AB InBev’s Acquisition of

SAB Miller

MFIN Investment Banking Assignment Group 5

1

Table of Contents

EXECUTIVE SUMMARY ..................................................................................................................................... 2

I. INDUSTRY OVERVIEW............................................................................................................................... 3

Global Beer Manufacturing Industry Diagnosis .......................................................................................... 3

Long-term Success Factors ........................................................................................................................... 4

II. COMPANY STRATEGIC RE-ASSESSMENT .................................................................................................. 6

AB InBev SWOT Analysis .............................................................................................................................. 6

The Future Direction..................................................................................................................................... 7

III. STRATEGIC ALTERNATIVE ANALYSIS ......................................................................................................... 8

Alternative #1 Continue Organic Growth .................................................................................................... 8

Alternative #2 Acquire Diageo’s Brewing Business - Explore African Market & A Famous Brand ............ 8

Alternative #3 Invest in Beijing Yanjing Brewery - Strengthen Presence and Power in China .................. 9

Alternative #4 Joint Venture with FEMSA – Further Expand Latin America Exposure .............................. 9

Alternative #5 A Merger with SABMiller – Creating the True Global Number One Beer Brand ............... 9

Strategic Alternative Conclusion................................................................................................................ 10

IV. VALUATION ............................................................................................................................................. 12

Relative Valuation Approach – Trading Comparable Analysis .................................................................. 12

Relative Valuation Approach – Precedent Transaction Analysis .............................................................. 13

Intrinsic Valuation Approach – Discounted Cash Flow (DCF) Analysis ..................................................... 14

Triangulate SAB Miller’s Fair Value ............................................................................................................ 17

V. HURDLES, RISKS & ACTION PLAN........................................................................................................... 18

Major Challenges and Potential Mitigation............................................................................................... 18

Risks and Concerns ..................................................................................................................................... 18

Action Plan.................................................................................................................................................. 19

VI. CONCLUSIONS AND RECOMMENDATION ........................................................................................... 23

APPENDIX........................................................................................................................................................ 24

Appendix A: Porter’s Five Analysis on Global Beer Manufacturing Industry........................................... 24

Appendix B: Comparable Analysis ............................................................................................................. 25

Appendix C: Precedent Transaction Analysis ............................................................................................ 30

Appendix D: DCF Analysis .......................................................................................................................... 32

REFERENCE...................................................................................................................................................... 38

2

EXECUTIVE SUMMARY Facing the increasingly competitive industry landscape in existing markets, it is crucial for AB InBev to

determine a strategy that helps maintain the competitive position and create value for shareholders.

After the analysis of the global beer industry landscape and our company’s specific characteristics, five

strategic alternatives were crafted and one was selected: to merge with the company’s archrival - SAB Miller.

We believe not only significant synergies can be realized, more importantly, an undisputable global No.1 beer company with unparalleled brand portfolio and efficiency will come to life.

Valuation

Discounted Cash Flow Analysis: using a WACC of 7.34% and including synergies, an enterprise value

of US$108.4 Bn was arrived. Sensitivity analysis reveals that firm value largely falls in the range from

US$99.1 Bn to US$122.8 Bn.

Comparable Company Analysis: a valuation range between US$93.3 Bn to US$106.0 Bn was arrived

with a control premium of 25% and a range of 16.1x to 18.3x of EV/EBITDA.

Precedent Transactions Analysis: SABMiller was valued using a transaction multiple range from 18.0x

to 21.0x of EV/EBITDA, resulting in a valuation in between US$102.4 Bn to US$119.5 Bn.

Recommendation

Our Opening Offer is US$90.0 Bn of enterprise value, which is slightly higher than its current enterprise

value. The Target Price is US$99.6 Bn, a valuation implying that 60% of synergy was allocated to SAB Miller.

The Walking-away Price is US$108.4 Bn.

The recommended action plan is divided into two parts. Our short-term action plan includes approaching

the SABMiller board of directors, conducting due diligence with emphasis on legal matters and mitigation of

associated risks, as well as negotiating a lower deal price. Our long-term action plan comes into effect upon

receiving regulatory clearance. Steps to be taken are: consolidating ownership of AB InBev and SABMiller,

structuring the deal with 5% cash 35% debt and 60% equity, post-merger integration ensuring comprehensive

cultural integration, as well as specific business actions to cultivate a stronger presence in the African market,

including product R&D, utilization of distribution channels, and large-scale marketing campaigns.

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I. INDUSTRY OVERVIEW

As one of the oldest industries, the beer manufacturing industry is mature and dynamic at the same time.

In 2015, the industry is expected to generate US$135.3 Bn revenue, representing a 1.3% decline y-o-y. On

the global level and looking forward, the industry environment is expected to become increasingly challenging.

Therefore, it is paramount for AB InBev to keep a holistic and updated view of the industry in order to

determine the factors the company needs to possess in order to be successful in the long term.

Global Beer Manufacturing Industry Diagnosis Over all, the competitive landscape of the industry continues to be challenging on multiple fronts

(Appendix 1). And to highlight the most important forces in play:

Intensive Rivalry

Competition between players is expected to continue to be intensive, primarily driven by the high industry

concentration and low overall industry level growth.

Given the mature nature of the industry, consolidation has been the mean of growth for leading players

for years. Despite the already very high market share concentration, such trend is expected to continue for

reasons such as to grow market shares, to build diversified product portfolios, and most importantly, to reduce

costs.

3.5

2.5

2.5

4

4

Threat of New Entrants

Buyers’ Power

Suppliers’ PowerThreat of Substitutes

Rivalry

Porter's 5 Analysis Visualization

Note: the higher the rating, the more infavorable of the industry

85%79%

65%

81%

62% 62%

73%

0%

25%

50%

75%

100%

Market Share of the Top 4 Players in Each Continent

Data Source: Euromonitor

$50

$70

$90

$110

$130

$150

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

IND

UST

RY

REV

ENU

E ($

BN

)

+0.8%

Data Source: IBISWorld

Global Beer Manufacturing Industry - Revenue

4

On the other hand, the industry is expected to grow only 0.8% per annum globally in the next five years

through 2020. Such low growth is driven by a number of factors, such as the stagnated population growth for

targeted group in developed markets [1&2] (adult between 18 – 44 years old), and consumers (especially

Millennials)’ increasing awareness and attention to personal health[3].

On the bright side, competition so far is mostly focused on product differentiation and marketing rather

than pricing.

Increasing Threat of New Entrants

The threat of new entrants is on the rise for the industry as a result of the shift in consumers’ taste and

technological improvements.

In recent years, consumers have started to grow tired of premium beers and gradually shifted their

preference to more niche products such as craft beers. At the same time, technological improvements in the

industry have kept at a steady pace. Such improvements increasingly allow micro brewers to compete

profitably on a much smaller scale.

Continued Threat of Substitutes

In addition to the traditional substitutes of beers such as soft drinks, spirits, and wines, there is an

increasing number of new alcoholic and non- alcoholic drinks being developed in recent years.

Industry Growth Opportunities

However, it is noteworthy that emerging markets continue to present attractive opportunities. Africa, Asia,

and South America are all expected to continue to pose strong growth in the next five years supported by 1)

adoption of beer-drinking life style; 2) growth in targeted population group; 3) increase in disposable income

level.

Long-term Success Factors Given the industry environment, to compete successfully in

the long-term, a leading international brewer, such as AB InBev,

needs to maintain its market share and profitability in the

traditionally developed markets, and cultivate its presence and

influence in the emerging markets. To achieve this overall goal,

AB InBev must possess four fundamental qualities.

Strong Distribution Network

Since beer products, in general, have a very low value to

weight characteristic, therefore, minimizing distribution costs is

critical to international beer manufacturers. A strong distribution

Long-term

Success

Distribution

Network

Financial

Flexibility

Economies of Scale

Brands and

Product Portfolios

5

network through multiple channels such as direct distribution and partnerships across geographical segments

is key to AB InBev’s future.

Brands and Diverse Product Portfolio

Beer is a volume business, and in order to convince customers to make repeated purchase, maintaining a

relevant brand image is critical. In addition, facing the more and more rapid change in consumer taste in

different products, it is also important for Ab InBev to develop and invest in high quality products to satisfy

different consumer preferences and minimize the impact of unexpected shifts in consumer tastes.

Economies of Scale

With increasingly advanced brewing technologies, firms of a wide range of size are able to lower per unit

costs to compete in the industry, thus, it is essential for AB Inbev to stay as efficient as possible.

Financial Flexibility

Keeping financial flexibility is vital for AB InBev’s long-term success. On one hand, with consolidat ion

continuing to be the trend, it is essential to have a heavy war chest so that necessary steps could be taken at

the right time. On the other hand, given the fierce competition, staying financially flexible also serves as a

defense mechanism to protect the company from unexpected changes in the industry.

