Post-Merger Value Creation: the Case of AB Inbev and SAB Miller

Post-merger value creation: the case of AB InBev and SAB Miller

Master Thesis

MSc. Finance and Strategic Management

Supervisor: Leonhardt Pihl

Author: Razvan Mititelu

CPR:

Number of characters: 121,264

Number of pages: 67

Date of submission: 15.05.2017

Executive Summary

The main objective of the following paper is to determine whether the merger of AB InBev with SAB Miller will create value.

Historically the companies represented the largest and the second largest beer producer in the world. They merged during late 2016 when 3G Capital, the main shareholder of AB InBev and the team behind its management team acquired SAB Miller through a friendly takeover. 3G Capital is a private equity company, known for its big-ticket acquisitions and for their way of slashing costs.

The papers starts with presenting in a descriptive matter the three parties involved. The following section starts the analytical side of the thesis through the restatement of the financial statements for the two companies in order to separate the operating activities from the financing ones. The forecast of the two companies is performed through a pro forma method. A financial model will be designed rather than static financial statements, in order to be able to apply different adjustments on some of the Income Statement and Balance Sheet items. The impact of these adjustments will be able to be measured only through a financial model.

The next section presents both qualitatively and quantitatively how 3G Capital usually applies their integration plan after the merger in order to obtain synergies. To forecast which synergies will be obtained and what will be their value, we will be looking at two comparisons: firstly against previous 3G deals including AB InBev and Kraft Heinz and secondly against peer companies in the industry such as Heineken and Carlsberg. The main synergies will be in the areas of Cost of Goods Sold, Selling, General and Administrative expenses and Accounts Payable Management. The value of these synergies will be taken then into account in the financial model in order to obtain the consolidated financial statements of the combined company.

Based on the financial statements of the merged company we will assess and measure the value creation. Firstly, through Return on Invested Capital and and Economic Value Added. Both measure will indicate that value is created, however not at the full potential. Cost synergies have a limited effect on the value creation and thus revenue growth synergies have to be introduced in order to maximize the potential. Revenue growth has a tremendous impact on value creation and will represent the success factor behind this merger. In the end section, we look at the value creation from a cash perspective and determine that the value of the combined company exceeds the market value of the two companies before the merger plus the acquisition premium. Thus, the thesis concludes that 3G Capital will be able to create value through the merger of AB InBev with SAB Miller.

Contents

...... 1 Executive Summary ...... 2 1. Introduction ...... 7 2. Research Questions ...... 7 3. Methodology ...... 8 3.2. Delimitation ...... 9 4. Companies’ Presentation ...... 9 4.1. AB InBev ...... 9 4.2. SAB Miller ...... 12 4.3. 3G Capital ...... 15 5. Building the Financial Model ...... 17 5.1. Reformulating the Financial Statements ...... 17 5.1.1. Analytical Income Statement ...... 17 5.1.2. Analytical Balance Sheet ...... 18 5.2. Pro forma Financial Statements ...... 19 6. The 3G Model ...... 22 6.1. Improving Cost of Goods Sold ...... 23 6.1.1. Cost of Goods Sold in previous 3G deals ...... 23 6.1.2. Cost of Goods Sold in the Industry ...... 25 6.2. Reducing Selling, General & Administrative Expenses ...... 31 6.2.1. Selling, General & Administrative expenses in previous 3G deals ...... 32 6.2.2. Selling, General & Administrative expenses in the Industry ...... 33 6.3. Accounts Payable Management ...... 38 6.3.1. Accounts Payable Management in previous 3G deals ...... 38 6.3.2. Accounts Payable Management - Industry Benchmarking ...... 40 6.4. Fixed Assets Optimization ...... 46 6.4.1. Asset Optimization in previous 3G deals ...... 46 6.4.2. Fixed Asset Optimization in the Industry ...... 46 6.5. Capital Structure ...... 47

7. Consolidated Financial Statements for the merged company ...... 50 8. Drivers and Measures of Value Creation ...... 53 8.1. Return on Invested Capital ...... 54 8.1.1. Return on Invested Capital in the Industry ...... 54 8.1.2. Return on Invested Capital Forecast ...... 56 8.2. Economic Value Added ...... 60 8.3. Revenue Growth ...... 62 8.4. Cash Value ...... 64 9. Discussion and Conclusion...... 68 10. Bibliography ...... 70 Appendix…………………………………………………………………………………………………………………………………………………….72

Exhibit 1: AB InBev company history. Source: AB InBev Annual Reports ...... 11 Exhibit 2: Forecast drivers for the Income Statement. Source: Koller et al. (2010) ...... 19 Exhibit 3: AB InBev Income Statement forecast drivers. Source: Bloomberg, Author's elaboration ...... 20 Exhibit 4: Forecast drivers for the Balance Sheet. Source: Koller et al. (2010) ...... 20 Exhibit 5: AB InBev Balance Sheet forecast drivers. Source: Bloomberg, Author's elaboration ...... 21 Exhibit 6: Kraft Heinz CoGS. Source: Kraft Heinz 10-K reports ...... 24 Exhibit 7: Brewing industry cost structure. Source: IBIS World report (2011) ...... 26 Exhibit 8: Brewing industry CoGS % Revenue. Source: Bloomberg ...... 27 Exhibit 9: AB InBev volumes sold. Source: AB InBev Annual Reports ...... 28 Exhibit 10: AB InBev and SAB Miller suppliers. Source: Bloomberg supplier analysis ...... 29 Exhibit 11: SAB Miller Cost of Goods Sold estimates. Source: Bloomberg, Author's elaboration ...... 30 Exhibit 12: AB InBev & SAB Miller Cost of Goods Sold. Source: Author's elaboration ...... 31 Exhibit 13: Kraft Heinz SG&A 2009-20016. Source: Kraft Heinz 10-K reports ...... 32 Exhibit 14: Industry SG&A % Revenue. Source: Bloomberg ...... 33 Exhibit 15: Sales by region, 2015. Source: AB InBev and SAB Miller Annual Reports ...... 34 Exhibit 16: SAB Miller offices. Source: SAB Miller Annual Reports...... 35 Exhibit 17: AB InBev offices. Source: AB InBev Annual Reports ...... 35 Exhibit 18: AB InBev+SAB Miller offices. Source: Arthur (2016) ...... 36 Exhibit 19: AB InBev SG&A Forecast. Sources: AB InBev Annual Report, Author's elaboration ...... 37 Exhibit 20: SAB Miller SG&A estimates. Sources: Bloomberg, Author's elaboration ...... 37 Exhibit 21: AB InBev & SAB Miller SG&A Expenses. Source: Author's elaboration ...... 37 Exhibit 22: Kraft Heinz: Days Payable Outstanding. Source: Kraft Heinz 10-K reports ...... 38 Exhibit 23: Kraft Heinz Cash Conversion Cycle. Source: Bloomberg, Kraft Heinz 10-K reports ...... 39 Exhibit 24: Kraft Heinz Net Working Capital. Source: Bloomberg, Kraft Heinz 10-K reports ...... 40 Exhibit 25: Industry Days Payable Outstanding. Source: Bloomberg ...... 41 Exhibit 26: Industry Cash Conversion Cycle. Source: Bloomberg and Annual Reports ...... 42 Exhibit 27: AB InBev Cash Conversion Cycle. Source: Bloomberg, AB InBev Annual Reports ...... 43 Exhibit 28: SAB Miller Cash Conversion Cycle. Source: Bloomberg, SAB Miller Annual Reports ...... 43 Exhibit 29: SAB Miller Adjusted Accounts Payable. Source: Author's elaboration ...... 44 Exhibit 30: SAB Miller Adjusted Net Working Capital. Source: Author's elaboration ...... 45 Exhibit 31: SAB Miller Cash Flow from Operating Activities. Source: Author's elaboration ...... 45 Exhibit 32: Kraft Heinz PPE. Source: Kraft Heinz 10-K reports ...... 46 Exhibit 33: Industry Revenue/PPE. Source: Bloomberg ...... 47 Exhibit 34: Kraft Heinz Debt. Source: Bloomberg ...... 47 Exhibit 35: AB InBev acquired debt in relation to the merger. Source: AB InBev 2016 Annual Report ..... 50 Exhibit 36: Value drivers. Source: Koller et al. (2010) ...... 53 Exhibit 37: Du Pont model. Source: Plenborg and Petersen (2012) ...... 54 Exhibit 38: Industry Return on Invested Capital. Source: Bloomberg. Author’s elaboration ...... 54 Exhibit 39: Breweries Profit Margin. Source: Bloomberg, Author’s elaboration ...... 55 Exhibit 40: Breweries Turnover Rate of Invested Capital. Source: Bloomberg, Author’s elaboration ...... 55 Exhibit 41: ROIC 2017-2020. Source: Author's elaboration ...... 56 Exhibit 42: Profit Margin 2017-2020. Source: Author's elaboration ...... 57 Exhibit 43: Turnover Rate of Invested Capital 2017-2020. Source: Author's elaboration ...... 58

Exhibit 44: Comparison of Days on hand of Invested Capital for AB&SAB and weighted average (AB+SAB). Source: Author's elaboration ...... 59 Exhibit 45: Economic Value Added for AB&SAB in 2020. Source: Appendix - Return on Invested Capital 2017- 2020...... 61 Exhibit 46: Economic Value Added for AB&SAB in 2020. Source: Appendix - Return on Invested Capital 2017- 2020...... 61 Exhibit 47: Economic Value Added calculation. Source: Author’s elaboration...... 61 Exhibit 48: Achieving EVA = 8,992, at various revenue growth rates. Source: Author's elaboration...... 63 Exhibit 49: Sensitivity analysis of Revenue Growth Rate and its impact on EVA. Source: Author's elaboration...... 63 Exhibit 50: Accumulated EVA for various revenue growth rates. Source: Author's elaboration ...... 64 Exhibit 51: Breakeven Year sensitivity to Revenue Growth Rate (vertical) and WACC (horizontal). Source: Author's elaboration ...... 66 Exhibit 52: Enterprise Value calculation. Source: Author's elaboration...... 67

1. Introduction

Through the merger of AB InBev and SAB Miller, historically the largest and the second largest beer company in the world, a mammoth company will be formed. According to some sources the merged company will dominate the global supply of beer with a market share of approximately 30%.

The question that is left is whether a company this size will be able to bring any value or quite the opposite destroy value due to its size. The engine behind this merger is a Brazilian private equity company called 3G Capital. Although in general the private equity industry is covered in mystery, the story behind 3G Capital success is out there with several books being written about it. They are well known for cutting costs and improving the efficiency of a company. With several big deals closed already such as Burger King, Heinz, Kraft and AB InBev, they have developed their own way of integrating a company in the post-merger phase, known as the 3G Model.

This paper applies financial methods in order to assess whether they will be able to create value through their usual way of integration. A financial model will be built to assess each cost cutting measure. Several measures of value creation will determine the final answer.

2. Research Questions

The main objective of the paper is to assess whether 3G Capital through its integration process generates value in the AB InBev and SAB Miller merger.

The main research question therefore is:

Will 3G Capital post-merger integration process of SAB Miller into the existing AB InBev organisation generate value?

The following sub-questions are phrased in order to provide a framework for the project and to cover all the aspects related to the subject:

1. How were AB InBev and SAB Miller expected to perform in the future as separate firms? 2. What is 3G Capital model for post-merger integration? 3. What synergies is 3G Capital applying in the case of SAB Miller and what is their value? 4. What will be the performance of the combined company in terms of Return on Invested Capital and Economic Value Added? 5. Does the value of the combined company exceed the market value of the two companies plus the acquisition premium?

The first sub question tries to answer how are the two companies forecasted to perform in the future as separate entities. The second one’s aim is to describe and to qualitatively assess the typical

integration process of a 3G company. The third sub questions will answer which synergies will take place, how will they be implemented and what will be their effects from a financial point of view. By calculating the ROIC and EVA, we will have two financial metrics to measure the value creation. The last sub question will look at the value creation from a cash perspective and will be the decisive measure for evaluating the investment.

3. Methodology

The paper follows three broad methods encompassed in two separate books in order to investigate the subject.

Firstly, the thesis follows the method of Plenborg and Petersen (2012) for the restatement of balance sheet and income statement and the assessment of profitability. The method is an analytical and quantitative process, which separates assets and activities into operating and non-operating.

Secondly, it follows the steps described by Koller et al. (2010) in order to construct the financial model. The method itself is practical oriented as it represents a “how to…” manual for building financial statements models. The scope of this method is building a financial model that encompasses the income statement, balance sheet and cash flow statement. The three statements need to be linked to each other and assumptions have to be taken in order for the model to be flexible and to forecast as many years into the future as needed. Additionally, for our purpose the model has to be able to take adjustments into some line items both on I/S and B/S and adjust the rest of the statements accordingly. This feature is highly significant as it distinguishes between simply stating financial statements and building a financial model. A financial model has to be able to run “what if” scenarios and show immediately the results.

Thirdly, it applies the framework provided by Koller et al. (2010) to explain how value is created. The framework is highly theoretical as it maps out how we should think about value. It illustrates what are the drivers of value (ROIC, revenue growth), how should we measure it (Cash flows) and what are the external factors influencing it (WACC). In order to decompose the framework into tangible and quantifiable facts we will use the Du Pont analysis.

Since the paper is a case study, any of the findings should not be applied as a generalization to other mergers and acquisitions deals or any other transactions in the brewing industry.

3.2. Delimitation

Following the transaction close, the new combined company had to get approval from the competition regulators of the main markets: EU, USA and China. In order to receive the approval several brands and business that used to be part of SAB Miller were sold. The Japanese brewer, Asahi, bought the brand Peroni, Grolsch and Meantime. Even more, SAB Miller sold the stake in its US joint venture with the partner Molson Coors agreeing to buy it1.

In the paper we will disregard the information that some parts of SAB Miller were sold. The rationale behind this assumption is due to the fact that no financial statements were released to the public containing detailed information about the brands i.e. no Income Statement or Balance Sheet for the specific brands were released. For the analysis to be feasible we will just have to assume the specific brands were performing average, in line with the overall company. If the brands were performing better or worse than the overall company, after selling the brands the company would perform quite the opposite. The same principle has to be applied also for the balance sheet items related to the brands. We will assume the brands were in line with the company i.e. they were not more asset intensive brands or more debt financed than the rest.

4. Companies’ Presentation

4.1. AB InBev

Anheuser-BuschInBevSA/NV is the world's largest brewers based in Belgium involved in the production, distribution and sale of beer and soft drinks. The company has operations in 26 countries across the world and offers a portfolio of over 400 brands of beer and other malt beverage brands. Anheuser-Busch InBev’s soft drinks business consists of both own production and agreements with PepsiCo related to bottling and distribution arrangements between various Anheuser-Busch InBev subsidiaries and PepsiCo. Ambev - subsidiary of Anheuser-Busch InBev is one of PepsiCo’s largest bottlers in the world. The Company has long- term agreements with PepsiCo whereby it was granted the exclusive right to bottle, sell and distribute certain brands of PepsiCo’s portfolio. Major brands that are distributed under these agreements are Pepsi, 7UP and Gatorade. ABInBev’s wide brand portfolio caters to a broad range of customer tastes and incomes, giving it the potential to absorb changes in market conditions that include seven of the ten most valuable beers in the world. The company has operations in the North America, Mexico, Latin America North, Latin America South, Europe and Asia Pacific Zones and has headquarters in Leuven, Belgium. The Company is listed on multiple exchanges with its primary listing on the Euronext Brussels (EN) and secondary listings on

1 (BBC, 2016)

Mexican Stock Exchange (BMV), Johannesburg Stock Exchange (JSE) and New York Stock Exchange (NYSE) with a market cap of €220 billion2.

