlier is removed
                               Robert Mondavi        175.00 -31.80        from the average the relationship is
                               Average          27.5 (-2.00)   0.04       far less significant.
Weighted Dollar                Adolph Coors            -1.24   3.94       The effect of the dollar does not seem
(1) Firm Value                 Anheuser-Busch           0.60  -3.89       to have a large effect on these firms.
(2) Operating Income           Brown-Forman             1.08   0.28       Therefore the majority of the debt
                               Molson                   4.82  -5.22       should be issued in US dollars, but
                               National Beverage        0.77   4.80       there is evidence to suggest that some
                               Robert Mondavi           2.90  -0.41       of the debt should be issued in
                               Average                  1.49  -0.08       foreign currencies. This should be
                                                                          evaluated on a firm by firm basis.
Inflation Rate                                                            Again, conflicting results reveal that
(1) Firm Value                 Adolph Coors         -12.80    14.60       the companies are not consistent but
(2) Operating Income           Anheuser-Busch         0.20    71.70       on average the firm’s income seems
                               Brown-Forman          -3.87    -1.32       to be effected by the inflation rate.
                               Molson                10.40    -9.20       This indicates that some of the
                               National Beverage     -5.43 -26.20         sector’s debt should be issued at
                               Robert Mondavi         8.60     5.80       floating rates.
                               Average               -0.48 9.23 (-3.26)

        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.

Influences of Macro-Economic Variables on Sector Value & Operating Income

      Macro Variable                     Results of Regression                 Implications for Financing
Long Term Interest Rates       Beverages (Alc.)       -14.6       6.84    Based on industry averages it
Regression Coefficients for:   Beverages (Non-Alc.) 0.65          2.56    appears that the duration of debt in
1) Market Value                Entertainment           20.7       2.75    the Beverages (Alcoholic) sector is
2) Operating Income            Home Furnishings        1.67       10.7    15 years. All of the other sectors
                               Retail-Building Supply 0.27        6.73    that these firms are in seem to favor
                                                                          short-term durations of debt.
Real GDP Growth                Beverages (Alc.)         -6.80     -20.9   The Alcoholic-Beverage sector
1) Market Value                Beverages (Non-Alc.)      0.90      6.39   seems to be influenced by
2) Operating Income            Entertainment             25.8      9.70   cyclicalities. As the GDP rises the
                               Home Furnishings          3.98      23.9   firm value and the income are
                               Retail-Building Supply   -2.74      1.61   reduced. The other sectors seem to
                                                                          be sensitive to cyclicalities as well
                                                                          but they tend to move with the GDP
                                                                          growth. This indicates a need for
                                                                          debt that protects from GDP
                                                                          fluctuations or reduced debt levels.
Weighted Dollar                Beverages (Alc.)         -1.14     1.69    Once again the Alcoholic-Beverages
1) Market Value                Beverages (Non-Alc.)     -0.58     0.38    sector does not seem to be sensitive
2) Operating Income            Entertainment            -0.17     0.57    to fluctuations in the dollar. The
                               Home Furnishings         -0.11     1.43    other sectors are also not sensitive to
                               Retail-Building Supply    1.18    -0.56    fluctuations in the dollar.
Inflation Rate                 Beverages (Alc.)         -67.7    -14.7    In the Alcoholic-Beverages sector
1) Market Value                Beverages (Non-Alc.)     -0.01    -2.12    the firm value and operating income
2) Operating Income            Entertainment             30.7    -9.05    are strongly influenced by the
                               Home Furnishings         -1.24     3.20    inflation rate. The relationship
                               Retail-Building Supply    1.69    -1.50    however is one such that when
                                                                          inflation increases the income and
                                                                          value decrease. Only the
                                                                          Entertainment sector’s value moves
                                                                          with inflation. This indicates that
                                                                          some of the debt in this industry
                                                                          should be a floating rate.

        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

each of these companies and the corresponding dividend ratios.