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II. COMPANY STRATEGIC RE-ASSESSMENT

Being the largest global brewer, AB InBev holds more than 36% of global beer market sales, and expected

to generate US$ 48 Bn revenue in 2015. Despite overall flat industry growth in the past five years, the

company has achieved a remarkable 5% CAGR in topline over the last five years while maintained a healthy

D/E ratio of about 22%.

The current leading position of AB InBev was a result of decades’ development in multiple dimens ions

of the business. There is no doubt that further value creation will be increasingly difficult, both sales growth

and margin improvement will be harder to achieve. Thus, it is crucial to reassess the company’s strength and

weakness in conjunction with the industry competitive landscape in formulating future strategic directions.

AB InBev SWOT Analysis

Strength – Strong Customer Loyalty

In recent years, the company’s impressive revenue

growth was driven by the products upward pricing and

volume growth at the same time. This achievement

demonstrated the strong loyalty from its customer

relative to industry peers.

Strength – Global Recognized Brands & Products

Brand names and product portfolio are critical to

the industry players. As the industry leader, the

company owns many world class names that provide a

great competitive advantage in marketing in new

geographical areas and new products.

Strength – Excellent Financial Flexibility

In recent years, AB InBev has implemented stringent cost control, not only resulted in best cost efficiency

among peers, but also built significant amount of financial dry powder for strategic actions.

Weakness – Stagnating Growth in Many Major Markets

In a number of markets, such as North American, that the company has a leading stance, the overall

growth is stagnating. This implies a soft growth prospects in the future if the company stays status quo.

Opportunity – Rapidly Growing African and Asian Markets

As discussed, the two geographic areas demonstrated and are expected to continue demonstrating strong

Strength: -Global Brands and

portfolio

-Strong brand

loyalty

-Financial strenght

Weakness:

- Lack of growth potential in N.A.

Opportunity:

- Emerging growth market

Threat:

-Consumer taste shift

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growth. And it is the company’s opportunity to expand footprint in these markets to boost future growth.

Data Source: IBISWorld, EuroMonitor

Threat – Consumer’s Rapid Change in Taste

Similar to other players, the company faces threats from the unpredictable but expected change in

consumer taste. Competitors both inside and outside the industry can capitalize on such shifts and attract

customers.

The Future Direction Given above SWOT analysis and in conjunctions with the industry competitive dynamic, it becomes clear

that staying status quo is imprudent. To continue creating value for shareholders, the company need to shift

its growth focus to rapid growing geographies such as Africa, and continue to seek means to improve return

on capitals.

17%

15%

33%

5%

29%

1%

North America14%

Latin America

16%

Europe27%

MiddleEast & Africa

Asia Pacific

Australasia1%

7%

35%

10 Yr Global CAGCR 2.2%

10 Yr N. America CAGR 0.0%

10 Yr Asia CAGR 4.3%

10 Yr Africa CAGR 5.8%

Industry Market Share by Geographic Locaion and Key Growth Rates

8

III. STRATEGIC ALTERNATIVE ANALYSIS

In order to achieve Ab InBev’s strategic goal of maintaining growth prospect in the competitive and

mature industry and continue to improve financial returns, five strategic alternatives are identified as shown

in the figure below. In addition, the four industry success factor along with difficulty in execution are used in

subjectively evaluating each of these alternatives.

Strategic Alternatives

Alternative #1 Continue Organic Growth Theoretically, all long-term strategic goals can be achieved organically. Organic expansion can be carried

out in the targeted emerging growth markets, while maintaining a more flexible financial stance that enables

the company to continue paying a high dividend to shareholders.

However, this approach suffers a few disadvantages that do not match our strategic objectives. For instance,

in addition to the time consuming managerial attention needed, more importantly, it is extremely difficult to

build strong beer brands and powerful distribution channels given the intensely competitive industry

landscape, not to mention realizing economies of scale in less exposed markets.

Alternative #2 Acquire Diageo’s Brewing Business - Explore African Market & A Famous Brand Diageo’s brewing business presents itself as an attractive acquisition candidate for two major reasons.

First, as Africa is one of the target markets for AB InBev to explore future growth, Diageo has a 12% market

share in Africa, primarily from East Africa. Secondly, acquiring Diageo will give AB InBev the influentia l

Guinness brand, which equivalent to US$1 Bn annual revenues addition.

Therefore, acquisition of Diageo’s brewing business presents strategic alliance with AB InBev’s long

term goal in at least two aspects: entering the rapid-growing African market and adding a well-known brand

to its brand portfolio. However, difficulty may arise from Diageo’s unwillingness to sell without an extremely

high premium or without acquiring the entire company, because the beer segment has generated meaningful

cash flow for Diageo and having a diversified product portfolio is also one of Diageo’s stated objectives.

9

Alternative #3 Invest in Beijing Yanjing Brewery - Strengthen Presence and Power in China AB InBev is now the third largest player in China with 18.6% beer volume [4]. Besides organic growth,

forming a strategic partnership by investing in a leading local player can help AB InBev gain insightful local

knowledge and promote distribution in the large, fast growing, but a relatively fragmented market.

And a rare opportunity presented itself: Beijing Yanjing Brewery, China's third-largest beer maker, plans

to sell about a 20% stake to a foreign strategic partner [5].Yanjing is controlled by Hong Kong-listed Beijing

Enterprises Holdings, whose largest shareholder is an investment arm of the Beijing government.

This alternative has a number of advantages. First, the opportunity to invest and partner with a major

local player is rare. The local knowledge gained will be invaluable for AB InBev. Also, assuming a 50%

premium on top of Yanjing’s current trading price of about US$1.11 USD per share, the 20% stake will only

cost around US$ 0.93 Bn, which exerts little financial pressure to AB InBev.

In terms of drawbacks, it is uncertain whether the government will intervene in AB InBev’s involvement in

the strategic partnership. Also, it will provide little benefit in terms of economies of scale in Asia.

Alternative #4 Joint Venture with FEMSA – Further Expand Latin America Exposure The benefit of engaging in joint ventures is to expand in Latin American markets and achieve cost

reduction. Latin American market accounts for 16% of the world’s beer volume, and has an average growth

of 3.3% in the last ten years. Through creating a joint venture with a competitive partner, AB InBev can

reduce costs by sharing marketing channels and market intelligence, etc.

A good candidate for a joint venture is Fomento Económico Mexicano (FEMSA) from Mexico. FEMSA has

a significant market share throughout Latin America, but is facing declines in volume in some markets, and

they would welcome a partner to create a win-win situation in the highly competitive market. Together, the

two companies represent over 90% market share in Mexico and 76% in Brazil. Therefore, the alliance can

create an unparalleled market power to enhance brand influence and strengthen distribution. However, it needs

to be evaluated carefully due to difficulty in executing a successful joint venture.

Alternative #5 A Merger with SABMiller – Creating the True Global Number One Beer Brand Another bold, extremely attractive and our chosen alternative is to merge with the company’s archrival –

SABMiller.

SAB Miller, currently our most immediate competitor with a comparative market share of 16.4%, sold

the second most beer volumes in 2015[6] and achieved a world total revenue of US$16.5 Bn. Through a variety

of brand names in their portfolio, the company has a presence in

all five continents, but in a very complimentary way to our

company’s exposure. By establishing leading local beer brands in

multiple geographic segments, SAB has conquered 94% of global

lager volumes [7]. Being the largest licensed bottler and distributor

of the Coca-Cola products outside of the U.S., the company's long

term relationship with the soft drink giant allows them to diversify

SAB Miller Financials in a Glance

FY 2015 Revenue 16.5 Bn

5-yr Revenue CAGR 3.30%

FY 2015 EBIT Margin 26.52%

FY 2015 FCF 2.15 Bn

Data Source: SAB Miller Filings

10

product offering and improve capital efficiency by co-sharing excess capacity with the Coke. In FY2015,

SAB Miller’s operation in developing markets that comprised of Latin America, Asia, and Africa accounted

for 75% of cash flow generated globally, while demand from other two markets – North America and Europe

are fairly stable. On the corporate level, the company has adopted a capital structure that is less aggressive

and healthy. In the most recent period, the company maintained market D/E of 12%.

In fact, to merge with SAB Miller present

compelling strategic rationale. Given the similar

characteristics from being the world #1 and #2 player

in the industry, AB InBev and ABMiller have some

similar strength such as owing diverse product

portfolio, and face similar opportunity and threat.

However, it is the different yet highly complementing

strengths and weaknesses lead to the unique

opportunity to create value for the combined entity.

In term of strength, SAB Miller has a strong

presence in growing markets, especial in Africa

where our company lacks. On the contrary, the unique

weakness for SAB Miller is their inability to break into Brazil market where we have strong position. Actually,

the market presence between the two companies is highly complementary as discussed in earlier and more

directly shown in the figure on the right. There, the combination can create a portfolio of the world's most the

influential beers across all the major continents.

In addition, the combined entity can benefit from the scale economies through combined procurement,

resources pooling, expertise sharing, and general cost cutting.