The American regions dominate sales at ABInBev, with North America accounting for 36%, Latin America (mainly Brazil) 21% and Mexico 9% while Asia makes up about 13%. Within American markets, ABInBev tends to have market shares in excess of 40%. However, the company now holds a significant market share of beer across all regions, resulting in an unprecedented 27% of total global volumes. For 2015, beer was responsible for 99% of ABInBev’s volumes. However, the company is working to develop its presence in other categories, including malt-based Ready-to-Drink beverages and cider/perry. The annual sales for the company in 2016 were US$45.5 billion. The Top Brands of AbInBev are as follows:

Global brands:

 Budweiser: Founded in 1876, Budweiser was the first beer launched by the company and is the most popular beer available across more than 85 countries and the most valuable beer brand.  Stella Artois: Based on a rich Belgian brewing heritage of more than 600 years, Stella Artois caters to the premium tastes and is sold in more than 90 countries. It is also the 4th most valuable brand in the world.  Corona: Founded in 1925 at the Cervecería Modelo in Mexico, Corona is the most popular beer brand in Mexico and 6th most valuable brand globally sold across 120+ countries3

International brands:

 Beck’s: Beck’s is German’s no. 1 Beer founded in 1873 and available in more than 85 countries  Leffe: Made from only the highest quality ingredients, Leffe's unique brewing heritage is now shared and enjoyed by consumers in more than 70 countries worldwide  Hoegaarden: Hoegaarden is a true authentic wheat beer dating back to 15th century and available across over 70 countries

Local champions: Bud Light, Skol, Brahma, Antarctica, Quilmes,Victoria, Modelo Especial, Michelob Ultra, Harbin, Sedrin,Klinskoye, Sibirskaya Korona, Chernigivske, Cass and Jupiler4.

2 (AB InBev, 2016) 3 (AB InBev, 2016) 4 (AB InBev, 2016)

Company History:

Anheuser- Busch InBev (Formed 2008)

Grupo Modelo Inbev Anheuser-Busch (Acquired 2012 - (Formed 2004) Mexico)

Interbrew Ambev Harbin Brewery

Brouwerij Artois AmBev Anheuser-Busch

Piedboeuf Cerveza Quilmes Brewery

Cervecería Labatt Brewing Nacional Company Dominicana

Lakeport Brewing Company

Exhibit 1: AB InBev company history. Source: AB InBev Annual Reports

ABInBev was formed following the acquisition of American brewer Anheuser-Busch by Belgian-Brazilian brewer InBev, which itself is a merger of AmBev and Interbrew. Interbrew was created in 1987 again from a merger of the two largest breweries in Belgium: Artois, based out of Leuven, and Piedboeuf, of Jupille. While AmBev was formed back in 1999 also with the merger of the two biggest Brazilian brewers, Antarctica (founded in 1882) and Brahma (founded in 1888). Anheuser-Busch was established in 1860 in St. Louis, Missouri, USA, as Anheuser & Co. In 2004, Interbrew and AmBev merged, creating the world’s largest

11 brewer, InBev. In 2006, InBev acquired the Fujian Sedrin brewery in China, making InBev the No. 3 brewer in China which is also the world’s largest beer market5.

On 18 November 2008, the merger of InBev and Anheuser-Busch was completed, creating Anheuser–Busch InBev, the world’s biggest brewing company in the world. The transaction details reveal Anheuser-Busch shares were acquired for 70 USD per share in cash, for an aggregate of $52 billion.

Key Management:

Carlos Brito, CEO: Born in Rio da Janeiro, Carlos Brito holds a degree in Mechanical Engineering from the Federal University of Rio de Janeiro. In 1987, Carlos Brito met Jorge Paulo Lemann through a friend of a friend. Brito was working for Shell Oil by then and had been accepted to Stanford Business School but was not able to afford it. Lemann together with other people from Banco Garantia ran a scholarship program that backed promising young people in their early careers. Lemann, who would later co-found investment firm 3G Capital, had only a few conditions: that Brito one day help other people if possible, and that he consider coming to work for them (Fortune, 2013). After finishing at Stanford, Brito went to work at Brahma, a Rio-based brewer that Garantia had just bought. Brito quickly rose the ranks at Brahma where he learned the art of cost cutting, working under Lemann's partner Marcel Telles. In 1999, the company announced plans to merge with São Paulo-based competitor Antarctica to form Cia de Bebidas das Americas, or Ambev and in 2004, only three months after becoming the CEO, Brito announced a merger with Belgian beer giant Interbrew to form InBev.

Claudio Braz Ferrero, Chief Supply officer: Served as Chief Supply Officer at Anheuser-Busch InBev SA/NV from January 1, 2007 to March 2016 and has been a Chief Supply Integration Officer after 2016 looking after global supply chain and integration operations globally.

Miguel Patricio: Has been Chief Marketing Officer of Anheuser-Busch InBev SA/NV since July 2012 and serves as its Member of Executive Board of Management looking after global branding and marketing strategies.

4.2. SAB Miller

Founded in 1895, SABMiller is now a global beverage company involved in Beer and Soft drink market and is the world’s second largest brewer, behind ABInBev, with a 10% share of total volume sales globally. The Company which was the first industrial company to be listed on the Johannesburg Stock Exchange has its

5 (de Mello, 2014)

12 first product- Castle Lager would still the South Africa’s most famous beer, 120 years after its launch. The UK based company has established a global presence and registers annual sales in beer and soft drinks of more than 30 billion liters and $20bn in revenue in EMEA, Americas, APAC and Australasia regions. The company has over 70,000 employees working in more than 80 countries and produces over 200 beers. The company also has a significant presence in China- world’s largest beer market and accounts for almost half of the market share along with its Chinese Joint venture partner, China Resources Enterprise. It also has a growing soft drinks business being one of the world’s largest bottlers of Coca-Cola drinks with 6% volume growth in 20166.

SABMiller has a wide portfolio of local and regional brands, with standard lager accounting for 53% of its total beer volume sales in 20167. The company is further advantaged by the geographical spread that was built over many years which is biased towards developing markets, offering higher long-term growth opportunities in both volume sales and margin expansion. SABMiller’s developing markets exposure is complemented by the scale in well established, extremely profitable, and cash generative businesses in developed markets, primarily in the USA (through its’ joint venture with Molson Coors), Australia, and Europe. The key initiatives taken up by the management include innovation that is scalable and repeatable across multiple markets, from new beer styles, including craft, to flavoured malt beverages to low or zero- alcohol beers8.

SABMiller continues to offset volume decline in developed markets by expanding its above-premium lager line, offering high-ABV beers, craft-style beers and a premium positioning. The company is expanding its portfolio and investing in brands with innovations that is aimed to rival the output of the craft industry. The firm’s emphasis on locally focused brands is expected to help the company to obtain provincial monopolies in emerging markets and affordable segments. SABMiller is significantly present in mid-priced and premium lager supported by its top ranking position in various African and American markets. However, the brewer is missing out on growth in other categories and on the brand equity to be gained from developing a wider range of beer alternatives which is why market is likely to see a wider array of innovations in beers via a premium positioning or the creation of beer alternatives. Global beers consist of four core brands which include Miller Genuine Draft, Grolsch, Pilsner Urquell and Peroni Nastro Azzurro which are promoted and distributed via a global platform.

Company History:

6 (SAB Miller, 2016) 7 (SAB Miller, 2016) 8 (SAB Miller, 2016)

In 1999, after listing on the London Stock Exchange to raise capital for acquisitions, the group purchased the Miller Brewing Company in North America from the Altria Group in 2002, and changed its name to SABMiller. Following this, the group's next major acquisition was of a major interest in Bavaria, South America's second largest brewer and owner of the Aguila and Club Colombia brands in 2005.

The company got engaged in the hostile takeover of Fosters in mid-2011 and at the end of 2011, the board of Foster's agreed to a takeover bid valuing the company at A$9.9bn (US$10.2bn). The deal was completed by the end of 2011, although it excluded the Foster's lager brand in the UK and Europe, where it is owned by the rival-Heineken. In May 2015, SABMiller announced it would acquire British brewery company Meantime Brewing for an undisclosed fee9. In 2016, ABInbev made an acquisition bid for SABMiller that would unite the world's two biggest beer companies. The deal was finalized at £44 per share valuing the company at $71bn.

Key management:

Alan Clark, CEO: Born in South Africa, Clark holds a master's degree in clinical psychology from University of Port Elizabeth and a doctorate in literature and philosophy from University of South Africa. Before joining SABMiller, he worked as a clerk in South Africa Prison services and later worked as a lecturer at Vista University. He joined SABMiller in 1990 as a trainee and quickly rose up the ranks where he was promoted as a General Manager and later the CEO of SABMiller’s South African soft drinks operations. In 2003, Clark was promoted to managing director of their European operations. He was in this role until July 2012, when he became chief operating officer (COO), and then in 2013, CEO of SABMiller, succeeding Graham Mackay10.

Domenic De Lorenzo, CFO: Lorenzo is a Chartered Accountant (SA), completing his articles at Arthur Young and was educated at the University of Cape Town. Lorenzo joined the firm 19 years ago and he served as a Director of Corporate Finance & development at SABMiller plc since 2000 and served as its Director of The Global Team since 2010 before he became the CFO in 2015.

Now since ABInbev acquired SABMiller on October 10 2016, the parent company announced that Mauricio Leyva, former CEO of SAB South Africa, will be the only SABMiller executive to remain within the new AB Inbev 18-member permanent board and served as Middle East’s zone president. A couple of more people

9 (SAB Miller, 2015) 10 (Bloomberg, 2017a)

14 such as Johann Nell, Human Resources head and Mark Bowman, Africa MD were staying on a transitional basis11.

4.3. 3G Capital

3G Capital, Inc. is a private equity firm specializing in investments in brands and businesses in retail and consumer sectors. It was founded in late 2004 by Jorge Lemann, Carlos Sicupira, Marcel Telles and Roberto Thompson Motta. The firm is known for its investments in special situations and has been hailed as a pioneer in the lean and mean approach of its acquired companies. The big ticket conquests for the firm include the likes of iconic global brands Anheuser-Busch, Heinz, Kraft and Burger King.

Lemann, who also represented Brazil in the Davis Cup tennis tournament, created his first venture Garantia. He purchased a little-known broker-dealer based out of Rio De Janerio and made it a full-fledged Investment bank, inspired by Goldman Sachs. The firm worked as private partnerships where executives were invited annually to increase or decrease their holdings based on their performance. In 1982, after a number of small time investments in listed stocks, Garantia undertook the first hostile takeover, purchasing a controlling stake in Lojas Americanas, the Brazilian variety retailer for 20 million US dollars. The trio found great opportunities in companies that lacked clear future and perceived agent-conflict interests12.

The company became well known for its game changing big ticket acquisition of Brahma, a Rio De Janerio- based brewer, for $60 million without proper legal and financial due diligence. It was also timed so inappropriately which was only months before the historic election of Fernando Collar De Mello against the union leader back then, Luiz Da Silva “Lula”, who scared the businessmen with his harsh left-wing statements. Days after closing the deal, a huge pension deal resurfaced, but that did not deter Lemann and his team. Marcell Telles, one of the three partners, became the CEO of the company and implemented a management revolution with methods and experiences from Garantia and Lojas Americanas. He started to expand the business into different regions of South America such as Argentina, Venezuela, Uruguay and also improved the company’s manufacturing practices. Marcel also orchestrated the acquisition of Brahma’s arch-rival, Antarctica and formed a new business, AmBev, which captured almost 70% of the Brazilian market share13.

11 (Morton, 2016) 12 (de Mello, 2014) 13 (de Mello, 2014)

From 1999 to 2004, the Antartica integration was the sole responsibility and goal of the company to lead and expand well in the newer markets. During the time, AmBev was still looking for an expansion and looking for possible Merger & Acquisition opportunities. In 2004, Ambev and its controlling shareholders announced a complex transaction where in the holding company which had Interbrew shares merged itself with a number of Belgium-based family stakes in Interbrew which made the trio retain control in the resulting company which was later called InBev. Moreover, in 2008, it started acquisition talks of Anheuser- Busch, the American brewing company with the most iconic brands Budweiser and Bud Light, led by none other than, Carlos Brito. This deal was heavily criticized by the Anheuser-Busch management and also the American media.

3G also started rolling out and trading in liquid markets with concentrated efforts on Private investment in public companies (PIPE). The first large bet was made in CSX, an American rail road company. After CSX, 3G raised a new funding to enable its takeover of Burger King in 2010 which was in some serious doldrums after 2008 recession. 3G Capital paid just $1.56 billion in cash to take control of Burger King in 2010, financing the burger joint’s remaining acquisition amount with debt. Burger King's earnings before interest, taxes, depreciation and amortization (EBITDA) minus capital expenditures increased more than 60% in the first year under 3G control, allowing the company to pay its new owners a $393.4 million special dividend. In 2012, 3G Capital returned Burger King to public markets by selling 29% of the company to a public investment vehicle for $1.4 billion. Two years later Lemann joined hands with Warren Buffett’s Berkshire Hathaway when Burger King struck an about $11 billion takeover of Canadian restaurant chain Tim Horton’s. Berkshire provided $3 billion in preferred equity financing to fund the acquisition and was offered 8.4 million shares for a price of $0.01 apiece. After the deal Burger King was renamed Restaurant Brands International and shares continued to soar and the money train kept rolling forward. Also, Restaurant Brands struck a deal to buy stock market darling Popeye’s Louisiana Kitchen for $1.8 billion, pushing its shares up 7% to new record highs14.

3G and Berkshire Hathaway joined forces in 2013 to buy Heinz for $23.3 billion in what was the fourth- biggest food and beverage acquisition of all time. The deal was significantly larger than the previous ones but followed the same framework: overtaking a large US based company using significant amounts of debt.

The company follows the same strategy in all of its companies that have proven to be a huge success globally:

14 (de Mello, 2014)

1. Find a business with poor management and bloated costs, but strong underlying economics and sustainable growth trends.

2. Inject a results-oriented culture, lean and mean strategy into the business with hard-charging managers in the most senior roles.

3. Set four big targets for senior executives each year: market share, expenses, EBITDA, and cash.

4. Implement Zero Based Budget – requiring every expense to be justified each year rather than build off last year’s budget. Be ruthless about trimming any expense that doesn’t generate revenue.

5. Don’t spread yourself too thin and focus on only one or two opportunities at a time15.

5. Building the Financial Model

5.1. Reformulating the Financial Statements

All firms consist of operating, investing and financing activities. For the purpose of our paper, it was critically important to separate operating items from financing ones. The reason is that “operating activities are the primary driving force behind value creation”16.

The historical financial statements for AB InBev and SAB Miller were retrieved from Bloomberg and can be observed under Appendix – AB InBev Historical Financial Statements and Appendix – SAB Miller Historical Financial Statements. However, some of the lines items were extracted from the actual annual reports of the company. Notes on specific line items that needed consideration were read and interpreted from the annual reports.

In the following sections we will describe the line items that required special attention or a judgement call in the reformulating process.

5.1.1. Analytical Income Statement

The analytical income statement requires every line item to be classified to either operations or finance. Operating profit is considered to be the primary source of value creation from the investors perspective. From the lenders perspective, operating profit is the primary source to support the debt obligations.17 The structure of the analytical income statement was taken from Plenborg and Petersen (2012).

Depreciation and amortisation. In AB and SAB Miller’s I/S, depreciation and amortisation are recognised under the function to which they belong. In the annual reports notes of each company, depreciation and

15 (de Mello, 2014) 16 (Plenborg and Petersen, 2012) 17 (Plenborg and Petersen, 2012)

17 amortisation are fully disclosed. In order to calculate earnings before interests, taxes, depreciation and amortisation (EBITDA) the depreciation and amortization for Cost of Goods Sold (CoGS) , Selling, General and Administrative(SG&A), Other operating expenses and Non-recurring items had to be extracted from their respective costs and restated as a single line item after EBITDA.