             Company                       1997              1996       1995       1994        1993
Adolph Coors
 Dividends ($millions)                      18.98             19.07      19.15      19.00      18.80
 Stock Repurchase ($millions)                2.95              9.94       9.94          -          -
 Cash to Stock Holders ($millions)          21.93             29.01      29.09      19.00      18.80
 Dividends                                 492.60            485.90     429.50     389.80     370.00
 Stock Repurchase                          587.10            770.12     393.40          -          -
 Cash to Stock Holders                   1,079.70          1,256.02     822.90     389.80     370.00
Brown-Forman Dividends
 Dividends                                  73.00             71.00      67.36      73.84      71.56
 Stock Repurchase                               -                 -          -          -          -
 Cash to Stock Holders                      73.00             71.00      67.36      73.84      71.56
 Dividends                                  39.18             35.56      40.05      36.82      38.22
 Stock Repurchase                               -                 -          -       0.02     120.28
 Cash to Stock Holders                      39.18             35.56      40.05      36.84     158.50
Nat'l Beverage Co.
 Dividends                                         -                -          -          -        -
 Stock Repurchase                               1.20                -          -          -        -
 Cash to Stock Holders                          1.20                -          -          -        -
Robert Mondavi
 Dividends                                         -                -          -          -        -
 Stock Repurchase                                  -                -          -          -        -
 Cash to Stock Holders                             -                -          -          -        -

          Company                    Dividend      Dividend
                                      Yield         Payout
Adolph Coors                          1.62%             68.50%
Anheuser-Busch                        2.18%             46.26%
Brown Forman                          1.89%             27.00%
Molson                                2.81%            180.00%
National Beverage Company             0.00%              0.00%
Robert Mondavi                        0.00%              0.00%
Industry Average                      2.50%             39.09%
         The dividend yield for the industry is relatively small, which is also reflected in the

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.

Trade-Offs on Dividend Policy

         The following tables provide detailed discussions of the ramifications of the dividend

policies of each company.

Stockholder Tax Preferences
           Company                                                  Implications
Adolph Coors                       Given Coors’s long history of consistent dividends their shareholders clearly
                                   have a preference for dividends.
Anheuser-Busch                     Busch’s shareholders are predominantly institutional investors who would
                                   not normally desire dividends however their dividend policy has been in
                                   place for over ten years and recent shareholders might prefer dividends.
Brown-Forman                       The majority of Brown-Forman’s investors are family members, given the
                                   consistent history of dividends family members seem to prefer dividends as
                                   a source of income.
Molson                             Molson has a long consistent dividend policy the average investor is likely
                                   to have a preference for dividend income.
National Beverage Company          The company has not used a consistent dividend policy or stock buyback
                                   program implying that its shareholders prefer capital gains.
Robert Mondavi                     The company has never paid dividends or used dividends it investors are
                                   interested in capital gains.

Information Effects and Signaling Incentives
           Company                                                   Implications
Adolph Coors                       Coors should not have to use dividends as a signal to markets in the fashion
                                   that it does.
Anheuser-Busch                     Anheuser-Busch is one of the most well followed beer companies in the
                                   United States and does not need to rely on dividends for communications
                                   with markets.
Brown-Forman                       The company uses dividends as a signal unnecessarily; the vast majority of
                                   its investors is family members and should not need these signals.
Molson                             Molson is a large well followed firm in Canada and should not need to use
                                   dividends as a signal of its health.
National Beverage Company          The insiders who are the majority of National’s investors do not need stock
                                   repurchase as a signal from the company.
Robert Mondavi                     The company has eight analysts following the stock and does not need stock
                                   repurchase or dividends to signal markets.
Effects on Flexibility
           Company                                                   Implications
Adolph Coors                      Coors is in a low growth industry, consistent markets share, and has control
                                  over its financial needs flexibility is not a high priority.
Anheuser-Busch                    Busch takes on long term projects and has produced consistent earnings over
                                  its long history future flexibility is not an important factor.
Brown-Forman                      Brown-Forman has highly consistent earnings and exercises a great deal of
                                  control over its projects; future flexibility is not meaningful concern.
Molson                            Molson has recently gone through a difficult period where earnings have
                                  declined, future flexibility might be a concern however dividend payout is
                                  relatively low.
National Beverage Company         Although, National is in a mature slow growth industry, it is a relatively
                                  new company and probably values flexibility.
Robert Mondavi                    Mondavi is attempting to grow quickly taking on a variety of new projects.
                                  They have had relatively consistent earnings but variable cashflows. Future
                                  flexibility is very important.