Combined together, massive unique synergies from the cost side can be realized, and market power can

be consolidated; not to mention the potential revenue synergies. If successful, such merger will create a true

No. 1 global beer company in the industry. But it is noteworthy that the potential financial pressure such deal

may impose to AB InBev is immense, not to mention other obstacles like regulatory scrutiny.

Strategic Alternative Conclusion To properly assess these alternatives, we weigh each alternative’s benefits and costs against the long term

success factors to AB InBev as following:

Factors

Alternatives

Diverse

Brand

Portfolio

Effective

Distribution

Economies

of Scale

Financial

Flexibility

Difficulty

to Execute

#1 Organic Growth D E E A A

#2 Acquire Diageo’s Brewing Business C C D C B

0%

20%

40%

60%

80%

100%

AB InBev SAB Miller Major 1 Major 2 Other

Constrasting Global Market Shares

11

#3 Invest in Beijing Yanjing Brewery D C C B C

#4 Joint Venture with FEMSA D B D B D

#5 Merger with SAB Miller A A A D E

Note: A=Excellent, B= Good, C=Fair, D= Poor, E= Very poor

Overall, the table shows an outcome that clearly separate the merger with SAB Miller out of the crowd.

Despite the difficulty in execution and possible burdens to AB InBev’s financial flexibility, this particular

alternative can create most positive impact to the company’s long-term strategic goals.

Therefore, while keeping options open for other alternatives, a merger with SAB Miller would be the top

choice of AB InBev. With transaction at such scale and with such difficulty, risks and potential means to

mitigate them are of top issues, which will be analyzed in the later section of this report.

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IV. VALUATION A deal will not be a good deal unless it is done at the right price. To best estimate the fair price for SAB

Miller, we use public comparable, precedent transaction, as well as the discounted cash flow valuation method

to triangulate value of the company.

Relative Valuation Approach – Trading Comparable Analysis Trading comparable analysis has a simple rationale: similar firms should be worth similar multiples. Also,

acknowledging the uniqueness of different companies, benchmarking and adjustments are conducted to

properly evaluate the value of SAB Miller under this analysis.

Comparable companies (Table B.1) were selected based on four dimensions: firm size, growth, maturity and

profitability (as shown in chart below). And the peers were selected from three major groups: 1) major players

in the global brewery industry, 2) local leaders in beer production, and 3) global leaders in beverage production.

Comparable Peers Benchmarking

Specifically, the scale and business exposure of global players provide comparability on business growth

for SAB Miller. And the beer manufacturing focused local brewers provide a pure relative measurement for

the brewery segment. Furthermore, the wine, spirit, and soft drink manufacturing industries are key

competitors to the beer manufacturing industry, where the comparison between market leaders and non-

leaders can provide some indications on size premium.

Size Benchmarking

The significant presence in the beer manufacturing industry assures SAB Miller stability in revenue

generation and sustainability in the long run. Operationally, a relatively large firm size also helps achieve

economy of scale and gain operation efficiency through cost reduction. Accordingly, we suggest SAB Miller

a size premium of 1.0x to 1.5x above the industry average. In addition, SAB Miller keeps a financial health

13

with 2.2x total debt to EBITDA, which adds financial flexibility to the firm.

Growth Benchmarking

As shown in Figure B.3 and B.4, Asia, Latin America and Africa demonstrates strong growth potential

in beer consumption. SAB Miller is standing as a leader in beer production in the three markets (Table B.3),

which can dramatically booster the revenue growth. So we include AB InBev, Kirin and Diageo in our

portfolio with cumulatively 57%, 92.7% and 43.4% revenue generated from the three markets respective ly

(SAB Miller 76%). Similarly, the selected comparable firms all have invested in innovations in beer styles

and flavors to capture the recent consumer demographics shift to the younger generation, which provides

another source of growth and is already imbedded in the multiples.

Maturity Benchmarking

SAB Miller is defined as a mature company with 94% of total volume sold in markets where it has top 2

national market share position and 25% EBITDA from associates and joint ventures. Thus, Sales, EBITDA

and EBIT are continuous and stable for SAB Miller. Since the brewery industry is at its mature stage,

companies, such as Heineken, Asahi, and Carlsberg, are all at its maturity stage. SAB Miller should relative ly

locate itself in the average position under the maturity benchmarking.

Profitability Benchmarking

Given the competitive landscape, SAB Miller has kept an average total revenue growth and EBITDA

growth among its industry peers. However, its EBITDA margin (33.96%) and EBIT margin (26.52%) in last

fiscal year is far above the peer average (22.01% and 15.82%, respectively), which is mainly attributed by

SAB Miller’s excellent cost-cutting potential and execution. (See Table B.4 and Figure B.6).

Comparable Analysis Summary

Overall, according to the four benchmarks discussed above, SAB Miller outperforms its peers’ average

with respect to firm size and profitability. Taking these into consideration, we propose that SAB Miller can

generate an as-is market value from US$66.4 Bn to US$112.7 Bn, which is US$84.1 Bn on average without

the control premium. (Table B.10)

Relative Valuation Approach – Precedent Transaction Analysis While precedent transaction and trading comparable analyses have the similar underlying rationale, the

difference is precedent transaction method automatically incorporate control premium and subject to the

market condition of at the time comparable transactions took place. Various adjustments were also made to

arrive our target SAB Miller multiples.

The selected transaction pool consists of 12 merger and acquisition events within the beer manufactur ing

industry in past five years from 2011 to early 2015. According to Table C.1, the acquirer company tends to

award a greater premium to target companies with larger firm size, which is also consistent with our previous

14

findings in the comparable analysis. Among all target firms, Modelo Beer and Fosters Beer who have had the

highest deal size of US$15.7 Bn and US$12.6 Bn, respectively, were purchased at EV/EBITDA multiple of

16.0x and 13.0x respectively. Therefore, SABMiller, as the industry 2nd player, should be assigned an even

higher multiple. On the other hand, historically, the average premium added to precedent transactions of the

beer manufacturing industry peaked 50% back to Q3 2012(Table C.2) and averaged at 22.96% over a five-

year period. The heated M&A market of beer manufacturing industry indicates that a reasonable premium

should be added to the SABMiller valuation.

Overall, with the consideration of the hot market condition and a significant size premium, here we adopt

an EV/EBITDA multiple of 19.0x and P/E multiple of 23.0x for SABMiller. The enterprise value of SAB

Miller given by precedent transaction analysis is US$97.8 Bn on average. (Table C.3 and C.4)

Intrinsic Valuation Approach – Discounted Cash Flow (DCF) Analysis The discounted cash flow analysis first values SABMiller as a stand-alone company on an as-is basis and

with improvements, then values SABMiller as acquired by AB InBev, a valuation taking into considerations

value of synergies and future options.

Valuation on As-Is Basis

For as-is basis, the two main value drivers of SABMiller are the low cost of capital and top-line revenue

growth.

First, the cost of equity is calculated (Table D.1) using the 10-year treasury rate as of March 31, 2015,

which reflects the long-term nature of cash flows that are to be discounted. The market return is calculated

using the annual MSCI Index returns from 2011 – 2015. SABMiller's cost of equity is 7.91% based on the

CAPM model. Second, the cost of debt is the average cost of debt for the period 2011 – 2015(Table D.2), and

0

20

40

60

80

100

120

140

Market Value As-Is Valuation(DCF)

With SelfImprovements

(DCF)

With UniqueSynergy (DCF)

Maximium

US$88.0 B

US$76.8 B

US$9.6 B

US$22.0 B

FutureOppo.

DCF Valuation Summary

15

the cost of debt for each year in that period is calculated by dividing the current year's interest expense by the

previous year's debt. The resultant cost of debt is 4.47%. Hence, the company's WACC is 7.34 %( Table D.3).

In major developed countries, lager volume growth has been negative over the past two years. In Europe,

SABMiller would buy Meantime Brewing Company, a craft brewer outpacing the UK beer market’s 1%

growth, to enter UK craft beer market [7]. However, the Euro is expected to remain weak relative to the US

dollar, and economic uncertainty is expected to be high in the next six years. Overall, the revenue growth rate

in Europe is expected to be -0.50% for 2016 and its annual incremental change is 0.25%. The revenue growth

rate in Europe is expected to approximate the global beer industry 0.8% by 2021(Table D.4). The revenue

growth in North America has been relatively stable and, therefore, the revenue in North America is expected

to grow moderately, with a growth rate of 0.5% for 2016 and its annual incremental change of 0.15 % (Table

D.4).