Taxes: on the I/S of the two companies cover both operating and financing items. They had to be separated into Income tax on EBIT and Tax on Net Financial Expenses.

Net Operating Profit After Tax (NOPAT) represents the total income generated by the operations. As it represents the main component of the analytical I/S, later on used in calculating the ROIC, it was double- checked in order to ensure it was calculated properly. The verification step included calculating it top-down (from the operations) and bottom-up (from financing items). The formula was the following:

퐸퐵퐼푇 − 퐼푛푐표푚푒 푇푎푥 − 푇푎푥 푠ℎ𝑖푒푙푑 + 푅푒푠푢푙푡푠 표푓 푎푠푠표푐𝑖푎푡푒푠 = 푃푟표푓𝑖푡 퐴푓푡푒푟 푇푎푥 + 푁푒푡 퐹𝑖푛푎푛푐𝑖푎푙 퐸푥푝푒푛푠푒푠 = 푁푂푃퐴푇

5.1.2. Analytical Balance Sheet

While constructing the analytical B/S, the same principle as before has to be kept: separating operating and financing line items.

Invested Capital or Net Operating Assets represent the combined investment in a company’s operating activities18 and is the sum of operating assets minus operating liabilities.

The relations that govern the analytical B/S are the following:

푁푒푡 푂푝푒푟푎푡𝑖푛푔 퐴푠푠푒푡푠 = 퐶푢푟푟푒푛푡 퐴푠푠푒푡푠 + 푁표푛 푐푢푟푟푒푛푡 퐴푠푠푒푡푠 − 푁표푛 𝑖푛푡푒푟푒푠푡 푏푒푎푟𝑖푛푔 푑푒푏푡

퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 = 퐸푞푢𝑖푡푦 + 퐼푛푡푒푟푒푠푡 퐵푒푎푟𝑖푛푔 퐷푒푏푡 − 퐹𝑖푛푎푛푐𝑖푎푙 퐴푠푠푒푡푠

푤𝑖푡ℎ 푁푒푡 푂푝푒푟푎푡𝑖푛푔 퐴푠푠푒푡푠 = 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙

Cash and Cash Equivalents: companies need a certain amount of operating cash in order to finance the day- to-day activities. How much of the total cash represents operating cash is not specified in neither cases. Both companies however have significant amounts of cash on their balance sheet, which have been increasing at a higher rate than operations suggesting they have been building on cash. As a consequence, all cash will be re-classified as excess cash under Financial Assets.

Other ST Assets (incl. Derivatives and Hedging, Tax Receivables, etc) are not part of the core operating activities but are related to the financial situation of the company were re-classified under Financial Assets.

LT Investments & Receivables (incl. LT Investments and LT Marketable Securities) are financial assets and were treated as such; reclassified under Financial Assets

18 (Plenborg and Petersen, 2012)

LT Derivative & Hedging Assets and LT Prepaid Pension Costs. Similar to the ST derivatives and hedging assets, were re-classified under Financial Assets. LT Prepaid Pension Costs are usually costs associated with the management of the company pension fund as some companies manage their own small pension fund for employees. They are not part of the operating activities and were moved under Financial Assets.

The rest of the assets were treated as Operating Assets.

Payables & Accruals (incl. Accounts Payable, Accrued Taxed, Interest & Dividends Payable) - part of operating liabilities, Payables reduce the need for (interest-bearing) debt and as such are part of Non- interest Bearing debt, being deducted from operating assets19.

ST Provisions are amounts put aside to cover a future liability usually related to a contract term. As they are a measure of risk management related to operations, are re-classified as Non-interest Bearing Debt.

Deferred Revenue, Deferred Tax Liabilities, Other Provisions & Creditors. They all represent liabilities but since they do not bear interest are treated accordingly and moved under Non-interest Bearing Debt.

The restated Income Statements and Balance Sheets can be found under Appendix – AB InBev Restated Financial Statements and Appendix – SAB Miller Restated Financial Statements

5.2. Pro forma Financial Statements

The starting point of the forecasted financial statements is the restated financial statements. The forecasting method is a sales-driven one where different line items are driven by the level of activity i.e. revenue growth20. The forecast period will cover 2017-2020, considered the first phase after the merger. This section is corresponding to the first sub questions as to how the two companies were expected to perform in the future

Exhibit 2: Forecast drivers for the Income Statement. Source: Koller et al. (2010)

19 (Plenborg and Petersen, 2012) 20 (Plenborg and Petersen, 2012)

For the Income Statement we followed the approach shown by Koller et al. (2010) stated below:

5Y AB InBev I/S Forecast Driver 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Average Revenue Growth% 8% 2% 9% 9% -7% 4% 4% 4% 4% 4% 4% CoGS % Revenue 38% 36% 36% 35% 34% 36% 36% 36% 36% 36% 36% Distribution % Revenue 8% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% Sales/Mkting/Ad % Revenue 12% 12% 13% 14% 15% 13% 13% 13% 13% 13% 13% General and Admin % Revenue 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Other Op Income % Revenue 2% 2% 3% 3% 2% 2% 2% 2% 2% 2% 2% Non-recurring items %Revenue -1% 0% 0% 0% 0% 0% 0% 0% 0% 0% Depreciation(t) %PPE net (t-1) 13% 13% 13% 11% 11% 12% 12% 12% 12% 12% 12% Amortization (t) %Intangibles (t-1) 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Income tax % EBIT 15% 13% 10% 17% 19% 15% 15% 15% 15% 15% 15% Financial Expense(t) % (ST Debt + LT Debt)(t-1) 7% 6% 7% 6% 5% 6% 6% 6% 6% 6% 6% Financial Income (t) % Cash & Cash Equivalents (t-1) 9% 6% 4% 10% 14% 8% 8% 8% 8% 8% 8% Share of P.A.T. for Non-controlling interest 26% 23% 13% 18% 16% 19% 19% 19% 19% 19% 19% Tax % 20% 16% 11% 18% 21% 17% 17% 17% 17% 17% 17% Payout Ratio - total sum paid out - constantly increasing 32% 33% 39% 38% 38% 65% 81% 81% 81% 81% 81% Exhibit 3: AB InBev Income Statement forecast drivers. Source: Bloomberg, Author's elaboration

All of the line items from the Income Statement were forecasted based on the last 5 years average.

For the Balance Sheet items the guide provided by Koller et al. (2010) was used:

Exhibit 4: Forecast drivers for the Balance Sheet. Source: Koller et al. (2010)

5Y AB InBev B/S Forecast Driver 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Average Inventories %CoGS 17% 17% 19% 18% 19% 18% 18% 18% 18% 18% 18% Account Receivables % Revenue 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% Prepaid Expenses %Revenue 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Tax Receivable %Revenue 2% 1% 2% 2% 2% 2% 2% 2% 2% 2% 2% Intangible Assets %Revenue 192% 192% 230% 214% 217% 209% 209% 209% 209% 209% 209% PPE %Revenue 41% 41% 48% 43% 43% 43% 43% 43% 43% 43% 43% Deferred Tax Assets %Revenue 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% Other LT Receivables %Revenue 1% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Payables %CoGS 84% 95% 104% 102% 112% 100% 100% 100% 100% 100% 100% Deferred Revenue %Revenue 0% 0% 2% 4% 3% 2% 2% 2% 2% 2% 2% Deferred Tax Liabilities %Revenue 29% 28% 30% 27% 27% 28% 28% 28% 28% 28% 28% Other Provisions & Creditors %Revenue 5% 7% 8% 3% 4% 6% 6% 6% 6% 6% 6% ST Provisions %Revenue 1% 0% 0% 0% 1% 0% 0% 0% 0% 0% 0% Common stock - constant Additional Paid in Capital - constant Retained Earnings (t)= Retained Earnings (t-1)+ Profit After Tax (t) - Dividends (t) Non-controlling interest - constant ST Debt growth 40% 23% -3% 42% -5% 15% 15% 15% 15% 15% 15% LT Debt - constant Derivatives & Hedging %Revenue 5% 3% 2% 2% 10% 4% 4% 4% 4% 4% 4% Cash from Cash Flow Statement Other ST Assets % Revenue 3% 2% 1% 3% 4% 8% 4% 4% 4% 5% 5% LT Inv & Receivables %Revenue 1% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% Derivative & Hedging Assets %Revenue 2% 2% 1% 0% 1% 1% 1% 1% 1% 1% 1% Prepaid Pension Costs constant Exhibit 5: AB InBev Balance Sheet forecast drivers. Source: Bloomberg, Author's elaboration

The above table shows all how all the Balance Sheet Items were forecasted.

Retained Earnings line is linking the Balance Sheet with the Income Statement as it is calculated as the previous year Retained Earning plus Profit After Tax minus Dividends.

The Cash line item is linking the Balance Sheet to the Cash Flow Statement as current year Cash on the B/S is Cash Ending Balance from Cash Flow Statement.

A similar exercise of forecasting was perfomed for SAB Miller also (see Appendix – SAB Miller Forecast Drivers)

Now that the three financial statements are linked between them and are also linked from one year to another via Profit After Tax –> Retained Earnings -> Cash Balance, the financial model is in place and it can be used to forecast an indefinite period automatically adjusting itself for any scenarios that we might encounter.

Any scenarios runs on the Income Statement items will affect Profit After Tax which in turn will affect the Cash Flow from Operations and the Cash Balance, which is picked up by the Balance Sheet. Any scenario runs on the Balance Sheet items will get picked up by the Cash Flow Statement, changing the Cash Balance ending balance and thus changing next year’s Cash Balance starting point.

A flexible financial model was needed to support the analysis in order to see immediately the impact on the long-term of a change in a line item. A static representation of the financial statements could not have done that.

6. The 3G Model

3G Capital have developed over the years a rather repeatable model for the integration process of new acquisitions. There have been slight differences in the integration process depending on the business and the industry of the acquisition. The typical target for acquisition has been companies with great brands and part of an old established industry, somehow neglected by the capital markets21.

Additionally, what has characterised most of the 3G acquisitions has been also the 3-phase process:

Phase 1: right after the acquisition, the acquired company enters a severe cost cutting process in order to be optimized in terms of organisation - people and production – processes. This phase last a few years, typically 3-4 years.

Phase 2: once the company has been optimized, the management focuses on the long-term organic strategy of increasing the revenue. By first decreasing costs and then increasing revenue, the companies manage to achieve a tremendous operating margin.

Phase 3: inorganic growth. All of the well known 3G transactions in the past have been followed by further consolidation in the market: Burger King and Tim Hortons, InBev with Anheuser-Busch and now SAB Miller and Heinz and Kraft.

After several big-ticket transactions highly covered by the media, 3G Capital have become well known for their excruciating cost-cutting measures as part of the integration process. The methods of cost optimisation were not developed by 3G people but rather borrowed from some of the successful businesses out there and adapted to their needs. The companies from which 3G Capital borrowed and adapted ideas include General Electric, Wal-Mart, Goldman Sachs, Berkshire Hathaway and Toyota22.

Despite their success, 3G has faced some harsh criticism from the media, partners and even political persons. Most often in the media, 3G has been criticism for the massive firings happening after a take-over. After acquiring Tim Hortons in 2014 and integrating it into the existing Burger King organisation, rumours started emerging about Burger King headquarter being moved for tax purposes to Canada, Tim Hortons’ home country23. However, they have still kept Burger King’s headquarter in the US. Their suppliers have

21 (de Mello, 2014) 22 (de Mello, 2014) 23 (Rushton, 2014)

22 also criticised them due to their harsh contract terms regarding delayed payments towards suppliers in order to increase their short-term liquidity basically with interest-free debt.

In the next several sections in order to provide evidence for my analysis and to forecast better, I will be using two different benchmarks: one, against previous 3G deals and second, against the main competitors in brewing sector. While the second approach to benchmarking is a typical one, benchmarking against companies from different industries might be challenging and misleading. As a result, I chose to compare this brewing sector transaction with the ones of Heinz and Kraft from the packaging industry. A justification is needed why the two transactions and the industries they are part of are similar, in order to make the comparison valid.

1. Both industries are characterised by high volumes and low margins. This translated into Return on Invested Capital terms means high Turnover Rate of Invested Capital and low Profit Margin. 2. The main business in both cases is about transforming raw materials into products that are ready to be consumed 3. Automation in the manufacturing process. Lately there has been an increase in the technological advancement making the production process faster, more flexible and less labour intensive. 4. The companies in both industries are situated in the center of the supply chain. They receive raw materials from suppliers and after the manufacturing process they sell their product to the wholesale businesses like supermarkets. This has two implications: one, they can never set the price paid by the end consumer and two, they are pressured by the supermarkets in terms of business deals and can further on down the line pressure their suppliers. 5. The products sold by both industries are highly regulated markets. In most of the countries there are limits on content of alcohol while packaged food needs approval from the respective regulators such as the FDA (Food and Drug Administration) in the US. 6. Tax duties on both alcohol content and sugar content. 7. The market structure in both industries is similar to an oligopoly where few major firms have the majority of the market share. In the packaged foods industry the dominant player are: Nestle, Kraft, Pepsico, Coca-cola and Unilever. In the brewing sector there are four major companies, two of which are the subject of this paper: AB InBev, SAB Miller, Heineken and Carlsberg.

The following sections will represent the qualitative solution to the second sub question referring to the 3G Capital model.

6.1. Improving Cost of Goods Sold

The costs of goods sold are the direct costs related to the production of the goods sold by the company. They comprise of raw materials, direct labour costs used to produce the good, storing inventory and depreciation of plant and equipment. However, it excludes distribution costs and sales force costs.

6.1.1. Cost of Goods Sold in previous 3G deals

The companies that were bought by 3G Capital and have gone through their process of cost cutting experienced significant reductions in Cost of Goods Sold. The method for cost optimization has been detailed focus on general cost redundancies, productivity enhancement, incentivized performance and zero-based budgeting method.

Heinz in April 2013, when it was acquired, owned 63 factories and leased 6 factories24. By the end of 2014, the company was owning just 54 factories and leasing 4 factories25. In a little over a year and a half, 3G Capital shut down 9 factories and terminated the lease agreement on another two. The number of jobs that were cut due to factory closures totalled 1,800. Kraft Heinz: CoGS

65% 65% 64% 64% 63% 63% 20,000 62% 61% 60% 1.2 B 16,000

12,000 40%

17,416 8,000 0.35 B 16,184 20%

4,000 7,513 6,442 6,701 6,754 7,165 7,132

0 0% 2009 2010 2011 2012 2013 2014 2015 2016

CoGS CoGS %Revenue

Exhibit 6: Kraft Heinz CoGS. Source: Kraft Heinz 10-K reports

The figure above tracks the development of Cost of Goods Sold. The values for 2013, 2014 and 2015 were adjusted by $168 MM26, $513 MM27 and $404 MM28 respectively, for severance and employee benefits related to job reductions. These charges qualify as exit and disposal costs according to US GAAP and fall under CoGS.

The cost cutting measures deployed by 3G in the period right after acquisition can be observed in two cases: in 2013 the year 3G acquired Heinz and in 2016 the year after Heinz merged with Kraft to form Kraft

24 (Heinz, 2013) 25 (Heinz, 2014) 26 (Heinz, 2013) 27 (Heinz, 2014) 28 (Heinz, 2015)

Heinz. By 2014 the measures implemented reduced the CoGS with approximately $0.35 BN from one year to another while in 2016 the effect was a cost reduction of $1.2 BN29. The results come as proof that: one, 3G is capable of drastic cost-cutting measures regarding CoGS and two, this is done in the period right after the acquisition, impacting the first year results.

6.1.2. Cost of Goods Sold in the Industry

Raw Materials

Malt is the source of sugars that become the alcohol that makes beer. The size of the production has significant influences over the price and the process that involves malt. Macro-breweries, as opposed to microbreweries, have higher bargaining power which enables them to demand lower prices from malt suppliers. According to a person inside the industry, a macro-brewer in the US will pay close to 22 cents per pound of malt while a medium-size beer producer can pay 40-50 cents per pound of malt30. This example shows how a global beer manufacturer can pressure suppliers into lowering their price.