Bond Covenants and Rating Agency Concerns
            Company                                                Implications
Adolph Coors                      Coors bond covenants do not pertain to dividends,
Anheuser-Busch                    No restrictive bond covenants, rating is not likely to be concern.
Brown-Forman                      No restrictive covenants, rating is not likely to be a concern
Molson                            Neither bond covenants nor rating would be a concern for Molson.
National Beverage Company         No restrictive bond covenants, rating is not likely to be concern.
Robert Mondavi                    No restrictive bond covenants however, a change in rating is likely to be a
                                  concern if a dividend policy is initiated.

         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

more effective means of returning cash to stockholders, particularly to a company such as

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

amount of cash to shareholders.
                           IX. Dividend Policy: A Framework

Free Cash Flow To Equity (FCFE) between 1993 and 1997

        The following tables shows the free cash flow to equity and the actual cash to

shareholders for each firm over the past five years.

       Firm         Net Income    (Cap Ex-Depr)*(1-DR)        Chg in WC*(1-DR)           FCFE
Adolph Coors          $23.34             -$29.09                   -$4.13                 -$9.88
Anheuser-Busch       $925.60             $341.52                    $3.94                $580.14
Brown-Forman         $264.91               $7.69                 -$18.30                 $275.52
Molson                $21.04              $87.82                  $13.21                 -$79.98
National Beverage       $7.17             -$1.67                   -$1.03                  $9.86
Robert Mondavi        $21.65              $16.42                  $24.84                 -$19.60
Average              $210.62              $70.45                    $3.09                $126.01

        On average, the firms could have returned $126 million in cash to its stockholders in

dividends or stock repurchases.

Average payments to equity between 1993 and 1997
        Firm                  FCFE               Dividends + Stock Buybacks
Adolph Coors                  -$9.88                       $18.73
Anheuser-Busch               $580.14                      $778.30
Brown-Forman                 $275.52                       $71.35
Molson                       -$79.98                       $62.03
National Beverage              $9.86                         $0.24
Robert Mondavi               -$19.60                         $0.00
Average                      $126.01                      $155.11

        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

stockholders in this sector to have cash returned to them.
Trust in management

       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

family ownership and control of the companies.

       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

investors than similar firms and the market.

       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).

                             Return on Equity and Stock and Required
                                      Returns (5-year Average)

                                                                                                     Required Returns



















       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

not achieved their required returns.

       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

continue with their current dividend policy.

       National Beverage and Brown-Forman have demonstrated better performance with

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

capital returns on stock.
                                         X. Valuation

Model Selection

Mondavi, National Beverage Corporation, and Anheuser-Busch

         We valued Mondavi, National Beverage Corporation, and Anheuser-Busch using a 2-

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



         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.

Coors and Molson

         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


Estimation of Inputs

         The inputs are summarized for each firm on the pages following this section.

       A schematic representation of each firm’s valuation is given on the pages following this

section. We valued our companies as follows:

Anheuser-Busch, Mondavi and National Beverage Corporation:

       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

   below for Anheuser-Busch, National Beverage Corporation and Mondavi.

   Value of Equity Per Share for Anheuser-Busch = $52.76
   Value of Equity Per Share for National Beverage Corporation = $12.75
   Value of Equity Per Share for Mondavi = $44.03


       The present value of the free cash flow to the firm is used to determine the value of the

   firm, which is shown below.

   Value of Brown-Forman = $3056 Million

       We next subtracted the market value of existing debt of $313 million from this value to

   arrive at the value of equity.

   Value of Equity for Brown-Forman = $2743 Million

       Finally, we arrived at the value of equity per share by dividing by the number of shares:

   Value of Equity Per Share for Brown-Forman = $39.07

Adolph Coors and Molson:
      The present value of the free cash flow to equity (per share) is used to determine the

   value of equity per share, which are shown below for Adolph Coors and Molson.

   Value of Equity Per Share for Adolph Coors = $29.03
   Value of Equity Per Share for Molson = $12.44

       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).

                              Current & Forecasted Stock Prices






             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.

                             Stock Valuation as a Function of Stable Phase Growth Rate

                                                                                         Adolph Coors
   Stock Valuation

                                                                                         Anheuser Busch
                                                                                         National Beverage
                                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

valuation, we attempted to use a combination of historical financial data and objective

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

significantly undervalue is Brown-Foreman; a valuation that we found to be quite sensitive to the

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.

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