On the other hand, the revenue growth potential in developing countries is high. In Africa, SABMiller

would continue to invest in capacity including expansions in Ghana and Nigeria which are nearing

completion[7]; the benefits from expansion are expected to emerge in 2018. The revenue growth rate in Africa

for 2016 and 2017 are 1.00% and 2.00% respectively, it would boost to 7.00% in 2018 but then decrease by

1.6% annually until 2021(Table D.4). In Latin America, lager pricing and growth in the premium and above

mainstream categories, together with strong soft drinks volume growth, are expected to continue in the next

six years. The revenue growth in Latin America for 2016 is expected to be 1.00% and its annual incrementa l

change is 0.75 %( Table D.4). In China, CR Snow, a beer brand of China Resources Enterprise which

SABMiller has a partnership with, is expected grow steadily through its premiumisation strategy. In Australia,

however, consumer sentiment would remain subdued with continued pressure on consumer spending affecting

beer category volumes. Overall, the revenue growth in Asia Pacific for 2016 is expected to be 0.50% and its

annual incremental change is 0.40 %( Table D.4).

Other assumptions could be found in Table D.5, the DCF analysis arrives at an enterprise value of

US$76.8 Bn in the case of As-Is valuation (Table D.6&D.7). The sensitivity table indicates that the enterprise

value of Square largely falls in the range from US$69.6 Bn to US$85.9 Bn (Table D.8).

Valuation with Improvements

SABMiller could further enhance its revenue by increasing the supply of soft drinks in Africa through a

partnership with local or global beverage companies, since the soft drinks volume has been rising by 9%

annually over the past two years in Africa. After taking into accounts SABMiller's pricing strategy as well as

the weakness of key currencies in Africa, a parallel increase in revenue growth rate by 0.25% every year is

considered conservative, increasing the enterprise value of SABMiller by US$1.48 Bn.

Also, SABMiller had increased its target annual run rate cost savings from its cost and efficiency program

announced in May 2014, from USUS$500 Mn by 31 March 2018 to at least USUS$1,050 Mn by 31 March

2020[7]. Assuming that the cost savings program would be successful, annual incremental change in

EBIT/Revenue in every region is expected to be 0.6%. It would increase the value of SABMiller by US$8.14

bn.

16

As a result, the DCF analysis arrives at an enterprise value of US$86.5 Bn in the case of valuation

With Improvements (Table D.9). The sensitivity table indicates that the enterprise value of Square largely

falls in the range from US$71.0 Bn to US$87.5 Bn (Table D.10).The capital expenditure schedule and the net

working capital schedule can be found in Table D.11 and D.12 respectively, while the pro forma condensed

balance sheet and the pro forma income statement can be found in Table D.13 and D.14 respectively.

Valuation with Unique Synergies

Other than the possible increase in the valuation on a stand-alone basis, the combined company will

certainly generate attractive synergies that cannot be achieved without the M&A transaction. To quantify

the pre-tax cost synergies, we made a few assumptions shown in below table.

Estimation will not take into account any potential synergies or dis-synergies arising from SABMiller’s non-consolidated interests, including its joint ventures and associates.

No material impact on the underlying operations of either company or their ability to continue to

conduct their businesses

No material change to macroeconomic, political or legal conditions in the markets in which two companies operate that materially impact on the implementation or costs

No change in tax legislation or tax rates or other legislation or regulation in the countries in which two companies operate that could materially impact the ability to achieve any benefits.

The unique cost synergy between the two companies are expected to arise from following aspects: The

combined group can benefit from the economies of scale through combined sourcing of raw materials and

packaging and reengineering of associated processes. We projected that this improvement will lower the

net working capital to revenue ratio by 5% on the global basis.

The new company can take advantage of AB InBev’s well-known cost cutting strategy and cut the

distribution cost through the alignment of brewery, bottling and shipping productivity including: reduced

water and energy usage, as well as optimization of other brewery and distribution processes across

geographies. This is expected to lower the operating cost to improve the EBIT margin by 1% and decrease

the capital expenditure growth rate by 2% on the global basis after the transaction accomplished.

AB InBev and SABMiller can share best practices relating to cost management, efficiency

improvements and productivity enhancements across administrative operations of the new company.

Because the two companies have huge overlapping business especially in North America, and Asia, we

expect the new company can realign the administrative costs across the combined group by consolidat ing

the regional headquarters and redundant equipment. Therefore, after the adjustment stated above, we further

modified the cash flow forecast by increasing the EBIT margin by 2% and decreasing the capital

expenditure growth rate by 1% in these two areas.

In unique revenue synergy can be created through the utilization of the combined portfolio of leading

global, national and local brands and by leveraging the talent pool of both companies. Therefore, we project

the revenue growth rate will at least increase by 0.5% on the global basis after the M&A deal accomplishes.

17

Furthermore, one of the most important and evident benefits of this potential M&A transition is to bring

together a largely complementary geographic footprint with access to high-growth regions like Africa, Asia

& South America. Builds on SABMiller’s heritage in this area, the combined company can realize

considerable growth in these emerging market. Therefore, in addition to the 0.5% increase on global basis,

we further improve the revenue growth by 0.5% in those states.

After the several modifications above, we can easily recalculate the firm value using the discount cash

flow model. Compared to the estimated firm value after self-improvement, by adding both cost reduction

and revenue enhancement synergy, estimated EV of SABMiller can be increased by US$21,961M to

US$ 108.42 Bn, with the equity value and share price increase to US$96.84Bn and US$57.79, respective ly.

Triangulate SAB Miller’s Fair Value

Above figure summarizes the results of the three valuation methods. Obviously, the precedent transaction

analysis provides us with the most conservative valuation of US$97.8bn and the highest valuation comes from

the DCF analysis about108.4bn. Triangulate between these results, we find the reasonable valuation agreed

by all methods should fall between US$95bn and US$105bn, with the share price ranges from US$49.78 and

US$55.75 correspondingly.

18

V. HURDLES, RISKS & ACTION PLAN Major Challenges and Potential Mitigation

Antitrust Scrutiny

As the world’s two largest brewers, two companies together will take almost a third of the world's beer

market share. Therefore, to make the deal go through smoothly, AB-InBev will face antitrust scrutiny around

the world and the deal could take up to 1 year to close. AB-InBev will have to navigate scrutiny and

jurisdiction of US and China, where both the two companies have a major presence. In addition, the combined

company may also have to make some small scale disposals in other markets such as Peru, Ecuador, Argentina,

UK, Netherlands and Italy.

In the US, a combined group can bring arch rivals Budweiser and Miller under the same roof and take

78% of the market share. Thus, in order to proactively address regulatory considerations, divestments are

inevitable. We would assume that the 58% SABMiller stake in MillerCoors in the US would have to be sold

to its joint venture partner, Molson Coors. The combined company might need to make a similar concession

to regulators in China, where SABMiller holds a 49 percent stake in a joint venture that owns China Resource

Snow, China’s best-selling beer brand (23% market share). We would expect that ABI/SABM would also

choose to dispose the SABMiller stake in China Resources Snow to address regulatory requirement.

Delays in South Africa

AB InBev is well-known for its cost cutting strategies, which alarmed labor union who was worry that

AB InBev might think of cutting jobs as an attempt to reduce costs. Since South Africa has an unemployment

rate of 25%, the government has a track record of delaying deals while imposing strict conditions to prevent

job losses. In addition, the government may block the deal if it leads to tax base erosion.

Potential Conflict of Interest

Last but not least, conflict of interest may rise from the two companies’ partners. SABMiller is an

important bottler for Coca-Cola in Africa. This would conflict with AB InBev’s partnership with PepsiCo as

a bottler for the soft drink company in Latin America.

Risks and Concerns Credit Risk

In order to facilitate the M&A process, AB InBev will have to pull all possible levers to create value from

the acquisition. Due to the large scale of this takeover deal, it is inevitable for our company to raise a

considerable amount of debt. Based on our valuation, the issuance of bond might bring AB InBev’s net debt

to four and a half times greater than its EBITDA. This will greatly increase the company’s leverage and cause

surging concern of bondholders.

19

Risk of Overpay

It's well-known that about 70% to 90% of all M&A deals don't meet their objectives. Given its operating

metrics are already a lot above than industry averages, implying the difficulty to further improve the business.

Therefore, we may fail to achieve the expected synergy and improvements.

Action Plan The action plan is separated into short-term and long-term. The 10-week action plan includes approaching

the SABMiller board of directors, conducting due diligence, and negotiating the deal price. We forecast the

wait for regulatory clearance to be approximately 6 months. The long-term action plan portrays activit ies

upon receiving regulatory clearance, including consolidating ownership of AB InBev and SABMiller through

the establishment of Newco, financing the deal with a combination of debt and equity, effective post-merger

integration, and specific post-merger business actions. The cumulative action plan time frame is 40 weeks.

Approach SABMiller Board of Directors

This stage is expected to take 3 weeks. Initial contact will be made, followed by signing of confidentia lity

agreement and distribution of the confidential information memorandum. Management presentation will then

be made, highlighting the opportunity for SABMiller. The approach stage will conclude with an exclusivity

period for transaction negotiation as well as a definitive agreement.

Due Diligence

In conducting due diligence, emphasis will be put on the analysis of SABMiller’s business and operations,

evaluation of its financial health, legal review of relationships, as well as assessment of risks and opportunit ies.