Hops are the plants that give a distinctive flavour usually bitterness to beers, especially to the craft ones. Yeast is usually cultivated within the company and not bought when it comes to the large beer producers.

Brewing, Aging and Packaging

The brewing process does involve to a certain extent human labour. However, in the recent years, the possibility of automation has made possible the increase in productivity. The packaging costs include cans, bottles and barrels. Often it represents the single biggest expense a brewery is incurring. Packaging can add as much as 25 cents for a bottle. When selling beer in barrels, the packaging cost drops significantly31

29 (Heinz, 2016) 30 (Satran, 2014) 31 (Satran, 2014)

The most recent data found on the brewing Brewing Industry Cost Structure industry cost structure was a study done in 120% 2011 by IBIS World.

The largest costs to breweries are purchases 100% 11.10% of raw materials which include packaging:

2.30% 1.50% glass, aluminium, cardboard and raw 2.60% 80% Profit materials: barley, sugar, malt, corn, rice 16.50% Rent wheat, hops and preservatives. Utilities 7.70% 60% Depreciation Labour is the next largest cost to the industry Others at 7.7%. It is safe to assume that from 2011, Wages when the study was made, up to 2017, the 40% Purchases labour costs for the whole industry have 58.30% decreased due to the consolidation in the 20% market among the big players which resulted in layoffs and due to the technological 0% advance which increased the efficiency of the operations. In 2011, the depreciation was Exhibit 7: Brewing industry cost structure. Source: IBIS World report (2011) estimated to be 2.6% of revenue. Brewing is a capital-intensive business where the depreciation of plants and equipment is significant. Other major costs are the rent at 2.3% and utilities at 1.5%.

Based on the above findings it can be concluded that the cost of raw materials is lower for the large breweries due to their increase bargaining power over suppliers. Besides raw materials, the packaging is another significant cost which can be lowered due to economies of scale and increase automatization.

Cost of Goods Sold – Industry Benchmarking

By definition Cost of Goods Sold implies that is a cost dependent on the revenue, therefore, the most useful measure to compare CoGS amongst different companies and to track its development across time is to look at CoGS as a percentage of revenue.

The higher the percentage of CoGS out of revenue the less a company retains from each dollar of sales. To put into perspective the current situation of AB InBev and SAB Miller, the figure below shows the

development of Gross margin across the main players in the beer industry: AB InBev, SAB Miller, Heineken, Carlsberg and an industry average compiled by Bloomberg and composed of 75 firms.

In Exhibit 8Exhibit 8 it can be seen how the CoGS as a percentage of revenue varied across the brewing industry for the period 2006-2015. The values include the depreciation and amortization expenses for all of the companies for a like to like comparison. The above values of AB InBev and SAB Miller do not match the ones from the restated financial statements as depreciation and amortization had been reclassified.

Brewing Industry CoGS % Revenue 70%

60%

50%

40%

30% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 AB InBev SAB Miller Carlsberg Heineken Boston Beer Co Industry average

Exhibit 8: Brewing industry CoGS % Revenue. Source: Bloomberg

For 2015 the percentage of CoGS from revenue for AB InBev and SAB Miller accounted for 39,30% and 45,96% respectively, meaning this cost category represents a big proportion of the overall expenditure of the two companies. Observing the above figure, it can be concluded that the measures taken by 3G since the 2008 merger of InBev with Anheuser-Busch, which has formed the current AB InBev, has taken the company from being an average one in terms of managing its CoGS to the leading company in the industry. It is expected, therefore, that the AB InBev entity within the new firm will not be able to cut CoGS further more. However, synergies will appear in various areas.

Increased productivity and production efficiency will be the first area to be improved. In the 1990s, Carlos Brito, the current CEO of the merged company was working at Brahma, one of the first companies that through successive mergers became what is today AB InBev. One of its factories was reaching less than 60% of its productive potential. Carlos Brito put together Projeto Manufactura (“Manufacturing Project”) a “set of production standards, best practices and standardized process and routines that became the framework

27 for every AmBev factory and was afterwards rolled out to InBev and AB InBev”32.The project improved factory productivity and reduced fixed costs.

AB InBev : Productivity measures 800 4,000 3,490 9% 3,357 3,431 3,426 9% 2,980 600 3,000 3,000 2,756 2,086 400 2,000

459 457 200 391 399 399 403 426 1,000

285 Million Hectolitres Million

0 0 2008 2009 2010 2011 2012 2013 2014 2015

Volumes sold Volume sold/employee

Exhibit 9: AB InBev volumes sold. Source: AB InBev Annual Reports

By measuring the productivity at AB InBev, the above figure shows the volumes sold expressed in million hectolitres and the volumes sold per employee. Showing just the volumes sold could be misleading since the company can increase the productivity together with the number of employees. In the period 2013- 2015 the volume per employee increased by 9% while from 2008 to 2015 the increase was about 50%. The increases in productivity show the practices used by 3G do work and the results are significant.

The second portion of Cost of Goods Sold to be improved will be raw materials and packaging. By consolidating the two biggest beer companies in the world, they will be able to increase their bargaining power and pressure their suppliers for a better price. Hop growers are usually small and numerous which weakens their supplier power. Barley growers however, have alternatives; barley can be sold for animal feed and malted barley for spirits distillation thus reducing their dependency on the beer industry. However, raw material quality is highly important for brewers as the taste of the beer is strongly influenced by the nature of the ingredients. Additionally, the switching costs for the end user are low; the companies

32 (de Mello, 2014)

28 cannot afford to change the quality and the taste of the beers, making them dependent on high-quality ingredients33.

Researching the main suppliers regarding CoGS for both companies might give an indication on which suppliers can be pressured into lowering their costs due to the increased buying power of the merged company.

AB InBev suppliers Looking at the two tables aside, there are Name % CoGS % of supplier revenue three suppliers that can be identified as Ball Corp 3.56% 7.00% common for both companies: Crown Crown Holdings 2.94% 5.75% Holdings, Owens-Illinois and Amcor Ltd. Owens-Illinois 1.86% 4.85% Hindalco Industries 1.72% 1.91% Crown Holdings is one of the largest Graphic Packaging 0.81% 3.35% packaging companies in the world, being Amcor Ltd/Australia 0.73% 1.29% the leader in metal packaging technology Constellium NV 0.71% 2.28% with operations in over 40 countries. The Nampak Ltd 0.47% 5.33% company is the number 1 producer of food Kerry Group PLC 0.35% 0.93% cans and metal vacuum closures and Ecolab Inc 0.29% 0.39% number 2 producer of beverage cans in SAB Miller suppliers the world34. Name % CoGS % of supplier revenue Owens-Illinois 1.97% 3.26% Owens-Illinois is the world’s largest Crown Holdings 1.82% 2.42% manufacturer of glass containers in the WestRock Co 1.16% 0.99% world with customers in 86 countries. Amcor Ltd/Australia 0.93% 1.19% Approximately one of every two glass Ardagh Packaging 0.45% 0.90% containers made worldwide made by the Molson Coors 0.44% 1.29% company, its affiliates or its licensees. The Associated British 0.30% 0.18% company provides innovative and Exhibit 10: AB InBev and SAB Miller suppliers. Source: Bloomberg supplier analysis competitive packaging solutions for the leading food and beverage companies35.

33 (Marketline, 2016) 34 (Crown Holdings, 2017) 35 (Owens-Illinois, 2017)

Amcor is the world’s largest supplier of flexible packaging with operations across 43 countries. Products include packaging for the tobacco industry, food industry, and rigid plastics such as PET containers for FMCG companies.

All three companies are in the packaging industry, and since packaging is one of the highest single costs according to Huffington Post (2014), the incentives to minimize its costs are significant. According to own calculations, for the merged company, Crown Holdings would represent a cost of approximately $1 billion or 4% of CoGS, which translates to be about 12,5% of the $8 billion supplier’s revenue. The company will push the supplier to lower the costs since they probably will be able to find a replacing company for packaging but the supplier will not afford to lose the biggest brewery in the world from its customer list.

The third method through which CoGS that will be lowered will be production integration and standardization. An example where the company can identify product integration synergies can be packaging. Above it has been explained how the company can attempt to lower the buying price of the input packaging but they can also attempt to standardize packaging for several beers which will lead to internal cost savings through economies of scale.

Regarding personnel cost cutting, a person familiar with the matter declared that 5,500 positions are likely to be eliminated (Bloomberg, 2016). Based on 3G past behaviour from previous deals, the workforce which will be fired that falls under CoGS will amount to approximately 3,000 people.

2016 2017 2018 2019 2020 SAB Miller 2015 Est Est Est Est Est Cost of Goods Sold 9,115 9,243 9,311 9,381 9,450 9,521

Cost savings related to packaging 200

Cost savings related to integration 300 100

Cost savings related to personnel 700 200 Total savings 1,200 300

Estimated Cost of Goods Sold 9,115 9,243 8,111 7,881 7,950 8,021 Exhibit 11: SAB Miller Cost of Goods Sold estimates. Source: Bloomberg, Author's elaboration

For the combined company, AB InBev & SAB Miller, after the cost cutting measures the CoGS will be:

2017 2018 2019 2020 AB InBev&SAB Miller Est Est Est Est

Cost of Goods Sold 24,977 25,409 26,167 26,953

Exhibit 12: AB InBev & SAB Miller Cost of Goods Sold. Source: Author's elaboration

6.2. Reducing Selling, General & Administrative Expenses

Selling, general and administrative (SG&A) are operating expenses that occur during the daily operations of a company but are not directly related to the manufacturing part. They refer to promoting, selling and delivering the product and managing the company overall. Examples are sales commissions, advertising, promotional materials, marketing, sales, finance and office staff, utilities, rent, supplies, computers, travel expenses, etc.

3G Capital separates its costs in strategic and non-strategic as they try to “convert ‘non-working money’ into ‘working money’. By reducing expenditures for ancillary items while investing in brands, marketing, sales efforts, trade program and other factors that drive top-line and bottom-line growth” (AB InBev Annual Report, 2014). The practice of reducing non-strategic expenses to increase the spending in strategic costs was inspired by Fifer (1995). The non-strategic expenses do not contribute to the firm’s top or bottom line. Those include office materials, middle management overhead, travel expenses, meals, etc. Strategic expenses are those that improve the company’s top or bottom line. Advertising, branding, trade marketing and R&D are all strategic expenses36. According to Fifer (1995), great companies underspend their competitors on non-strategic costs and overspend them on strategic ones.

Another method for shredding unnecessary costs used by AB InBev is a budgeting system called Zero-Base Budgeting (ZBB). The method was developed in the 1970s by Peter Pyhrr, an academic, and made public through Harvard Business Review. This approach departs from the usual way of basing budgets on past years’ expenses. The common practice in budgeting is to focus on the increase compared to last year’s budget and not focus on the underlying cost itself. The ZBB method requires that each expense be discussed in detail, and everything is built from the ground up. Like this inefficiencies are being uncovered and there is a thorough understanding of the entire expense structure. AB InBev by holding its expenses

36 (de Mello, 2014)

constant or even reducing them produces incredibly powerful compound effects when sales grow at a level reasonably above inflation37.

6.2.1. Selling, General & Administrative expenses in previous 3G deals

After some of the previous acquisitions, 3G instated very specific rules for the employees to follow in order to reduce the spending on non-strategic expenses. Employees were allowed just 200 pages per month for printing38, no colour printing except for advertising, each employee was allowed maximum $15 per month worth of office supplies and mini-fridges were banned in the offices to reduce electricity bill. Two leased and one owned corporate jets were removed39. Executives had to travel economy class and sleep in 2-star hotels. Other measures included using Skype for long-distance calls and banning free cases of beer for AB InBev executives. These accurate measures show how much emphasis 3G Capital puts on cost reduction in the period right after the acquisition, in order to increase the value of companies and free up cash flows.

Kraft Heinz: SG&A 22% 21% 21% 21% 4500 20% 22% 18% 1.6 B 17% 14% 3000 13% 12% 0.12 B 0.35 B 3,975 2291 7% 1500 2,235 2,304 2,417 2,291 2,067 1,939 2%

0 -3% 2009 2010 2011 2012 2013 2014 2015 2016 SG&A SG&A %Revenue

Exhibit 13: Kraft Heinz SG&A 2009-20016. Source: Kraft Heinz 10-K reports

The figure above shows how SG&A and SG&A as a percentage of revenue have developed across years. The values for 2013, 2014 and 2015 were adjusted by $24340 MM, $124 MM41 and $619 MM42 respectively, for severance and employee benefits related to job reductions. These charges qualify as exit and disposal costs

37 (de Mello, 2014) 38 (Bloomberg, 2014) 39 (Bloomberg, 2013) 40 (Heinz, 2013) 41 (Heinz, 2014) 42 (Heinz, 2015)

32 according to US GAAP and fall under SG&A. After the acquisition of Heinz, the SG&A expenses were reduced by approximately $0.5 B during a period of 2 years, 2012-2014. The synergies in terms of SG&A for the combined Kraft Heinz company amounted to $1.6 B cost reduction across just one year. The source of the synergies was the overlap regarding personnel for corporate functions such as administration, finance and marketing.

The main takeaway from the above example is that 3G reduces SG&A massively by approximately 3 percentage points compared to the revenue. It does so by firing personnel, and most of that happens in the second year after take-over due to delays caused by negotiations with the unions and staff work contract terms.

6.2.2. Selling, General & Administrative expenses in the Industry

By looking at the brewing industry and benchmarking the SG&A to revenue ratio of AB InBev and SAB Miller against peers we will be able to better predict the forecasts for the merged company starting from 2017 onwards.

Brewing Industry SG&A % Revenue 45%

40%

35%

30%

25%

20% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AB InBev SAB Miller Carlsberg Molson Coors Industry average

Exhibit 14: Industry SG&A % Revenue. Source: Bloomberg

The SG&A to revenue measure across the brewing sector is shown in Exhibit 14. The values include the depreciation and amortisation expenses as they are recognised in the function to which they belong.For a like to like comparison, the values of AB InBev and SAB Miller also include depreciation and amortisation therefore they do not match the ones from the restated financial statements as depreciation and amortisation had been reclassified.

The industry average of SG&A to revenue for 2015 was 39% which places SAB Miller at 26%, together with AB InBev at 29%, at the top of the pyramid. None of the two companies discloses the SG&A expenses by region. To identify where synergies will happen in terms of cost of administration, finance, marketing and other corporate functions, we need to follow the source of the money. Since SG&A expenses are directly related to revenue, separating regionally the sources of income will lead to identifying the destination regions of the SG&A expenses. The exercise will help us understand which regions have large organisations for both companies as currently, each company has its corporate functions across each region. Once the two companies merge, there will be redundant corporate functions across some areas, and there will be a need for just one organisation per region. We look to identify the areas where the two companies have a significant share of revenue, and therefore they overlap in terms of SG&A expenses for the area.

AB InBev and SAB Miller Sales by Region, 2015 25,000

20,000

15,000

10,000 17,442 16,133 (40%) (37%) 5,000 6,942 6,545 198 5,669 4,360 3,768 (35%) 2,380 (33%) (1%) (13%) (10%) (19%) 0 (12%) Latin America North America Asia Pacific Europe Africa

AB InBev SAB Miller

Exhibit 15: Sales by region, 2015. Source: AB InBev and SAB Miller Annual Reports

The two companies have very different strategies; AB is more focused on global and international beer brands while SAB Miller has achieved a significant presence in the national and local beer markets. However, as Figure 8 highlights, Latin America, Asia-Pacific and Europe are the regions where the two companies overlap most.

