Brown-Forman (BF.A, BF.B) faces a challenging operating environment and is likely to see limited value creation over the next 18 to 24 months outside of a deal, RBC Capital Markets said in a Tuesday research note.

The investment firm said that it expects the company's fiscal Q4 results to be relatively in line. It anticipates muted organic sales in developed markets with strength driven mainly from emerging markets. US tracked channel consumption improved to -0.5% in the April quarter from -2.9% in the January quarter.

With mergers and acquisitions noise around Brown-Forman now fading, RBC said focus is shifting back to fundamentals. Against this backdrop, the company faces whiskey oversupply, mounting pricing and competitive pressures, and an upcoming cost headwind.

RBC said the quickest path to value creation would be a deal, with a combination with Sazerac "making the most sense."

The brokerage further said that Sazerac operates at a higher EBITDA per employee than Brown-Forman, which could increase profitability. The firm also sees a significant global opportunity for a combined entity to emerge as a legitimate challenger to Diageo (DEO).

RBC has a sector perform rating and a $30 price target.