555

422

415

1

24

3

4

3

0 5 10 15 20 25 30 35 40 45

Large scale marketing campaignUtilization of African distribution channels

Localized R&D

Effective communicationCultural integration & staff retention

Organization structure & executive selectionDesignated integration manager

Integration planning

NewCo Establishment

Regulatory Clearance

Price negotiation

Due diligence

Approach

Weeks

Action Plan

20

This thorough dig-down enables us to answer key questions including “Is the beer industry attractive?”, “Are

the competitive dynamics attractive?”, and “Are SABMiller’s internal capabilities strong?” The business and

financial analysis have been covered in the previous sections of this report. Legal review is closely tied to the

revelation of risks in this specific deal, as anti-trust regulations triggered by some of SABMiller’s holdings

present major challenges to the completion of the transaction, a preliminary review can be found in the

Hurdles and Risks part of this report. Accumulation and analysis of related information are required to derive

implications of those relationships, which will then enable effective action to be taken, such as divesting

SABMiller’s interests in some of those holdings. The due diligence process is expected to take 4 weeks, after

which a detailed risk mitigation plan should be laid out to cope with the major risks and hurdles identified.

Price Negotiation

Based on self-improvements and synergies in addition to its current operations, SABMiller is valued at

US$108.4 Bn, which we set as the walk-away price, considering synergies are difficult to achieve. As

SABMiller is currently trading at US$87.96 Bn, we price the opening offer at US$90 Bn. Our target price is

US$99.6 Bn, derived from SABMiller’s status quo, assuming 90% of their self-improvements and 60% of

combined synergy can be achieved.

Negotiation is expected to take 4 weeks, upon completion of due diligence. In attempts to negotiate for a

lower price, we can leverage the fact that given SABMiller’s size, AB InBev is one of the few, if not the only

one, with the capacity to complete a deal of this scale. With little competitors, we can effectively avoid a

bidding war. Moreover, a choice is given to SABMiller’s current shareholders in terms of payment method,

in which the Partial Share Alternative allows them to choose either cash or shares. This flexibility of payment

method should also help lower the price. Finally, upon completion of the transaction, we intend to retain a

large proportion of SABMiller’s current management team, and introduce employee stock options to

incentivize key talents. These attempts to ensure a smooth transition of management and operations also call

for a lower deal price.

Deal Structure

Valuation of SABMiller’s share equity at US$108.4 Bn consists of cash and shares. Considering the scale

of the transaction, debt is required to finance the cash portion of the deal, in addition to utilization of AB

InBev’s internal financial resources. The recommended deal structure consists of 5% cash, 35% shares, and

60% debt.

With the current net debt to EBITDA ratio of 2.5 times, AB InBev has sufficient debt capacity, be it bank

loans or bond issuances, to finance the deal. Bank loans are recommended since they can generally be

borrowed at lower rates than corporate bonds. Net proceeds from the sale of SABMiller’s interests in

MillerCoors and the global Miller brand will be used to pay down loans. Considering the short-term nature

of bank loans as well as the interest environment, the loan facilities will later be refinanced through bond

issuances. Despite the increased interest rates from near-zero level, the continuingly low level depicts a

compelling situation for utilization of debt, which also brings interest tax shield benefits.

21

Newco

After receiving regulatory clearance, ownership consolidation of the two companies is expected to take

1 week. SABMiller will first form a new company, Newco, which will acquire the shares of SABMiller. In

exchange, Newco shares will be distributed to SABMiller shareholders. Next, AB InBev will acquire all

Newco shares held by former SABMiller shareholders. Upon completion of the acquisition of shares, AB

InBev will merge into Newco, so Newco will be the new holding company for the combined group.

Post-Merger Integration

Post-merger integration is key to effectively realizing the synergies in areas of procurement and

engineering, brewery and distribution efficiencies, best practice sharing, and corporate headquarters or

overlapping regional headquarters. It is crucial for the planning of integration to start early, while the key to

successful implementation is to move fast. Major aspects to address are organization structure and executive

selection, cultural integration and staff retention, and communication mechanisms.

In managing the above aspects, the role of a designated integration manager is essential to successful

post-merger integration. Considering the size of AB InBev and SABMiller, integration will not be an easy

task. An integration manager is thus necessary to act as a consultant to former SABMiller employees, facilitate

the former SABMiller management team, and be held accountable for achievement of the integration plan.

The integration manager should remain effective for the entire 4 weeks of integration.

The first aspect to address is organization structure and executive selection. Changes are expected to

come into effect within 2 weeks to minimize turbulence. Having a local board in South Africa would be

critical to the future success of the combined company, as being able to break into the African market is a

major rationale for the deal. The regional headquarters of the combined company for the African continent

should be maintained in Johannesburg, since geographic proximity to the proposed Johannesburg Stock

Exchange will likely benefit the company’s capital markets performance. As for executive selection, AB

InBev should retain a large proportion of SABMiller’s current management team, especially in the African

regions, due to their familiarity with local operations and consumption habits.

The second aspect to address is cultural integration and staff retention. Due to the largely complementary

geographic footprints of AB InBev and SABMiller, the corporate cultures should be comprehensive ly

integrated rather than maintained separately. As a cross-border transaction, particular attention should be paid

to the cultural differences between the two companies, including practices of business conduct, behavioura l

norms, and leadership styles. However, provided the global nature of both AB InBev and SABMiller, it should

not be a difficult task for people from both companies to adopt a common set of beliefs and practices.

Regardless of whether the two cultures can successfully integrate, staff retention poses a major concern as

key employees may be lost during times of change and uncertainty. Thus, employee stock option plans should

be offered to prevent key personnel from walking away.

The final aspect to address is effective communication between the combined companies, which should

be ongoing throughout the 4-week integration period. Initially, broad level corporate changes should be

22

communicated throughout the organization in a timely manner to reduce uncertainties to employees. In the

months following the completion of the deal, more frequent regional meetings should be held to effective ly

convey information between the two companies in non-overlapping operational regions, while departmental

meetings should be held in overlapping areas.

Business Actions

Due to market saturation, slow growth has been characterizing the North American beer market for a

number of years, while the African market is experiencing rapid growth. According to the BCG matrix, the

North American market is a cash cow while the African market is a star, making it in the company’s best

interest to deploy cash from the North American operations to support further development in the African

market. Specifically, we propose the establishment of a new research and development lab in South Africa,

utilization of SABMiller’s African distribution channels, and launch of large-scale marketing campaigns in

Africa. These business actions will be implemented upon completion of the ownership consolidation.

The first business action we propose to the combined entity is propelling localized research and

development in Africa. SABMiller’s R&D has mainly focused on improving the sustainability of the brewing

process, while AB InBev’s innovation labs have introduced tasting tours in addition to their product line

innovation activities [8]. To capture the African market and make appearance of the combined company, AB

InBev and SABMiller should thus establish a new research and development lab in South Africa, which will

allow better product innovation based on local tastes and sustainability measures based on the local

environment.

With the innovative products that R&D brings, we have the building blocks to effectively capture the

African market. The next step is to utilize SABMiller’s African distribution channels for product placement.

This is essential to not only selling the new products, but more importantly, allowing the core AB InBev

product lines to break into the African market. In addition, a large-scale marketing campaign is recommended

to fully publicize the newly entered products in increasing local consumers’ tendency to make purchases.

With the product, place, and promotion in place from the proposed business actions, we will be able to

effectively market the products.

23

VI. CONCLUSIONS AND RECOMMENDATION

Considering the fact that the beer manufacturing industry is characterized by intense rivalry as well as

increasing threat from new entrants and substitutes, it is increasingly pressing for AB InBev, a leading global

beer manufacturer to maintain its current competitive position.

Five strategic alternatives have been crafted to propel AB InBev’s growth: organic growth, acquisit ion

of Diageo’s brewing business, investment in Beijing Yanjing brewery, joint venture with FEMSA, and merger

with SABMiller. Due to the unparalleled portfolio, complementary geographic footprint, and massive

synergies to be created, SABMiller presents itself as the most attractive alternative of all. The merger is thus

recommended.

In valuing SABMiller, discounted cash flow analysis gives an enterprise value of US$108.4 Bn while

the valuation range falls within US$99.1 Bn to US$122.8 Bn with sensitivity analysis. Comparable company

analysis gives a range of US$93.3 Bn to US$106 Bn, and precedent transactions analysis gives a range of

US$102.4 to US$119.5 Bn. With triangulation, the target deal price is US$99.6 Bn, assuming 90% of

SABMiller’s self-improvements and 60% of the synergies are achieved. The recommended opening offer is

US$90 Bn, as SABMiller is currently trading at US$87.96 Bn, with US$108.4 Bn from the DCF analysis as

the recommended walk-away price.

Despite financial soundness of SABMiller as a target, the deal may be subject to some risks and hurdles,

of which regulatory scrutiny is a major concern. An action plan is crafted so that in the short-term, AB InBev

is recommended to approach the board of SABMiller, conduct due diligence that will effectively reveal and

assess all barriers, and negotiate an appealing price. In the long-term, upon receiving regulatory clearance,

thus clearing a major hurdle, the action plan gives direction in structuring the deal with largely debt, steps to

ownership consolidation, strategy for effective post-merger integration, and specific business actions to

cultivate a stronger presence in Africa.