Region Office Error! Reference source not found. and Global Headquarter London, UK Error! Reference source not found. show Latin America Miami, USA how the two groups were structured North America Chicago, USA before the merger in terms of regional Europe Zug, Switzerland organisation and offices. Error! APAC Hong Kong & Beijing Reference source not found. shows how Africa Johannesburg, South Africa the merged company is organized. Exhibit 16: SAB Miller offices. Source: SAB Miller Annual Reports.

Latin America represents a key market Region Office Global Headquarter Leuven, Belgium for both companies as Error! Reference Functional Management Office New York, USA source not found. indicated. It is also the Latin America North Sao Paolo, Brazil region where AB traces its roots to and Latin America South Buenos Aires, Argentina where the efficiency programmes have Middle Americas Mexico City, Mexico been developed as it has been the case North America St. Louis, USA with Projeto Manufactura and Zero-Base Europe Leuven, Belgium Budgeting. In the organisation of the APAC Shanghai, China merged company, the offices for LATAM Exhibit 17: AB InBev offices. Source: AB InBev Annual Reports have been kept at Sao Paolo and Buenos Aires while SAB Miller’s office in Miami disappeared from the organisation43. SAB Miller’s Latin American organisation had been engulfed into the existing AB structure since the latter one was fully optimised. The following zones overlapping in terms of revenue and organisation implicitly were APAC and Europe. As in the previous case, the APAC office has been kept in

Region Office Global Headquarter Leuven, Belgium Functional Management Office New York, USA Latin America North Sao Paolo, Brazil Latin America South Buenos Aires, Argentina

43 (AB InBev, 2016)

Middle Americas Mexico City, Mexico Shanghai while the SAB’s Honk Kong North America St. Louis, USA office is gone. The interesting example, APAC Shanghai, China however, is Europe, where both Africa Johannesburg, South Africa companies had their global headquarter. Exhibit 18: AB InBev+SAB Miller offices. Source: Arthur (2016) SAB Miller had in central and south of London approximately 600 employees. It has been announced that the office will be phased out gradually during the transition period, keeping the global headquarter in Leuven, Belgium44. Additionally, the office from Switzerland will be cut off. The APAC offices Hong Kong and Beijing have had a similar fate. The only office that has been kept was the one in Johannesburg as headquarter for Africa. The region was not on AB’s radar before the merger, and now it represents an opportunity to penetrate or consolidate the market through SAB organisation. AB InBev stated that “Africa will be a critical driver for the future growth of the business”45.

We can conclude that Latin American and Europe is where most of the SG&A costs savings will happen since these are the regions where the SAB Miller organisation has been either scaled down or completely cleared off. On the other side, Africa will represent a source of investment and an increase in SG&A determined by the strategy to develop more in the region.

One SG&A area that will not be affected by cost cutting measures, however, will be sales and marketing, as AB has stated before the completion of the merger. During an analyst call presentation, AB stated that “no significant net savings are expected in consumer and customer facing sales & marketing investments within the cost base of SAB Miller”46. The measure of not touching SAB Miller’s marketing and sales organisation is taken in order to maintain the same level of sales and not decrease them which might be the case if an optimization process would happen in the client-facing roles.

2016 2017 2018 2019 2020 AB InBev 2,015 Est Est Est Est Est

Distribution Expenses 4,136 4,122 4,284 4,452 4,627 4,809

Sales/Marketing/Ad Expenses 6,455 6,709 6,972 7,246 7,531 7,827

General and Administrative Expenses 2,213 2,300 2,390 2,484 2,582 2,683

Total SG&A (Pro forma statements) 12,804 13,131 13,646 14,183 14,740 15,319

44 (Davis, 2016). 45 (AB InBev, 2015b) 46 (Ab InBev, 2016b)

Exhibit 19: AB InBev SG&A Forecast. Sources: AB InBev Annual Report, Author's elaboration

The table above shows the estimates of Total SG&A costs for AB InBev according to the pro forma statements.

2016 2017 2018 2019 2020 SAB Miller 2015 Est Est Est Est Est Sales, Marketing and Distribution Expenses 2,132 2,225 2,242 2,258 2,275 2,292 Administrative expenses 2,232 2,269 2,286 2,303 2,320 2,337 Total SG&A (Pro forma statements) 4,364 4,494 4,528 4,561 4,595 4,629

Cost savings of 10% in Distribution 224 226

Cost savings in Administrative Expenses of 229 691 10% in 2017 and 30% in 2018 Total savings 453 917

Sales, Marketing and Distribution 2,132 2,225 2,017 2,032 2,049 2,066 Administrative expenses 2,232 2,269 2,057 1,612 1,629 1,647 Estimated Total SG&A 4,364 4,494 4,075 3,645 3,679 3,713 Exhibit 20: SAB Miller SG&A estimates. Sources: Bloomberg, Author's elaboration

The first part of Exhibit 20 shows the SG&A expenses as per pro forma statements. The 2017 savings amount to 10% of the distribution costs due to synergies. The sales and marketing costs will not incur any changes as stated before. Since the cost savings of administrative expenses relate to the dismissal of personnel, the significant proportion usually happens after a period of 2 years since takeover due to negotiations and work contract clauses as it was the case with Heinz. Both distribution and administrative cost savings, although they happen in 2017 and 2018, they do not have just a one-time effect. Since they are operational costs, they impact by the same scale also the future SG&A expenses i.e. in the period 2019- 2020.

For the combined company, AB InBev & SAB Miller, after the cost cutting measures the total SG&A expenses will be:

2017 2018 2019 2020 AB InBev&SAB Miller Est Est Est Est

SG&A Expenses 16,919 16,993 17,552 18,131

Exhibit 21: AB InBev & SAB Miller SG&A Expenses. Source: Author's elaboration

6.3. Accounts Payable Management

Accounts Payable (A/P) is a line item on the balance sheet under current liabilities that represents a short- term obligation towards creditors. When a company receives raw materials or goods from a supplier before paying for them, it records the bill or the invoice for the goods under A/P. From the moment the goods are received until the invoice is paid, the amount stays under A/P.

One strategy that 3G Capital deploys right after acquiring a company in order to free up cash is to increase the period when A/P are being paid. That is to say, the companies pay their suppliers extremely late. Most suppliers expect payment in 30 days. 3G owned companies ask their suppliers to give them 3-4 months to pay their bill47.

6.3.1. Accounts Payable Management in previous 3G deals

The method of delaying the payment of A/P has also been applied to Heinz after the 2013 acquisition. We are using the Days Payable Outstanding (DPO) metric to show how long it takes Kraft Heinz to pay its invoices. Kraft Heinz started paying its suppliers every 85 days in 2014 while in the previous year it was 67 days.

Kraft Heinz: Days Payable Outstanding 100

87 90 40 85 72 67 62 62 58 20

0 2009 2010 2011 2012 2013 2014 2015 2016

Exhibit 22: Kraft Heinz: Days Payable Outstanding. Source: Kraft Heinz 10-K reports To measure the full impact of delaying payments to the suppliers, we will look at Cash Conversion Cycle (CCC). The metric shows the period needed to sell inventory, to collect receivables and to pay supplier bills. It measures how long does it takes for a company to convert resources into cash flows, showing the ability to deploy short-term assets and liabilities in order to generate cash.

47 (Strom, 2015)

Kraft Heinz: Cash Conversion Cycle

43 39 Days Sales 28 32 34 41 Oustanding 11 (DSO) 47 49 12 34 38 66 70 78 Days 65 57 61 68 33 54 Inventory 13 Outstandin g (DIO) Days -58 -22 -19 Payable -62 -62 -72 -67 -85 -87 -90 Outstandin g (DPO) Cash Conversion Cycle (CCC)

2009 2010 2011 2012 2013 2014 2015 2016 Exhibit 23: Kraft Heinz Cash Conversion Cycle. Source: Bloomberg, Kraft Heinz 10-K reports

In Error! Reference source not found. it can be observed how the CCC metric has evolved in the period 2009-2016. The components of CCC are: Days Inventory Outstanding (DIO) it measures how long it takes a company to turn its inventory into sales; Days Sales Outstanding (DSO) counts how many days it takes to collect revenue after sales; Days Payable Outstanding (DPO) as explained above. Appendix - Kraft Heinz: Cash Conversion Cycle presents a detailed calculation of CCC.

From the above graph it can be seen that already from the first year of full ownership, 2014, 3G has managed to reduce by more than half the CCC: from 33 days in 2013 to just 13 days in 2014. The main element optimized was the A/P which shows an improvement of approximately 30% through DPO. In 2015 and 2016 the CCC was so well managed that it became negative. A negative CCC is a highly desirable achievement which interprets as the company is not paying for inventory or supplies until after it receives payment for selling the product.

A negative CCC is met quite often in the e-commerce business48. Since a negative CCC is an unusual fact for a “brick and mortar” business, I researched other ways to calculate CCC or its elements. DPO has two methods for calculation: one using CoGS as a denominator, as it was the case above, and the other using total purchases as a denominator. As a sanity check, in the Appendix - Kraft Heinz: Cash Conversion Cycle, the second method is also undertaken. This second approach also shows a negative CCC for the years 2015 and 2016, therefore, confirming our initial claim.

48 (Forbes, 2012)

If A/P had been managed according to be above statements, another area where the impact is highly visible is the Net Working Capital (NWC) under the balance sheet. NWC is a short-term liquidity measure, evaluating a company’s ability to pay of its current liabilities with current assets. There are various ways to calculate NWC, the major difference being the presence or thereof the lack of cash. We chose to calculate NWC according to Plenborg and Petersen (2012):

푁푒푡 푊표푟푘𝑖푛푔 퐶푎푝𝑖푡푎푙 = 퐼푛푣푒푛푡표푟푦 + 퐴푐푐표푢푛푡푠 푅푒푐푒𝑖푣푎푏푙푒 − 퐴푐푐표푢푛푡푠 푃푎푦푎푏푙푒

Kraft Heinz: Net Working Capital

871 769 Accounts Receivable 1,265 (A/R) 994 1,074 1,067 795 1,234 1,379 2,684 1,204 768 2,618 Inventories 914 1,120 1,097 1,238 1,249 1,452 1,329 1,333 1,184

-1,101 -1,130 -1,338 -1,202 -1,310 -1,651 -679 -543 Accounts Payables -4,168 -3,996 (A/P)

Net Working Capital

2009 2010 2011 2012 2013 2014 2015 2016 Exhibit 24: Kraft Heinz Net Working Capital. Source: Bloomberg, Kraft Heinz 10-K reports

6.3.2. Accounts Payable Management - Industry Benchmarking

The industry leader in terms of the length of time taken to pay its suppliers at 242 days is AB InBev according to the DPO graph below. Since the 2008 merger that form the current AB InBev the company steadily increased its DPO showing therefore that it has been action taken by 3G with a specific purpose: paying suppliers later will free up the cash needed for strategic expenses that increase either the top or bottom line such as such as investment in CAPEX, expenditures on marketing and sales, etc Fifer (1995).

Industry Days Payable Outstanding

400

300

200

100

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AB InBev SAB Miller Carlsberg Molson Coors Industry average

Exhibit 25: Industry Days Payable Outstanding. Source: Bloomberg

One adverse effect of delaying payments to the suppliers it’s the deteriorating relationship with them. The question that arises after observing AB InBev pays its suppliers so late is why the suppliers want to still work with AB InBev. Some of them have to continue to work with AB InBev. Due to the size of their business, it is hard for suppliers to find another customer as a replacement for AB InBev. Other vendors choose to cut business ties with AB while others protest against their requirements. The cases of an advertising agency and a small manufacturing company are real examples of this category49. Both of them received papers to accept a payment period longer than 120 days. By accepting it, AB will not incur any future penalties for paying them back so late.

The practice of delaying the payments to suppliers often appears in the food and beverage industry50 as it is also confirmed by the above graph that shows that all of the big brewing companies have slowly but steadily increased the period for paying their suppliers. SAB Miller has also followed the trend of increasing its DPO but at a much lower rate. There remain improvements to be done which will be exploited by 3G. However, in order to make a better forecast on the adjustments that will happen to SAB Miller regarding A/P, we have to look at the overall picture. We will consider how fast the industry is converting resources into cash and benchmark AB and SAB Miller. Since companies have different business terms with suppliers and customers, the way they convert cash differs from one another.

49 (Strom, 2015) 50 (Strom, 2015)

Industry Cash Conversion Cycle

100

-100

-200

-300 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AB InBev SAB Miller Carlsberg Molson Coors Industry average

Exhibit 26: Industry Cash Conversion Cycle. Source: Bloomberg and Annual Reports

The CCC industry average has been decreasing in the last ten years by approximately 20%, from 70 days in 2006 to 57 days in 2015. However, the big players presented above have declined their CCC even more. This shows that big breweries have an advantage over small ones when it comes to negotiating terms with partners both up and down the supply chain. AB InBev had 12 days in 2006 while in 2015 it has -151 days. At the current level, AB is paid for its products approximately half a year before it has to pay for its inventory and suppliers. Essentially is an interest-free way to finance operations by borrowing from their suppliers.

The same statement is valid also for SAB, although they had not been that efficient at optimising their working capital resources. SAB had a CCC of -2 days in 2006, which means the time it takes for cash inflows to happen is just slightly lower than the time of cash outflows. In 2015 SAB had a CCC of -57 days, approximately two months of upside between the time inflows and outflows occur. The next step is to investigate how the two companies managed to improve their CCC by looking at the CCC components.

AB InBev: Cash Conversion Cycle

Days Sales 57 Oustanding 49 45 (DSO) 26 26 25 25 24 25 28 82 Days 65 66 57 58 62 55 54 53 55 Inventory 12 -9 13 Outstanding (DIO) -102 -119 -33 -127 -115 -59 Days -139 -79 Payable -158 -100 -104 Outstanding -119 -180 (DPO) -185 -151 -202 Cash -242 Conversion Cycle (CCC)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Exhibit 27: AB InBev Cash Conversion Cycle. Source: Bloomberg, AB InBev Annual Reports

SAB Miller: Cash Conversion Cycle

Days Sales Oustanding 30 30 (DSO) 27 30 29 31 32 29 32 20 Days 48 50 56 51 Inventory 38 45 39 41 37 40 Outstanding 20 18 12 -5 (DIO) -2 -12 -23 -26 Days -55 Payable -60 -62 -49 -74 -86 -86 Outstanding -93 -99 -57 -115 (DPO) -128 Cash Conversion Cycle (CCC)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Exhibit 28: SAB Miller Cash Conversion Cycle. Source: Bloomberg, SAB Miller Annual Reports

The DIO across both companies had a minor improvement of 2-3 days in a period of 10 years. CAGR. AB was able to manage its inventory while experiencing a tremendous growth by quickly integrating the new acquisitions and keeping their inventories in line with the growth. SAB Miller, on the other hand, experienced a slow growth period and kept the inventory at a stable level without managing to improve it.

A comparison of DSO for both companies illustrates some interesting results. AB InBev made significant improvements in DSO compared to SAB during the 10 -year period. In 2006 DSO showed 49 days while in

2015 the DSO period decreased to almost half at 28 days. SAB Miller in 2006 had a DSO of 20 days and in the 10- year period, it increased the DSO by 12 days reaching 32 days in 2015. This shows poor management of the Account Receivables, even more so in a period with very little growth.

The DPO the last component of the CC and the focus point of this analysis. First, both companies made a significant improvement to their A/P, as the DPO in both cases has more than doubled in a period of 10 years. This indicates that improvements in A/P are the main explanation for the overall improvement in working capital. However, when comparing the two entities, AB was more efficient than SAB in managing it. Looking at the top line growth rates for both companies, there are two very different stories. AB InBev revenue grew at a CAGR of 10% mostly through inorganic growth while SAB Miller revenue grew at 0.66% CAGR. It means AB assimilated the new suppliers coming from the acquired businesses and contracted them with harsh business terms in order to improve the DPO.

