2. 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
3. 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.
4. 3
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 IndustryDiagnosis
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
$150
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
INDUSTRYREVENUE($BN)
+0.8%
Data Source: IBISWorld
Global Beer Manufacturing Industry - Revenue
5. 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-termSuccess 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
Distributi
on
Network
Financial
Flexibility
Economie
s of Scale
Brands
and
Product
Portfolios
6. 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 consolidation
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.
7. 6
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 dimensions
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 InBevSWOT 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 ofgrowth
potential in N.A.
Opportunity:
- Emerging growth
market
Threat:
-Consumer taste
shift
8. 7
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 SWOTanalysis 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 America
14%
Latin America
16%
Europe
27%
MiddleEast & Africa
Asia Pacific
Australasia
1%
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
9. 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 influential
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.
10. 9
Alternative #3 Invest in Beijing Yanjing Brewery - Strengthen Presence andPower 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 GlobalNumber 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
11. 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
12. 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.
13. 12
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
14. 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 respectively
(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 relatively
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 – PrecedentTransaction 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 manufacturing
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
15. 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 Self
Improvements
(DCF)
With Unique
Synergy (DCF)
Maximium
US$88.0 B
US$76.8 B
US$9.6 B
US$22.0 B
Future
Oppo.
DCF Valuation Summary
16. 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 incremental
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 Bnin 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.
17. 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 consolidating
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.
18. 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, respectively.
Triangulate SAB Miller’sFair 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.
19. 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.
Risksand 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.
20. 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 activities
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 confidentiality
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 opportunities.
5
5
5
4
2
2
4
15
1
24
3
4
3
0 5 10 15 20 25 30 35 40 45
Large scale marketing campaign
Utilization of African distribution channels
Localized R&D
Effective communication
Cultural integration & staff retention
Organization structure & executive selection
Designated integration manager
Integration planning
NewCo Establishment
Regulatory Clearance
Price negotiation
Due diligence
Approach
Weeks
Action Plan
21. 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.
22. 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 comprehensively
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, behavioural
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
23. 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 effectively
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.
24. 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, acquisition
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.
25. 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 regulation
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 infavorableof the industry
26. 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
27. 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
AsahiGroup 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
28. 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
29. 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
30. 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
36. 35
Table 10: Sensitivity Analysis of Valuation with Improvements
Table 11: Capital Expenditure Schedule for DCFAnalysis of Valuation with Improvements
Table 12: Net Working Capital Schedule for DCFAnalysis 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 LTAssets=LTAssets - 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
37. 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
38. 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
39. 38
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