The Success of this deal will enable AB InBev to become the number one player in all markets , as a

result of more efficient practice, creation of a portfolio of the most valuable brands, discover new growth

through complementary geographic footprints, and enhanced utilization of excess capital.

24

APPENDIX

Appendix A: Porter’s Five Analysis on Global Beer Manufacturing Industry

Factor & Rating Explanation

Threat of New Entrants

(Moderate to High)

The threat of new entrant to the industry has been growing. Such situation was a result of the combination of consumer shift tastes to craft beers and

innovations in the industry reduces the capital investment required to establish a beer brewer.

Buyers’ Power

(Weak to Moderate)

On a global basis, independent grocery stores are the number one channel, representing about 50% of industry revenue. Other channels includes

hospitality sector and supermarkets. Overall, the buyers’ power is weak to moderate.

Suppliers’ Power

(Weak to Moderate)

The major inputs for manufacturing beers are raw materials like

aluminum and wheat. These commodities providers have relative low bargaining power over beer manufactures.

Threat of Substitutes

(High)

The primary substitutes of beer are beverages such as wine and spirits. Consumer taste are always changing, culture background and regulat ion

can also make consumers to shift to other substitutes. Rivalry

(High)

In addition to sluggish growth expectation for the industry, there is also high concentration of market shares by major players, with top three players in the industry control about 68% global market shares in 2015

based on IBISWorld Revenue industry revenue estimation6. However, the basis of competition is primarily on brands and marketing rather than

price.

3.5

2.5

2.5

4

4

Threat of New Entrants

Buyers’ Power

Suppliers’ PowerThreat of Substitutes

Rivalry

Porter's 5 Analysis Visualization

Note: the higher the rating, the more infavorable of the industry

25

Appendix B: Comparable Analysis Table 1: Comparable Companies

Comparable Companies

(USD in Bns, except per share data)

Enterprise Value/ Total Price/

Equity Enterprise 2015 2016E 2015 2016E 2015 2016E Debt/ 2015 2015

Company Ticker Value Value Sales Sales EBITDA EBITDA EBIT EBIT EBITDA EPS Volume

SABMiller plc SAM LN 77.2 87.9 3.9x 4.9x 15.3x 19.0x 20.2x 24.1x 2.2x 25.5x 162.6

Tier 1: Global Brewer

Anheuser-Busch InBev SA/NV ABI BB 199.9 246.0 5.6x 5.3x 14.5x 13.7x 17.7x 16.8x 2.9x 24.6x 437.5

Diageo DGE LN 79.7 96.7 5.7x 5.5x 19.1x 17.0x 21.8x 19.2x 3.1x 19.4x 359.8

Heineken N.V. HEIA NA 48.8 62.9 2.8x 1.9x 12.1x 7.8x 18.4x 10.9x 2.7x 23.8x 1598.7

Asahi Group holdings Ltd. 2502 JT 14.5 17.8 1.2x 1.1x 10.4x 9.8x 15.9x 14.5x 2.1x 22.9x -

Carlsberg A/S CARLB DC 13.6 18.9 1.9x 2.0x 31.0x 10.4x - 15.7x 8.8x - 103.2

Mean 71.3 88.5 3.4x 3.2x 17.4x 11.8x 18.5x 15.4x 3.9x 22.7x 624.8x

Median 48.8 62.9 2.8x 2.0x 14.5x 10.4x 18.1x 15.7x 2.9x 23.3x 398.6x

Tier 2: Market Concentrated Brewer

Kirin Holdings Company Ltd. 2503 JT 12.5 20.5 1.1x 1.1x 10.1x 9.3x 19.9x 16.5x 3.1x .0x -

Molson Coors TAP US 18.2 20.7 5.8x 6.5x 24.8x 12.5x 39.8x 35.1x 3.5x 25.0x -

The Boston Beer Company, Inc. SAM US 2.6 2.5 2.6x 2.2x 12.7x 10.8x 16.2x 13.7x .0x 28.2x -

Mean 11.1 14.6 3.2x 3.3x 15.9x 10.9x 25.3x 21.8x 2.2x 17.7x

Median 12.5 20.5 2.6x 2.2x 12.7x 10.8x 19.9x 16.5x 3.1x 25.0x

Tier 3: Global Beverage Manufacture

The Coca-Cola Company KO US 185.8 210.3 4.7x 5.2x 19.7x 15.3x 24.1x 18.4x 4.1x 21.0x -

Nestle SA NSRGY US 230.0 247.1 2.6x 2.7x 15.1x 12.8x 18.9x 15.8x 3.1x 25.7x -

PepsiCo Inc. PEP US 145.6 167.0 2.7x 2.6x 15.5x 17.7x 20.0x 21.0x 1.3x 21.7x -

Mean 187.1 208.1 3.4x 3.5x 16.8x 15.3x 21.0x 18.4x 2.9x 22.8x

Median 185.8 210.3 2.7x 2.7x 15.5x 15.3x 20.0x 18.4x 3.1x 21.7x

Overall

Mean 86.5 101.0 3.3x 3.3x 16.8x 12.5x 21.3x 18.0x 3.2x 21.2x 624.8x

Median 48.8 62.9 2.7x 2.6x 15.1x 12.5x 19.4x 16.5x 3.1x 23.3x 398.6x

Source: Bloomberg

26

Table 2: Beer Production Volume

Company Volume

SABMiller plc 324 Annual report page 39

Anheuser-Busch InBev SA/NV 457 Annual Report page 4

Diageo 222 Annual reports page 48 and IFC2

Heineken N.V. 30.5 Annual report page 2

Asahi Group holdings Ltd. -

Carlsberg A/S 131.8 Annual report page 11

Volume in Mns of hectoliters

Figure 1: Major Players in Wine Segments

Figure 2: Major Players in Beverage Segments

Figure 3: Beer Consumption by Region

27

Figure 4: World’s Fastest Growing Beer Markets

Table 3: Revenue by Region

Geographic Region SAB Miller AB InBev Diageo Heineken Asahi Carlsberg Kirin

Latin America 35% 49% 10% 8%

Africa 29% 13% 15%

Asia Pacific 12% 8% 21% 12% 100% 28% 84%

Europe 11% 6% 24% 48% 72% 7%

North America 13% 37% 32% 24%

100% 100% 100% 100% 100% 100% 100%

Source: Bloomberg and Company Annual Report

* Carlsberg: Europe figure includes both Western Europe (53%) and Eastern Europe (19%).

Figure 5: Revenue by Region

0%20%40%60%80%

100%Latin America

Africa

Asia PacificEurope

Northe America

Revenue by Geographic Region 2015

SAB Miller AB InBev Diageo Heineken Asahi Carlsberg Kirin

28

Table 4: Profitability Benchmarking

Company Total Revenue

Growth 2015

EBITDA

Growth 2015

EBITDA

Margin 2015

EBIT Margin

2015

SABMiller -1.02% 1.67% 33.96% 26.52%

AB InBev -7.35% -7.42% 38.85% 31.89%

Diageo 5.41% 3.92% 29.68% 25.99%

Heineken 6.51% 10.72% 22.76% 14.99%

Asahi 4.03% 2.36% 11.11% 7.27%

Carlsberg 1.31% -6.45% 6.29% -0.87%

Kirin 0.05% -6.26% 11.23% 5.68%

Molson Coors -13.96% -19.56% 23.44% 14.63%

The Boston Beer 6.30% 9.55% 20.74% 16.27%

Average 0.14% -1.27% 22.01% 15.82%

Figure 5: Profitability Benchmarking

-15.00% -10.00% -5.00% 0.00% 5.00% 10.00%

SABMiller

AB InBev

Diageo

Heineken

Asahi

Carlsberg

Kirin

Molson Coors

The Boston Beer

Average

Total Revenue Growth 2015

-30.00% -20.00% -10.00% 0.00% 10.00% 20.00%

SABMiller

AB InBev

Diageo

Heineken

Asahi

Carlsberg

Kirin

Molson Coors

The Boston Beer

Average

EBITDA Growth 2015

0.00% 10.00%20.00%30.00%40.00%50.00%

SABMiller

AB InBev

Diageo

Heineken

Asahi

Carlsberg

Kirin

Molson Coors

The Boston Beer

Average

EBITDA Margin 2015

-10.00% 0.00% 10.00% 20.00% 30.00% 40.00%

SABMiller

AB InBev

Diageo

Heineken

Asahi

Carlsberg

Kirin

Molson Coors

The Boston Beer

Average

EBIT Margin 2015

29

Table 5: Relative Valuation

Multiple Enterprise Equity Diluted Price

(USD in billions, except per share data) Value Value Shares Out. per Share Column1 Column2