Looking at the AB InBev’s DPO change year-over-year is averaging 16 days during the period 2006-2015. For our adjusted forecast we will assume the same change year-over-year happening at SAB post-merger in terms of DPO.

Adjusted Adjusted Adjusted Adjusted Days Payable Accounts Net Working Cash Flow from Outstanding Payable Capital Operations

Due to the increase of in DPO assumed, there will be several items impacted by it. First on the Balance Sheet the A/P will increase which in turn will impact the Net Working Capital. Secondly, a change in Net Working Capital will affect Cash Flow from Operations on the Cash Flow Statement.

SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est

Days Payable Outstanding 128 128 128 128

Accounts Payable 4,603 4,637 4,672 4,707

Adjusted Days Payable Outstanding 144 160 176 192 (+16 days increase YoY)

Adjusted Accounts Payables 5,011 5,460 5,915 6,376

Exhibit 29: SAB Miller Adjusted Accounts Payable. Source: Author's elaboration

The calculation behind the table above assumes Cost of Goods Sold remains as forecasted in the pro forma statements and the increase in Accounts Payable is driven by an increase of 16 days in DPO.

SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est (+) Inventories 1,035 1,043 1,051 1,059 (+) Accounts Receivable 1,270 1,279 1,289 1,299 (-) Accounts Payables 4,603 4,637 4,672 4,707 (=) Net Working Capital -2,298 -2,315 -2,332 -2,349

(+) Inventories 1,035 1,043 1,051 1,059 (+) Accounts Receivable 1,270 1,279 1,289 1,299 (-) Adjusted Accounts Payables 5,011 5,460 5,915 6,376 (=) Adjusted Net Working Capital -2,706 -3,137 -3,575 -4,019 Exhibit 30: SAB Miller Adjusted Net Working Capital. Source: Author's elaboration

After increasing the A/P, the Net Working Capital becomes even more negative which represents an improvement. Traditionally, a negative NWC is a disaster as it means companies cannot cover the bills and their short-term liquidity is in danger. When negative net working capital is done on purpose through efficient management, then it becomes a source of funding. Usually, long-term liabilities fund long-term assets and short-term liabilities fund short-term assets. Negative net working capital means short-term liabilities exceed short-term assets and the difference between them funds long-term or fixed assets such as investments in CAPEX.

SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est Cash Flow from Operating Activities 4,744 5,090 5,956 7,037 Adjusted Cash Flow from Operating Activities 5,421 5,318 6,009 6,827 Change 408 583 802 1,079 Accumulative change 408 991 1,793 2,872 Exhibit 31: SAB Miller Cash Flow from Operating Activities. Source: Author's elaboration

Due to the positive adjustment in A/P the Cash Flow from Operating Activities is also impacted positively. Over the period of 4 years forecasted in the financial model, the overall cash position improves by $2.8B. The company can use the extra funds from Operating Activities towards Financing Activities as they can pay back more of the debt contracted for financing the deal. As a conclusion, by increasing the period they take to pay their Accounts Payable, the company can release cash flow stream of $2.8B over a period of 4 years.

The company can use the extra cash towards paying back the huge amount of debt sitting on their balance sheet. By de-leveraging the company and bring it to a more suitable financial structure,

6.4. Fixed Assets Optimization

6.4.1. Asset Optimization in previous 3G deals

Kraft Heinz: Gross PPE 8,518 9,000 Asset disposal 7,430 1,830 906 6,000 5,225 5,267 5,359 4,466 4,110 2,720 2,782 2,900 2,796 6,688 3,000 2,131 2,374 6,524 431

1,978 2,092 2,505 2,484 2,459 2,365 0 2009 2010 2011 2012 2013 2014 2015 2016

PPE, net Depreciation

Exhibit 32: Kraft Heinz PPE. Source: Kraft Heinz 10-K reports

The above figure shows the development of Heinz’s gross Property, Plant & Equipment (PPE) composed of net PPE and depreciation. Between 2013-2014, the value of gross PPE went from $ 5.3 BN to $ 2.7 BN due to asset disposal and asset write-down as a measure of asset optimization. This shows that 3G Capital does have the measures in place to cut down on PPE to optimize the use of fixed assets in production.

6.4.2. Fixed Asset Optimization in the Industry

We were not able to find information about the number of breweries each company owned in order to compute a Fixed Assets ratio embedded into operations as we did in the previous cases. We therefore had to find a proxy to analyse the Fixed Asset topic and we developed the Revenue/ Property, Plant and Equipment in order to measure the amount of revenue produced by each dollar of PPE. The results as it can be seen are very similar for all four companies over the 5-year period, 2011-2015, with very little variation when comparing companies as that might be the standard for the industry. However, there are variations present year-over-year caused by the change in revenue.

Industry Revenue/PPE

3.0

2.5

2.0

1.5 2011 2012 2013 2014 2015

AB InBev SAB Miller Carlsberg Heineken

Exhibit 33: Industry Revenue/PPE. Source: Bloomberg

SAB Miller seems to be most stable and most efficient company in the peer group with AB InBev having mixed results. Any future adjustments that we would have to do to the PPE would have to be in relation to revenues while in practice, the PPE assets are relatively stable over short periods of time since improvements in that area take time. Additionally, any adjustment to the PPE will greatly disturb the total Invested Capital further on disturbing profitability ratios.

In consequence, since SAB Miller is the most efficient company and any adjustment in PPE will have great effects on the Invested Capital, we will assume no adjustments to be made to the Fixed Assets section of SAB Miller during the integration phase.

6.5. Capital Structure

Kraft Heinz Debt 32,404 30,000 25,230

20,000 29,713 13,655 25,151 10,000 5,142 4,618 4,613 5,027 6,009 13,585 3,848 5,076 4,559 3,078 4,780 0 1,535 2,160 2,691 2009 2010 2011 2012 2013 2014 2015 2016 ST Debt LT Debt

Exhibit 34: Kraft Heinz Debt. Source: Bloomberg

Since 3G Capital acquired Heinz in April 2013 the company has added a massive amount of debt compared to the previous years. Just after the acquisition the value of debt more than doubled showing that the transaction was a leveraged one. On top of that debt, there was even more added once Kraft was acquired and merged with Heinz in 2015 to form Kraft Heinz. Kraft itself had approximately $8 BN of debt previous to the merger which put together with the Heinz debt would be approximately $21 BN debt for the combined company. However, in 2016 we see a debt value of $32 BN, $10 BN more than the combined debt of both companies. It can be stated that 3G Capital is accustomed to use debt as a mean to raise capital and buy out companies. As 3G have raised debt several times in past for similar transactions, they can get loans at a very low-interest rate due to the confidence the lenders have in them knowing they can fulfil the debt obligation.

On 2nd March 2017, AB InBev released their first Annual Report51 under the new structure, which includes the previous SAB Miller entity. As the merged company formed officially only in October 2016, the newly released annual report comprises of the Income Statement capturing the activity corresponding for the full year 2016 of AB InBev and the period between October to December for SAB Miller. The Balance Sheet, as it represents a snapshot of the company position at a single point in time, captures all the adjustment post- merger in terms of financial structure.

For our purposes, the Income Statement does not represent a point of interest, as it does not capture the activity for the full year 2016 for both companies. However, the Balance Sheet does represent a good source of information for adjusting the financial model to reflect better the reality.

The purpose of the next exercise is to compare the 2016 Balance Sheet from our financial model to the one from the Annual Report. The exercise will function as a sanity check for our model and will improve the accuracy of it.

The first step was to restate the reported Balance Sheet as we did previously for AB and SAB. We restated the Balance Sheet to indicate Net Operating Assets and Invested Capital. The step was necessary for a like to like the comparison with the balance sheet from the financial model. The same guiding principles were used into restating the Balance Sheet as before. For a full detailed view of the restated Balance Sheet, please refer to Appendix - AB InBev 2016 Balance Sheet (as reported).

Looking at the Invested Capital level, the two Balance Sheets show a significant difference. The Invested Capital for the 2016 reported Balance Sheet is $176,099 M. The Balance Sheet from our financial model

51 (AB InBev, 2016)

48 shows an Invested Capital of $128,085 M. The main difference between the two comes from the fact that our balance sheet does not count for the new financial structure of the company. The deal was financed with a high amount of debt, which is not captured in our model yet. To reflect better the reality, we will adjust the Long-term Debt in the financial model in order to match the one from the latest Annual Report. In the same time, on the other side of the Balance Sheet, we will also adjust the Goodwill in order to have the Invested Capital match the Net Operating Assets.

In the financial model, we forecasted that at the end of 2016 AB had on the books a value of Long-term Debt of $43,541 M and SAB a value of $8,814 M, combined $52,355 M. The Annual Report shows a value of the Long-term Debt for the combined entity of $113,941 M. The difference between the value we forecasted and the reported one is $61,586 M. In order to finance the deal, the company issued bonds worth 60,720 M in USD and EUR currencies (see Appendix – AB InBev Debt Maturity Profile). The difference between what we are missing on the Balance Sheet and what the company has issued is insignificant.

As a result, we will make an adjustment of $60,720 M to the value of the Long-term Debt in the financial model in order to reflect the reality. The details of the 60,720 M bond issuance are presented in Exhibit 35. For a detailed debt repayment plan, refer to Appendix – Debt Repayment Schedule. The interest and principal payments related to the newly acquired debt are integrated into the financial model and follow the schedule presented in the Appendix – Debt Repayment Schedule. The principal amount is recorded on the Balance Sheet under Invested Capital as “LT Debt related to the 2016 merger”. It will be a separate line from the already present debt. The interest payments are integrated in the financial model on the Income Statement after NOPAT as a separate line, “Financial expenses related to the 2016 merger”.

Principal Maturity Currency Interest Rate Amount Year 4,000 USD 1.900% 2019 1,750 EUR 0.625% 2020 1,250 EUR 3M EURIBOR + 75 bps 2020 7,500 USD 2.650% 2021 500 USD 3M LIBOR +126 bps 2021 2,000 EUR 0.875% 2022 6,000 USD 3.300% 2023 2,500 EUR 1.500% 2025 11,000 USD 3.650% 2026 3,000 EUR 2.000% 2028

6,000 USD 4.700% 2036 One additional step that we have to take at 2,750 EUR 2.750% 2036 this point is to check whether the company is 11,000 USD 4.900% 2046 able to meet its debt repayment schedule. 1,470 USD 4.915% 2046 Most of the debt comes due in the next 60,720 decade. Only $ 15 BN is scheduled to be

Exhibit 35: AB InBev acquired debt in relation to the merger. paid in the period covered by our analysis, Source: AB InBev 2016 Annual Report 2017-2020. The highest amount to be paid is scheduled for 2019 and it amounts to $6 BN including interest expenses and principal repayment. However, the EBITDA for that year is expected to be $ 26 BN, which is more than four times the amount to be paid. Even in 2026 when the company has to pay more than $12 BN, it is only half of the EBITDA mentioned before. As a result, it is safe to assume for future purposes that the company can meet its debt requirements in the future. However, the dividend payout and investments in CAPEX will be put under much pressure as a result of the debt obligations.

The above sections referring to Cost of Goods Sold, Selling, General and Administrative Expenses and Accounts Payables Management show the values of the synergies thus answering sub-questions number 3.

7. Consolidated Financial Statements for the merged company

Based on the pro forma financial statements and including the measures implemented for Cost of Goods Sold, Selling, General and Administrative Expenses, Accounts Payable and Capital structure, we forecasted the financial statements for the combined company for 2017-2020. The revenue growth rate for this period, 3%, is the implied growth rate achieved by AB and SAB in the past 5-year period, 2011-2015.

The financial statements presented below will serve as the basis for the next section, the calculation and interpretation of various measures of value.

Income Statement 2017 Est 2018 Est 2019 Est 2020 Est Revenue 67,227 69,228 71,302 73,453 Cost of Goods Sold -24,977 -25,409 -26,167 -26,953 Selling, General and Administrative Expenses -16,919 -16,993 -17,552 -18,131 Other Operating (Income)/Expense - Net 1,337 1,381 1,428 1,476 EBITDA 26,669 28,207 29,011 29,845 Depreciation -3,429 -3,529 -3,633 -3,740 Amortization -1,329 -1,331 -1,334 -1,337 EBIT / Operating Income 21,911 23,347 24,044 24,767

Income Tax -4,134 -4,453 -4,561 -4,673 Tax shield from Net Financial Expenses 943 857 786 769 NOPAT 18,720 19,750 20,268 20,863 Financial Expenses -3,979 -4,043 -4,125 -4,221 Financial Expenses related to the 2016 merger -2,026 -2,026 -2,026 -1,950 Financial Income 1,041 1,559 2,016 2,126 Tax on Net Financial Expenses -943 -857 -786 -769 Net Financial Expenses -5,907 -5,367 -4,920 -4,814 Profit After Tax 12,814 14,383 15,348 16,049

Total Dividends Paid 9,546 10,859 11,741 12,438

Balance Sheet 2017 Est 2018 Est 2019 Est 2020 Est

Net Operating Assets Inventories 3,950 4,044 4,176 4,313 Accounts Receivable 4,601 4,742 4,887 5,038 Prepaid Expenses 712 735 759 784 Tax Receivable 1,028 1,062 1,097 1,134 Current Assets 10,291 10,582 10,920 11,269

Total Intangible Assets 118,441 118,618 118,795 118,974 Goodwill related to the 2016 merger 60,720 60,720 60,720 60,720 Property, Plant & Equip, Net 28,419 29,282 30,178 31,107 Investments in Affiliates 9,838 9,838 9,838 9,838 Deferred Tax Assets 1,394 1,395 1,396 1,397 Other LT Receivables 827 827 827 827 Misc LT Assets 159 160 161 162 Non-current Assets 219,797 220,839 221,915 223,025

Accounts Payables 21,744 22,608 23,688 24,801 Deferred Revenue 904 939 976 1,014 Deferred Tax Liabilities 16,082 16,625 17,189 17,775 Other Provisions & Creditors 2,623 2,727 2,834 2,945 ST Provisions 224 233 242 252 Misc ST Liabilities 883 889 896 902 Non-interest Bearing Debt 42,461 44,022 45,825 47,689

Net Operating Assets 187,627 187,400 187,010 186,605

Invested Capital

Common Stock 10,075 10,075 10,075 10,075 Retained Earnings 61,674 65,198 68,805 72,417 Non-controlling Interest 4,778 4,778 4,778 4,778

Total Equity 76,527 80,051 83,658 87,270

ST Debt 10,170 11,343 12,725 14,314 LT Debt 52,355 52,355 52,355 52,355 LT Debt related to the 2016 merger 60,720 60,720 56,720 53,401 Pension Liabilities 2,725 2,725 2,725 2,725 Derivatives & Hedging Liabilities 4,420 4,420 4,421 4,422 Interest Bearing Debt 130,390 131,563 128,947 127,218

Cash and Cash Equivalents 15,587 20,159 21,263 23,395 Other ST Assets 2,514 2,832 3,042 3,191 LT Investments & Receivables 217 224 233 241 Derivative & Hedging Assets 970 997 1,055 1,053 Prepaid Pension Costs 2 2 2 2 Financial Assets 19,289 24,214 25,595 27,882

Invested Capital 187,627 187,400 187,010 186,605

Cash Flow Statement 2017 Est 2018 Est 2019 Est 2020 Est

Cash Flow from Operating Activities Profit After Tax 12,814 14,383 15,348 16,049 Depreciation & Impairment 4,758 4,861 4,967 5,077 Change in Inventories -60 -94 -132 -137 Change in Receivables -79 -140 -146 -151 Change in Prepaid Expenses -94 -23 -24 -25 Change in Tax Receivable 206 -34 -35 -37 Change in Investments in Affiliates 0 0 0 0 Change in Deferred Tax Assets -1 -1 -1 -1 Change in Other LT Receivables 0 0 0 0 Change in Misc LT Assets -1 -1 -1 -1 Change in Account Payables 1,024 864 1,080 1,113 Change in Deferred Revenue 34 35 37 38 Change in Deferred Tax Liabilities 1,042 543 564 585 Change in Other Provisions & Creditors 99 103 107 111 Change in ST Provisions 8 9 9 10 Change in Misc ST Liabilities 7 7 7 7 Cash Flow from Operating Activities 19,757 20,511 21,779 22,639

Cash Flow from Investing Activities

Change in CAPEX -4,262 -4,393 -4,528 -4,669 Purchase of intangibles -1,504 -1,508 -1,512 -1,516 Change in Goodwill acquired 0 0 0 0 Cash Flow Investing Activities -5,765 -5,900 -6,040 -6,185

Cash Flow from Financing Activities

Dividends Paid -9,546 -10,859 -11,741 -12,438 Interest Bearing Debt 926 1,174 -2,617 -1,729 Other ST Assets -227 -318 -211 -148 LT Investments & Receivables -8 -8 -8 -8 Derivative & Hedging Assets 38 -27 -58 2 Prepaid Pension Costs 0 0 0 0 Cash Flow from Financing Activities -8,817 -10,039 -14,635 -14,322

Cash Beginning Balance 10,413 15,587 20,159 21,263

Total Cash Flow 5,175 4,572 1,104 2,132

Cash Ending Balance 15,587 20,159 21,263 23,395

8. Drivers and Measures of Value Creation

Companies generate value by investing cash now in order to generate more cash in the future i.e. today’s cash outflows are less than tomorrow’s cash inflows after taking into account the time value of money.

Cash flows are driven by the expected return on invested capital and revenue growth. A company’s return on invested capital and its income growth determine how revenues are converted in cash flows. Any management decision that does not increase cash flow does not create value (Koller et al., 2010).

ROIC

Cash Flow Revenue Value Growth Cost of Capital

Exhibit 36 : Value drivers. Source: Koller et al. (2010)

In order to have a structure on the analysis of the measures of value creation, we will use the below framework, known formally as a Du Pont model.

Profit Margin

ROIC Turnover Rate of Invested capital EVA

WACC

Exhibit 37: Du Pont model. Source: Plenborg and Petersen (2012)

Return on Invested Capital (ROIC) is the return the company earns on each dollar invested in the business. It expresses the return on capital invested of a firm’s net operating profit after tax (Plenborg and Petersen, 2012).

푁푒푡 푂푝푒푟푎푡𝑖푛푔 푃푟표푓𝑖푡 퐴푓푡푒푟 푇푎푥 (푁푂푃퐴푇) 푅푒푡푢푟푛 표푛 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 = 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙

8.1. Return on Invested Capital

8.1.1. Return on Invested Capital in the Industry

5-Year ROIC 2011 2012 2013 2014 2015 Average AB InBev 13.15% 14.13% 19.17% 12.62% 12.08% 14.23% SAB Miller 11.32% 9.48% 9.95% 11.67% 9.84% 10.45% Carlsberg 6.04% 6.43% 5.78% 5.07% -1.64% 4.34% Heineken 9.51% 14.03% 7.50% 7.51% 8.93% 9.50% Molson Coors 7.62% 5.65% 5.44% 5.17% 4.06% 5.59% Industry average 12.63% 11.61% 10.09% 8.86% 8.77% 10.39% Exhibit 38: Industry Return on Invested Capital. Source: Bloomberg. Author’s elaboration

The above table presents the cross-sectional analysis of ROIC on the brewing industry. Looking across the period AB InBev constantly exceeds the other competitors in terms or ROIC. It is also the one with the lowest variation in the 5-year period. SAB Miller is the third company amongst the ones presented, surpassed by Heineken due to the extremely positive result from 2012. SAB Miller also does not have any “spikes” of performance on single years like AB and Heineken do.

We also observe a trend amongst all five companies and across the industry as a whole: the ROIC has fallen across the 5-year period without exception. None of the companies in 2015 exceeds the level from 2011.

ROIC cannot explain why the profitability decreased during the period. We have to look if revenue and expense management or capital utilisation is driving the decrease. In order to do that we have to decompose the ROIC into profit margin and turnover rate of invested capital (Plenborg and Petersen, 2012).

푁푒푡 푂푝푒푟푎푡𝑖푛푔 푃푟표푓𝑖푡 퐴푓푡푒푟 푇푎푥 (푁푂푃퐴푇) 푃푟표푓𝑖푡 푀푎푟푔𝑖푛 = 푅푒푣푒푛푢푒

푅푒푣푒푛푢푒 푇푢푟푛표푣푒푟 푅푎푡푒 표푓 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 = 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙

5-Year Profit Margin 2011 2012 2013 2014 2015 Average AB InBev 26.79% 28.37% 42.77% 26.31% 25.27% 29.90% SAB Miller 22.45% 17.44% 18.50% 18.20% 16.61% 18.64% Carlsberg 11.46% 11.24% 11.09% 9.99% 6.32% 10.02% Heineken 9.71% 10.59% 9.55% 9.81% 10.95% 10.12% Exhibit 39: Breweries Profit Margin. Source: Bloomberg, Author’s elaboration

Turnover Rate of 5-Year 2011 2012 2013 2014 2015 Invested Capital Average AB InBev 49.09% 49.79% 44.82% 47.95% 47.81% 47.89% SAB Miller 50.43% 54.37% 53.78% 64.12% 59.22% 56.38% Carlsberg 52.69% 57.26% 52.09% 50.79% -26.01% 37.36% Heineken 97.93% 132.54% 78.56% 76.55% 81.61% 93.44% Exhibit 40: Breweries Turnover Rate of Invested Capital. Source: Bloomberg, Author’s elaboration

By looking at the two tables is hard to point exactly which is the cause of the fall in ROIC across the industry and the big players. Profit Margin(PM) has decreased in the 5-year period for AB, SAB and Carlsberg while Heineken has slightly increased by about 1 percentage point. The Turnover Rate of Invested Capital (TRIC) falls across all players except SAB Miller, sometimes dramatically as it was the case of Carlsberg (due to impairment charges on goodwill). AB had a slight decrease of about 2 percentage points while SAB Miller experienced a positive increase of about 9 percentage points in the 5-year period. After careful consideration, we conclude that the drop of ROIC across the industry and the big player is due to a combination of PM and TRIC and is not explained wholly by one single ratio. The industry figures for ROIC, PM and TRIC, will serve us as a sanity check for our forecasted values in the next parts.

8.1.2. Return on Invested Capital Forecast

In the following section, we will question whether the combined company, AB InBev and SAB Miller, will provide a better ROIC than the weighted average of ROIC of AB InBev and SAB Miller as separate entities. What we are questioning, in the end, is if 3G Capital management is bringing any value i.e. will the measures deployed by 3G on the merged company generate more value than the companies if they were continued to be ran as before the merger corresponding to sub question 4.

푅푂퐼퐶 (퐴퐵 퐼푛퐵푒푣&푆퐴퐵 푀푖푙푙푒푟) ≥ 푤푒𝑖푔ℎ푡푒푑 푎푣푒푟푎푔푒 (푅푂퐼퐶 (퐴퐵 퐼푛퐵푒푣) + 푅푂퐼퐶 (푆퐴퐵 푀푖푙푙푒푟))

The cut-off date will be 2020 as this is the year the full integration and synergies will be achieved.

For calculating ROIC for the merged company we will use as a source the Consolidated Financial Statements for the merged company shown in the previous chapter. For the calculation of ROIC for the separate entities and the weighted average one, we will use the Pro forma Financial Statements.

18% Return On Invested Capital

16% 14.26% 13.66% 14% 13.09% 12.53% 12% 11.18% 10.54% 10.84% 9.98% 10%

8% 2017 2018 2019 2020 AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB

Exhibit 41: ROIC 2017-2020. Source: Author's elaboration

The merged company contains all the cost cutting and capital structure changes imposed by 3G Capital. The merged company, AB&SAB, is then compared with AB, SAB and the weighted average of both. AB and SAB act as separate fictional entities as if they were run in the future as before (without being merged). We can think of the weighted average company AB+SAB, that it represents how the two companies would combine under a merger of equals, not an acquisition as it was in practice, and without any particular management intervention. A merger of equals happens when two organisation of roughly the same size merge to form one company. In a merger of equals, the shareholders give up they shares in the two businesses and receive securities in the newly formed company52 i.e. they are not paid a premium (as it was the case with SAB Miller shareholders.

We observe the ROIC of the merged company is much less than that of the weighted average of AB and SAB. In other words, the cost cutting measures and the capital structure modification done by 3G Capital does not create more value than if the two companies were separate entities or merged as equals.

Since the time frame we are focusing on is just four years, a period where all the cost synergies are happening and none of the revenue synergies materialize, we conclude that the cost cutting measures right after the merger are not enough to create additional value.

In order to examine what drives the value down, we will decompose the ROIC into Profit Margin and Turnover Rate of Invested Capital. For a detailed calculation, see Appendix – Return on Invested Capital

Profit Margin

30% 28.53% 28.43% 28.40% 28% 27.85% 26% 24% 24.72% 24.08% 24.39% 22% 23.74% 20% 18% 16% 2017 2018 2019 2020

AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB

Exhibit 42: Profit Margin 2017-2020. Source: Author's elaboration

52 (Investopedia, 2017a)

2017-2020.

The Profit Margin of the merged company is higher than AB, SAB and their weighted average. The result is not surprising since the merged company encompasses all the cost-cutting measures implemented by 3G. Comparing the above figures with the ones from the industry in the previous section, they seem to be acceptable for the brewing industry and not out of line. This serves us as a double check to the financial model that predicted the Profit Margins. Turnover Rate of Invested Capital

65% 57.70% 55.99% 54.35% 52.77% 55%

45% 38.13% 39.36% 35.83% 36.94% 35% 2017 2018 2019 2020

AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB

Exhibit 43: Turnover Rate of Invested Capital 2017-2020. Source: Author's elaboration

The Turnover Rate of Invested Capital of the merged company AB&SAB is about 15 percentage points lower than that of the weighted average of AB + SAB.

After checking the above figures with the ones for the industry, they seem to be in line thus confirming the forecast method in the financial model.

Consequently, although the Profit Margin of the merged company is higher, the Turnover Rate of Invested Capital causes the drop in Return on Invested Capital.

For each line item that composes the Invested Capital, we will calculate the number of days on hand to obtain details both on the relative importance and the trend on each line item. Days on hand indicates the number of days an accounting item is consuming cash53.

365 퐷푎푦푠 표푛 ℎ푎푛푑 (푓표푟 푒푎푐ℎ 𝑖푡푒푚) = 푇푢푟푛표푣푒푟 푟푎푡푒 (표푓 푒푎푐ℎ 𝑖푡푒푚)

53 (Plenborg and Petersen, 2012).

AB&SAB Days on hand of Invested Capital weighted average (AB+SAB) 2017 2018 2019 2020 2017 2018 2019 2020 21 21 21 21 Inventories 22 22 22 22 25 25 25 25 Accounts Receivable 25 25 25 25 4 4 4 4 Prepaid Expenses 4 4 4 4 6 6 6 6 Tax Receivable 6 6 6 6 56 56 56 56 Current Assets 57 57 57 57

643 625 608 591 Total Intangible Assets 643 625 608 591 330 320 311 302 Goodwill related to the 2016 merger 0 0 0 0 154 154 154 155 Property, Plant & Equip, Net 154 154 154 155 53 52 50 49 Investments in Affiliates 53 52 50 49 8 7 7 7 Deferred Tax Assets 8 7 7 7 4 4 4 4 Other LT Receivables 4 4 4 4 1 1 1 1 Misc LT Assets 1 1 1 1 1,193 1,164 1,136 1,108 Non-current Assets 864 844 825 807

118 119 121 123 Accounts Payables 116 116 117 117 5 5 5 5 Deferred Revenue 5 5 5 5 87 88 88 88 Deferred Tax Liabilities 87 88 88 88 14 14 15 15 Other Provisions & Creditors 14 14 15 15 1 1 1 1 ST Provisions 1 1 1 1 5 5 5 4 Misc ST Liabilities 5 5 5 4 231 232 235 237 Non-interest Bearing Debt 229 229 230 231

1,019 988 957 927 Net Operating Assets 692 672 652 633 Exhibit 44: Comparison of Days on hand of Invested Capital for AB&SAB and weighted average (AB+SAB). Source: Author's elaboration The comparison shows the sole reason the Turnover rate of Invested Capital of the merged company is diminished compared to the weighted average one is the investment in Goodwill related to the 2016 merger. As a conclusion, the Return on Invested Capital decreases because the benefits of improving costs and optimizing net working capital are out weighted by the heavy burden of goodwill and debt (depending on which side of the balance sheet you are looking) acquired in relation to the merger.

8.2. Economic Value Added

Economic value added (EVA) is the incremental difference in the rate of return over the cost of capital. It expresses the value generated from funds invested in a business. EVA measures the charge of cost for investing capital into a certain project and then evaluates if it is generating enough cash to be considered a good investment. The charge represents the minimum return that investors require to make their investment worthwhile. A positive EVA indicates a project generates returns in excess of the required minimum return54. The result is a measure of quantified economic profit.

퐸푐표푛표푚𝑖푐 푉푎푙푢푒푑 퐴푑푑푒푑 = (푅푂퐼퐶 − 푊퐴퐶퐶) ∗ 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙

The total required rate of return is called the weighted average cost of capital (WACC) calculated as:

푁퐼퐵퐷 푀푉퐸 푊퐴퐶퐶 = ∗ 푟 ∗ (1 − 푡) + ∗ 푟 푁퐼퐵퐷 + 푀푉퐸 푑 푁퐼퐵퐷 + 푀푉퐸 푒

where NIBD = market value of Net Interest Bearing Debt, MVE = market value of equity, rd = interest rate on

Net Interest Bearing Debt, re = shareholders’ required rate of return, t = marginal tax rate.

As we are interested in forecasting the EVA, we would require the WACC to have as well a forward-looking perspective. As the task of forecasting the expected market value of equity and debt is daunting, we will use a WACC computed by Bloomberg that reflects the latest public information disclosed. In section Appendix – WACC a more detailed view is presented.

Bloomberg estimates the WACC for the merged company as per 10th May 2017 to be 7.2%, 7% representing the equity side and 0.2% the debt side. Although the debt side seems to be undervalued, it is calculated after taxes. Also by verifying Appendix – Debt Repayment Schedule we will observe the company indeed managed to borrow at an extremely low-interest rate. There might other questionable issues such as the way to calculate the required return on equity since there are various methods acceptable. However, for the purpose of the entire paper and this section, in particular, we choose the use the 7.2% WACC, being aware of the shortcomings and the weaknesses it implies.

Furthermore, we will compute the EVA for the merged company and the weighted average one, similar to the previous section. The purpose is to quantify the economic profit created by the merged company and

54 (Investopedia, 2017b)

60 compare it with the hypothetical example, which is the weighted average one. We will use as a cut-off date the year 2020, as that is the year were all the integration process and cost cutting measures are completed.

Weighted average (AB+SAB) 2020 EVA Invested Revenue NOPAT PM TRIC ROIC WACC EVA Capital 73,453 18,155 127,304 24.72% 57.70% 14.26% 7.20% 8,992 Exhibit 45: Economic Value Added for AB&SAB in 2020. Source: Appendix - Return on Invested Capital 2017-2020.

AB&SAB 2020 EVA Invested Revenue NOPAT PM TRIC ROIC WACC EVA Capital 73,453 20,863 186,605 28.40% 39.36% 11.18% 7.20% 7,427

Exhibit 46: Economic Value Added for AB&SAB in 2020. Source: Appendix - Return on Invested Capital 2017-2020.

It can be observed that approximately $1.5 BN are lost in economic profit in the year 2020 alone due to the difference in ROIC.