Column1 2015E 2016E Average P/E 94.1 80.4 1.676 48.01

Price/Earnings Net income 3.3 3.7 EV/Sales 80.0 66.4 1.676 39.62

Assumed Multiple 22.7x 23.5x 23.1 EV/EBITDA 93.3 79.7 1.676 47.57

Equity value 74.1 86.8 80.4 EV/EBIT 94.8 81.2 1.676 48.44 EV With Price

P/Volume 126.4 112.7 1.676 67.28 25% Control Per

EV/Sales Net revenue 16.5 16.7 Column1 Column2 Column3 Column4 Column5 Premium Share

Assumed Multiple 4.8x 4.8x 4.8 High 126.4 112.7 67.3 157.9 94.3

Enterprise value 80.2 79.9 Low 80.0 66.4 39.6 100.0 59.7

Net Debt 12.5 14.7 13.6 Average 97.7 84.1 50.2 122.1 72.9

Equity value 67.6 65.2 66.4 Trading 114.0 100.4 59.9

EV/EBITDA EBITDA 5.7 5.9 5.8

Assumed Multiple 18.3x 14.0x 16.1

Enterprise value 104.2 82.4

Net Debt 12.5 14.7

Equity value 91.7 67.7 79.7

EV/EBIT EBIT 4.5 4.5

Assumed Multiple 22.8x 19.5x 21.1

Enterprise value 101.6 88.0

Net Debt 12.5 14.7

Equity value 89.0 73.3 81.2

Price/Volume Volume 324 366

Assumed Multiple 300.2x 350.2x 325.2

Equity value 97.3 128.2 112.7

SABMiller Relative Valuation

30

Appendix C: Precedent Transaction Analysis

Table 1: Precedent Transactions

Acquirer Target Date Target EV/EBITDA Target P/E Price

USUS$ bn

ABI OB Korea Jan-14 11.0x 13.6x 5.8

Heineken Unibrew Jul-13 9.0x 0.5

Carlsberg Chongqing Mar-13 16.0x 46.0x 0.5

Heineken APB Nov-12 15.0x 35.1x 3.8

ABI Modelo Jul-12 16.0x 18.0x 15.7

AmBev CND Apr-12 13.0x 2.5

Molson StarBev Apr-12 11.0x 11.0x 3.5

AEFES SAB Oct-11 13.0x 1.9

SAB Fosters Sep-11 13.0x 17.9x 12.6

Kirin Schincariol Aug-11 16.0x 5.6

Heineken APB Nov-12 15.0x 3.8

Heineken FEMSA Jan-10 11.0x 7.4

Source: JPMorgan Europe Equity Research

Table 2: Beverage Industry M&A Activities Overview

Period Deal Count Volume (in Mns) Average Premium

SABMiller 77200.0

2015 Q2 5 442.3 14.94%

2015 Q1 6

2014 Q4 6

2014 Q3 1

2014 Q2 2 17.8

2014 Q1 2 5800.0

2013 Q4 6 499.0

2013 Q3 5 506.1

2013 Q2 2

2013 Q1 6 4498.5 26.43%

2012 Q4 4 986.4 1.82%

2012 Q3 6 7124.3 50.62%

2012 Q2 8 21251.7 32.91%

2012 Q1 6 74.9

2011 Q4 8 1905.2

2011 Q3 9 3661.9

2011 Q2 7 15047.3 11.06%

2011 Q1 8 118.1

31

Source: Bloomberg

Table 3: Precedent Transaction Valuation

SABMiller Relative Valuation (USD in Bns, except per share data)

Column1 2015E

Price/Earnings Net income 3.3

Assumed Multiple 23.0x

Equity value 75.0

Net Debt 12.5

Enterprise value 87.6

EV/EBITDA EBITDA 5.7

Assumed Multiple 19.0x

Enterprise value 108.1

Net Debt 12.5

Equity value 95.6

Table 4: Valuation Results

Enterprise

Value

Equity

Value

Diluted

Shares

Out.

Price per

Share

High 108.1 95.6 1.68 57.0

Low 87.6 75.0 1.68 44.8

Average 97.8 85.3 50.9

32

Appendix D: DCF Analysis

Table 1: Cost of Equity

Table 2: Cost of Debt

Table 3: Cost of Capital

Beta 0.85

Risk-Free Rate 1.96%

Market Risk Premium 7.00%

Cost of Equity 7.91%

Cost of Equity

2011 5.42%

2012 4.18%

2013 4.35%

2014 4.14%

2015 4.25%

Average 4.47%

Cost of Debt

As of March 31,2015 (Amount in millions)

GBp/USD 1.48289

Number of Shares 1,675,670,012

Equity(Market Value) $87,963.13

Debt(Book Value) $12,544.00

Equity+Debt $100,507.13

Tax Rate 25%

WACC 7.34%

WACC

33

Table 4: As-Is Valuation Assumption (1)

Table 5: As-Is Valuation Assumption (2)

Table 6: DCF Analysis of As-Is Valuation

Baseline Assumptions(1) Africa Asia Latin America Europe North America South Africa Corporate

Revenue Growth 1.00% 0.50% 1.00% -0.50% 0.50% 0.00% -2.50%

Incremental Change in Revenue Growth - 0.40% 0.75% 0.25% 0.15% 0.00% 0.50%

EBIT/Revenue 25.00% 19.00% 26.00% 16.00% 8.00% 0.00% 3.00%

Incremental Change in EBIT/Revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Capex Growth 9.00% 3.00% 5.02% -3.48% 5.50% 0.00% 0.00%

Incremental Change in Capex Growth -1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

3/31/2016

Tax 25.00%

WACC 7.34%

NWC/Revenue -17.50%

NWC(exc.debt)/Revenue -3.83%

LT Assets/Revenue 2.50x

Depreciation/LT Assests 3.00%

Adjustments/EBIT 29.61%

Dividend Payout Ratio 44.89%

Minority/Income Before Minority 7.25%

Baseline Assumptions(2)

As-Is Valuation (000's units) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021

EBIT (USD$ MM) 4,894.86 4,972.44 5,158.52 5,343.80 5,525.11 5,700.76

EBIT*(1-T) (USD$ MM) 3,671.14 3,729.33 3,868.89 4,007.85 4,143.84 4,275.57

Depreciation(+) (USD$ MM) 1,387.93 1,387.87 1,410.54 1,432.58 1,454.15 1,475.93

Change in NWC(-) (USD$ MM) 30.10 (70.79) (143.09) (139.05) (132.96) (125.73)

Capex(-） (USD$ MM) 1,652.76 1,733.00 1,811.35 1,886.39 1,956.74 2,021.13

Free Cash Flow (USD$ MM) 3,376.22 3,454.98 3,611.17 3,693.08 3,774.20 3,856.10

Terminal Value (USD$ MM) 91,495.70

FCF+TV (USD$ MM) 3,376.22 3,454.98 3,611.17 3,693.08 3,774.20 95,351.81

Discount Factor (USD$ MM) 0.93 0.87 0.81 0.75 0.70 0.65

Enterprise Value (USD$ MM) $76,829.59

Net Debt (USD$ MM) 11,579.00

Equity Value (USD$ MM) $65,250.59

Equity Value per Share (USD$) $38.94

Projected

DCF Analysis

34

Table 7: Terminal Growth Value of As-Is Valuation

Table 8: Sensitivity Analysis of As-Is Valuation

Table 9: DCF Analysis of Valuation with Improvements

Terminal Growth 3%

Discount Rate 7.34%

Terminal Value 91,495.70

PV of TV $59,814.71

Terminal Value

2.50% 2.75% 3% 3.25% 3.50%

6.84% $78,501 $82,400 $86,807 $91,828 $97,600

7.09% $74,225 $77,660 $81,514 $85,869 $90,832

7.34% $70,391 $73,435 $76,830 $80,639 $84,944

7.59% $66,934 $69,647 $72,656 $76,011 $79,776

7.84% $63,800 $66,231 $68,913 $71,887 $75,203

Terminal Growth

Discount

Factor

Enterprise Value($M)

As-Is Valuation

With Improvements (000's units) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021

EBIT (USD$ MM) 4,899.14 5,089.12 5,403.58 5,729.02 6,061.12 6,396.65

EBIT*(1-T) (USD$ MM) 3,674.36 3,816.84 4,052.69 4,296.77 4,545.84 4,797.49

Depreciation(+) (USD$ MM) 1,388.88 1,390.61 1,416.00 1,440.77 1,464.96 1,489.07

Change in NWC(-) (USD$ MM) 27.11 (76.92) (153.06) (150.14) (144.78) (137.81)

Capex(-) (USD$ MM) 1,652.76 1,733.00 1,811.35 1,886.39 1,956.74 2,021.13

Free Cash Flow (USD$ MM) 3,383.37 3,551.36 3,810.39 4,001.29 4,198.83 4,403.25

Terminal Value (USD$ MM) 104,478.10

FCF+TV (USD$ MM) 3,383.37 3,551.36 3,810.39 4,001.29 4,198.83 108,881.35

Discount Factor (USD$ MM) 0.93 0.87 0.81 0.75 0.70 0.65

Enterprise Value (USD$ MM) $86,455.97

Net Debt (USD$ MM) 11,579.00

Equity Value (USD$ MM) $74,876.97

Equity Value per Share (USD$) $44.68

Projected

DCF Analysis

35

Table 10: Sensitivity Analysis of Valuation with Improvements

Table 11: Capital Expenditure Schedule for DCF Analysis of Valuation with Improvements

Table 12: Net Working Capital Schedule for DCF Analysis of Valuation with Improvements

Table 13: Pro Forma Balance Sheet for DCF Analysis of Valuation with Improvements

*NWC(exc.debt)=CA - CL(exc.current debt)

**Net LT Assets=LT Assets - LT Non-Interest-Bearing Liabilities

2.50% 2.75% 3% 3.25% 3.50%

6.84% $88,351 $92,803 $97,836 $103,569 $110,159

7.09% $83,475 $87,397 $91,798 $96,772 $102,438

7.34% $79,104 $82,580 $86,456 $90,806 $95,722

7.59% $75,163 $78,261 $81,696 $85,528 $89,827

7.84% $71,591 $74,367 $77,429 $80,825 $84,612

Enterprise Value($M) Terminal Growth

Discount

Factor

With Improvements

With Improvements (000's units) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021

Capex

Africa (USD$ MM) 391.00 663.00 720.00 784.80 847.58 906.91 961.33 1009.40 1049.77

Asia (USD$ MM) 88.00 96.00 80.00 82.40 84.87 87.42 90.04 92.74 95.52

Latin America (USD$ MM) 528.00 413.00 429.00 450.54 473.17 496.93 521.89 548.10 575.63

Europe (USD$ MM) 216.00 252.00 253.00 244.19 235.68 227.47 219.55 211.90 204.52

North America (USD$ MM) 0.00 1.00 15.00 15.83 16.70 17.61 18.58 19.60 20.68

South Africa (USD$ MM) 228.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Corporate (USD$ MM) 28.00 60.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00

Total Capex (USD$ MM) 1,479.00 1,485.00 1,572.00 1,652.76 1,733.00 1,811.35 1,886.39 1,956.74 2,021.13

Capital Expenditure Schedule

Projected

With Improvements (000's units) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021

Net Working Capital (USD$ MM) (2820.00) (4615.00) (2973.00) (2945.89) (3022.82) (3175.88) (3326.02) (3470.80) (3608.62)

Change in NWC (USD$ MM) (1,795.00) 1,642.00 27.11 (76.92) (153.06) (150.14) (144.78) (137.81)

Projected

Net Working Capital Schedule

With Improvements (000's units) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019FY 2020FY 2021

Net Working Capital(exc.debt)* (USD$ MM) (351) (96) (1,012) (645) (662) (695) (728) (760) (790)

Net Long-term Assets** (USD$ MM) 46,359 44,625 37,911 42,099 43,198 45,385 47,531 49,600 51,569

Net Assets (USD$ MM) 46,008 44,529 36,899 41,454 42,536 44,690 46,803 48,840 50,780

Debt (USD$ MM) 18,548 17,047 12,544 14,879 13,688 13,391 12,887 12,133 11,102

Equity (USD$ MM) 27,460 27,482 24,355 26,574 28,848 31,299 33,916 36,707 39,678

Net Capital (USD$ MM) 46,008 44,529 36,899 41,454 42,536 44,690 46,803 48,840 50,780

Projected

Pro Forma Condensed Balance Sheet

36

Table 14: Pro Forma Income Statement for DCF Analysis of Valuation with Improvements

With Improvements (000's units) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021

Revenue

Africa (USD$ MM) 2,267.00 6,752.00 6,853.00 6,938.66 7,112.13 7,663.32 8,134.61 8,504.74 8,755.63

Asia (USD$ MM) 3,797.00 3,285.00 3,136.00 3,151.68 3,180.05 3,221.39 3,276.15 3,344.95 3,428.57

Latin America (USD$ MM) 7,821.00 7,812.00 7,812.00 7,890.12 8,028.20 8,228.90 8,496.34 8,836.19 9,255.91

Europe (USD$ MM) 4,292.00 4,319.00 4,186.00 4,165.07 4,154.66 4,154.66 4,165.04 4,185.87 4,217.26

North America (USD$ MM) 141.00 143.00 143.00 143.72 144.65 145.81 147.19 148.81 150.67

South Africa (USD$ MM) 4,895.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Corporate (USD$ MM) (5,828.00) (5,607.00) (5,596.00) (5,456.10) (5,346.98) (5,266.77) (5,214.11) (5,188.04) (5,188.04)

Total Revenue (USD$ MM) 17,385.00 16,704.00 16,534.00 16,833.15 17,272.70 18,147.30 19,005.23 19,832.53 20,620.01

Cost of Sales(exc. Depre.) (USD$ MM) 11,534.00 10,984.00 10,844.00 10,545.13 10,792.98 11,327.71 11,835.44 12,306.45 12,734.29

EBITDA

Africa (USD$ MM) 544.00 1,751.00 1,755.00 2,116.29 2,194.09 2,390.96 2,566.47 2,713.01 2,823.69

Asia (USD$ MM) 923.00 752.00 692.00 857.16 883.95 914.77 949.98 990.00 1,035.32

Latin America (USD$ MM) 2,449.00 2,520.00 2,526.00 2,533.86 2,626.37 2,741.41 2,881.48 3,049.76 3,250.16

Europe (USD$ MM) 878.00 818.00 784.00 898.19 920.87 945.80 973.16 1,003.14 1,035.97

North America (USD$ MM) 7.00 9.00 16.00 15.81 17.14 18.52 19.94 21.43 22.98

South Africa (USD$ MM) 1,224.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Corporate (USD$ MM) (174.00) (130.00) (83.00) (133.29) (162.71) (191.87) (221.24) (251.26) (282.39)

Total EBITDA (USD$ MM) 5,851.00 5,720.00 5,690.00 6,288.02 6,479.72 6,819.58 7,169.79 7,526.07 7,885.72

Depreciation (USD$ MM) 1,458.00 1,281.00 1,231.00 1,388.88 1,390.61 1,416.00 1,440.77 1,464.96 1,489.07

EBIT

Africa (USD$ MM) 439.00 1,478.00 1,471.00 1,734.67 1,820.71 2,007.79 2,180.08 2,330.30 2,451.58

Asia (USD$ MM) 462.00 468.00 438.00 598.82 623.29 650.72 681.44 715.82 754.29

Latin America (USD$ MM) 1,983.00 2,069.00 2,110.00 2,051.43 2,135.50 2,238.26 2,361.98 2,509.48 2,684.22

Europe (USD$ MM) 652.00 576.00 548.00 666.41 689.67 714.60 741.38 770.20 801.28

North America (USD$ MM) 7.00 9.00 14.00 11.50 12.44 13.41 14.42 15.48 16.57

South Africa (USD$ MM) 1,052.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Corporate (USD$ MM) (202.00) (161.00) (122.00) (163.68) (192.49) (221.20) (250.28) (280.15) (311.28)

Total EBIT (USD$ MM) 4,393.00 4,439.00 4,459.00 4,899.14 5,089.12 5,403.58 5,729.02 6,061.12 6,396.65

Net Interest (USD$ MM) 822.00 736.00 629.00 560.40 664.73 611.51 598.25 575.71 542.05

Adjustments(+) (USD$ MM) 1,094.26 1,082.68 959.90 1,450.81 1,507.07 1,600.19 1,696.57 1,794.92 1,894.28

Income Before Tax (USD$ MM) 4,665.26 4,785.68 4,789.90 5,789.56 5,931.45 6,392.27 6,827.34 7,280.32 7,748.88

Tax (USD$ MM) 1,192.00 1,173.00 1,273.00 1,447.39 1,482.86 1,598.07 1,706.84 1,820.08 1,937.22

Net Income Before Minority (USD$ MM) 3,473.26 3,612.68 3,516.90 4,342.17 4,448.59 4,794.20 5,120.51 5,460.24 5,811.66

Minority 236.07 266.25 255.09 314.81 322.52 347.58 371.24 395.87 421.35

Net Income (USD$ MM) 3,237.19 3,346.43 3,261.80 4,027.36 4,126.07 4,446.62 4,749.27 5,064.37 5,390.31

Projected

Pro Forma Income Statement

37

Table 15 Summary of Valuation

Valuation Approach Scenario EV Share

Price

Comparable Companies Analysis

Base Case US$97.7bn US$50.20

With Control Premium US$122.1bn US$72.90

Precedent Transaction Analysis With Control Premium US$97.8bn US$50.90

DCF Analysis

As-Is Valuation US$76.8bn US$38.90

With improvement US$86.5bn US$44.70

After synergy US$108.4bn US$57.80

38

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