Using the goal seek function in Excel we found that for the merged company to achieve the same level of EVA as the weighted average one, the Return on Invested Capital would have to be 12.02%. Since the Turnover Rate of Invested Capital is fixed, in order to achieve the ROIC of 12.02% the increase would have to come from the Profit Margin. An increase in PM from 28.40% to 30.53% would be required. Since increasing the Revenue is not a strategy for the company during this phase, an NOPAT of $22,428 M is needed to achieve the desired PM. The growth in NOPAT from $20,863 to $22,428 would have to be the result of even more cost cutting measures worth $ 1.5 BN.

AB&SAB 2020 EVA of 8,922 Invested Revenue NOPAT PM TRIC ROIC WACC EVA Capital 73,453 22,428 186,605 30.53% 39.36% 12.02% 7.20% 8,992 Exhibit 47: Economic Value Added calculation. Source: Author’s elaboration. In author’s opinion, additional cost cutting measures of $1.5 BN cannot be achieved or are not economically feasible since they will affect the production, which in turn will lower the revenue.

As a result, we state that the merged company only in 2020 is losing about $1,5 BN in economic profit compared to a theoretical example. This hypothetical example represents the weighted average of the two

61 companies without any management intervention i.e. no cost cutting measures and no capital structure adjustment. Although the present paper is a case study anchored in reality, there was a need to create the hypothetical example as a term of comparison to examine whether the company can achieve more value creation only through the means of cost cutting.

We conclude that the merged company AB InBev&SAB Miller cannot achieve the maximum potential regarding value creation only through cost cutting measures, working capital optimisation and capital structure modification.

8.3. Revenue Growth

Since cost-cutting measures single-handedly, do not represent the optimal solution for value creation, we will turn our focus on revenue growth as according to Exhibit 36. Revenue growth represents a powerful driver of value creation.

As mentioned previously, growth creates value only when a company’s new customers generate returns on invested capital (ROICs) greater than the cost of capital. Achieving the right balance between growth and ROIC is essential to value creation.

Koller et al. (2010) mention that for companies with high ROIC, returns are affected more by an increase in revenues than an increase in ROIC. Meaning that these types of businesses if they let their ROIC drop slightly, but not too much, to achieve higher growth, their returns can improve. AB InBev can be such a company considering in the recent past it had the highest ROIC amongst competitors.

Due to the limits on the size of the paper and the purpose, it has been designed for, this section is not about investigating how revenue growth can be achieved or what are the specific strategies in terms of markets, products, prices etc the company has to undertake to grow at a certain rate.

What we want to demonstrate is how long-term revenue growth creates value. Let us assume that in 2020 once the integration phase of the merger ends, the management board is aiming to achieve the level of Economic Value Added (EVA) of $ 8,992 M mentioned previously in the hypothetical example. They would be interested in knowing in what year that level of EVA can be achieved.

In order to do the simulation, we will use the financial model. We still assume the same financial statements for the period 2017-2020 as in the section Consolidated financial statements for the merged company. Based on the year 2020 we forecast the financial statements into the future.

16,000 r=5%

r=3% 12,000

r=2%

8,992 r=1% 8,000 r=0%

4,000 Economic Value Added (EVA) Added Value Economic

0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Exhibit 48: Achieving EVA = 8,992, at various revenue growth rates. Source: Author's elaboration.

At a revenue growth rate of zero, meaning revenue remains constant at the 2020 level, the firm can never achieve an EVA of 8,992. At 1% growth rate the company achieves the targeted EVA during 2028, and an additional half of percentage growth shortens the period by three years. The implied growth rate assumed for the period 2017-2020 of 3% makes the target achievable in 2023.

Achieving Target EVA= $8,992 M At a revenue growth rate of zero, meaning revenue Revenue Growth Rate remains constant at the 2020 level, the firm can never (r) Year to reach target achieve an EVA of 8,992. At 1% growth rate the 0.0% - company achieves the targeted EVA during 2028, and 1.0% 2028 an additional half of percentage growth shortens the 1.5% 2025 period by 3 years. The implied growth rate assumed for 2.0% 2024 the period 2017-2020 of 3% makes the target 2.5% 2023 achievable in 2023. 3.0% 2023 4.0% 2022 When looking at the accumulated EVA for the same 5.0% 2022 revenue growth rates, we then observe the scale of Exhibit 49: Sensitivity analysis of Revenue Growth Rate impact revenue growth has on value creation for a and its impact on EVA. Source: Author's elaboration. longer period. A 1% increase in the growth rate, translates into approximately $12 BN additional economic profit for the period 2017-2030.

200,000

160,000

120,000

80,000

Accumulated EVA Accumulated 40,000

- 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

r=5% r=3% r=2% r=1% r=0%

Exhibit 50: Accumulated EVA for various revenue growth rates. Source: Author's elaboration

The impact of revenue growth rate is significant in the long-term value creation as it has a compounding effect, similar to the effect of an interest rate on a long-term investment. The company, therefore, has to develop and invest in strategies to increase the revenue growth in order to maximize the potential for value creation.

8.4. Cash Value

Return on Invested Capital and Economic Value Added both measure different aspects of value creation. As a primary investment criterion, however, Private Equity firms are looking for companies with stable and recurring cash flows in order to have sufficient cash to service the entire debt obligation. It comes as no surprise that PE firms are interested in precisely measuring the cash returns on their investment55.

Acquisitions create value when the cash flows of the combined companies are greater than sum of cash flows of the independent companies.

In this section, we want to measure the breakeven year when the value of the combined company matches the implied price of it. We are looking for the breakeven year as opposed to the somewhat similar payback period method. The payback period is a purely accounting measure which completely ignores the time value of money thus not satisfying our needs.

Ideally, in order to measure the breakeven year of the transaction, we would treat it as a separate project and calculate the increase in value created by the acquisition and compare it with the market value of the target plus the acquisition premium.

55 (Barber and Goold, 2007)

퐵푟푒푎푘푒푣푒푛 푌푒푎푟(푋): ∆푉푎푙푢푒 푑푢푒 푡표 푡ℎ푒 푎푐푞푢𝑖푠𝑖푡𝑖표푛 = 푀푎푟푘푒푡 푉푎푙푢푒 표푓 푇푎푟푔푒푡 + 퐴푐푞푢𝑖푠𝑖푡𝑖표푛 푃푟푒푚𝑖푢푚

However, since we are not able to separate the value brought in only by the acquisition due to the synergies amongst the two companies, we will have to use the combined company as a whole.

To determine the year when the breakeven ensues we will use the following equation:

퐵푟푒푎푘푒푣푒푛 푌푒푎푟 (푋): 푉푎푙푢푒 표푓 푡ℎ푒 퐶표푚푏𝑖푛푒푑 퐶표푚푝푎푛푦 𝑖푛 푌푒푎푟 푋 = 푀푎푟푘푒푡 푉푎푙푢푒 표푓 퐴푐푞푢𝑖푟푒푟 푏푒푓표푟푒 퐴푐푞푢𝑖푠𝑖푡𝑖표푛 + 푀푎푟푘푒푡 푉푎푙푢푒 표푓 푇푎푟푔푒푡 + 퐴푐푞푢𝑖푠𝑖푡𝑖표푛 푃푟푒푚𝑖푢푚

The above equation is inspired from Koller et al. (2010) and adapted to our needs. The goal is to identify the year when the total value of the merged company equals the sum of the market value of the acquirer before announcing the deal plus the market value of the target before the deal was announced plus the premium paid for the acquisition.

In this case, we will work based on the assumption that financial markets were efficient and the Market Value of the Acquirer before Acquisition is correctly priced. A misprice in the Market Value of the Acquirer would disturb our result significantly.

We will start with the end part, market values and premium paid, as it is public information. According to S&P IQ Capital database, the market capitalization of AB InBev the day prior to the announcement of the offer was €160,723 MM (see Appendix – Transaction Details). The EUR/ USD exchange rate used by S&P IQ Capital is 1.19514356, which translates into $192,087MM. The market capitalization of SAB Miller the day before the offer was €69,490 MM, which translates to $83,050 MM. The implied enterprise value meaning the market capitalization plus the premium paid was € 101,946 MM, meaning $121,840 MM. This translates into a premium for the acquisition of 46%. In consequence the market cap of the acquirer plus the market cap of the target plus the acquisition premium equal to $313,928 MM. This value will be right side of our equation.

To calculate the left side of the equation, we need to compute the value of the merged company by using an NPV formula, similar to the Discounted Cash Flow (DCF) model used for determining the enterprise value. The main difference will be that the DCF model incorporates a calculation for the terminal value of the company. Since we are not interested in valuing the company for an indefinite period, we will not include a terminal value of the company.

퐹퐶퐹퐹 푀푎푟푘푒푡 푉푎푙푢푒 = ∑푥 푡 푡 푡=1 (1+푊퐴퐶퐶)푡

65 where x=breakeven year,

FCF=Free cash flow to the Firm = Cash Flow from Operating Activities - Cash flow from Investing activities56,

WACC=weighted average cost of capital.

Our base case scenario assumes a revenue growth rate equal to the implied one of 3% and a WACC of 7.2%, the breakeven year when the value of the future FCFFs equals the market value of AB plus the market value of SAB plus the acquisition premium is 2050. Any future FCFF obtained after 2050 will represent a gain on the transaction for the acquirer.

Also in this particular evaluation, the revenue growth rate and the WACC play a major role. We will construct a sensitivity analysis based on these two measures in order to assess the impact they have upon the breakeven year.

Breakeven Year WACC

6.20% 7.20% 8.20% 9.20%

r=3% 2045 2050 2060 >2070 Rate

r=4% 2041 2045 2051 2064 r=5% 2039 2042 2046 2052 r=6% 2038 2040 2043 2047 r=7% 2036 2038 2040 2043

Revenue Growth Revenue r=8% 2035 2037 2038 2041 Exhibit 51: Breakeven Year sensitivity to Revenue Growth Rate (vertical) and WACC (horizontal). Source: Author's elaboration

Higher revenue growth rate implies more value created while a higher WACC implies lower value created.

After careful research, there was no evidence of any study looking at the breakeven period of an acquisition. The reason is that the method is quite unorthodox as most studies look at the valuation of transactions. Consequently, we do not have a term of comparison for our breakeven period. However, we consider the breakeven period of 33 years, 2017-2050, for the merged company to recoup its value too high.

Therefore, the need of a proper valuation arises to collect additional information.

56 (Plenborg and Petersen, 2012)

We will construct a DCF valuation to evaluate the enterprise value according to the method of Plenborg and Petersen (2012) based on the formula:

푥 퐹퐶퐹퐹푡 퐹퐶퐹퐹푛+1 1 퐸푛푡푒푟푝푟𝑖푠푒 푉푎푙푢푒 = ∑ + + 0 (1 + 푊퐴퐶퐶)푡 푊퐴퐶퐶 − 푔 1 + 푊퐴퐶퐶 푡=1

Year 2017 2018 2019 2020 2021 2022 FCFF 13,991 14,611 15,739 16,454 16,995 17,494 WACC 7.2% 7.2% 7.2% 7.2% 7.2% 107.2% Present Value, FCFF 13,052 12,714 12,776 12,459 12,005 11,527

Present Value of FCFF in 5 -year forecast horizon 63,005 Present Value of FCFF in terminal period 615,804 Estimated Enterprise Value 678,809 Net Interest-Bearing Debt -95,487 Estimated market value of equity 583,322 Exhibit 52: Enterprise Value calculation. Source: Author's elaboration

The assumptions made in the DCF model were g=4.5% as this is the growth rate of the FCF once the debt raised for the acquisition is paid back, Net Interest-Bearing Debt equal to approx. $ 95 BN after the debt related to the merger is paid back and the revenue growth rate, r, is the implied one of 3%.

The DCF model clearly shows that the enterprise value is far bigger than the market value of the AB InBev plus the market value of SAB Miller plus the acquisition premium thus providing an answer to subquestion 5.

9. Discussion and Conclusion

The aim of this paper was to examine whether 3G Capital will be able to generate value from the SAB Miller deal. Thus, the following problem statement had the role in guiding the qualitative and quantitative analysis:

Will 3G Capital post-merger integration process of SAB Miller into the existing AB InBev organisation generate value?

The sub-research questions had the role of forming a structured approach to answering the main issue.

In the first analytical section of the paper, Building the Financial Model we answer the first sub research question in the form of the pro forma financial statements. The 3G Capital integration process is analysed qualitatively and quantitatively in the 3G Model Part. In the same section, we present and estimate the value of the synergies based on a comparison with the Kraft Heinz deal and benchmarked against the main players in the industry. We focus on the Cost of Goods Sold, Selling, General and Administrative Expenses, Accounts Payable Management and Capital Structure.

Once the value of synergies is forecasted, they are integrated into the financial model under the Consolidated Financial Statements. Based on them, we assess and calculate the value of the combined company regarding Return on Invested Capital and Economic Value Added in the Drivers and Measures of Value Creation section. We find that both ROIC and EVA are positive which means value is created. However, the high level of debt raised in connection with the merger drags the ROIC down, lower than a theoretically calculated value of the weighted average of the two companies. For the same reason, the EVA of the combined company is also lower then the weighted average of the two companies. The two results show us that although the combined company is generating value, it is not reaching the full potential only through cost cutting measures. The value resulting from the cost cutting measures and working capital optimization is out weighted by the heavy burden of debt. In order for the value to be maximised,

68 strategies that generate revenue growth have to be put in place. Revenue growth represents the success factor that is key to value creation as it has a compounding effect on it.

In the very last section of the paper, we measure value creation in terms of cash, as that is the primary investment criterion for private equity companies. Firstly, we calculate the breakeven period, which identifies the year when the value of the combined company matches the market value of AB plus the market value of SAB plus the acquisition premium. Any incoming cash flows past the breakeven year would represent pure upside for the owners. However, the results are not clear, as the period seems to be too long. In this case, a typical DCF valuation is performed to calculate the enterprise value. The results are significant and clearly states that the value of the combined company exceeds the market value of both companies plus the acquisition premium.

To conclude, this paper has successfully answered the main research question bringing qualitative and quantitative proofs that 3G Capital acquisition of SAB Miller and its integration with AB InBev will generate value. However, the success factor lies in the revenue growth in the long term. Thus the main aim of this master thesis has been attained.

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Appendix – AB InBev Historical Financial Statements

Income Statement 2009-2015 FY FY FY FY FY FY FY In Millions of USD except Per Share 2009 2010 2011 2012 2013 2014 2015 Revenue 36,758 36,297 39,046 39,758 43,195 47,063 43,604 + Sales & Services Revenue 36,758 36,297 39,046 39,758 43,195 47,063 43,604 - Cost of Revenue 17,198 16,151 16,634 16,447 17,594 18,756 17,137 + Cost of Goods & Services 15,186 14,197 14,647 14,437 15,461 16,486 14,998 + Depreciation & Amortization 2,012 1,954 1,987 2,010 2,133 2,270 2,139 Gross Profit 19,560 20,146 22,412 23,311 25,601 28,307 26,467 + Other Operating Income — — — — — — — - Operating Expenses 9,502 9,100 9,850 10,584 11,430 13,004 12,719 + Selling, General & Admin 9,211 8,840 9,742 10,494 11,832 13,427 12,804 + Selling & Marketing 7,233 7,162 7,945 8,545 9,571 10,986 10,591 + General & Administrative 1,978 1,678 1,797 1,949 2,261 2,441 2,213 + Research & Development 159 184 175 182 185 217 207 + Depreciation & Amortization 806 831 795 736 735 1,083 976 + Prov For Doubtful Accts -159 4 -23 15 31 10 31 + Other Operating Expense -515 -759 -839 -843 -1,353 -1,733 -1,299 EBIT / Operating Income (Loss) 10,058 11,046 12,562 12,727 14,171 15,303 13,748 - Non-Operating (Income) Loss 3,277 2,290 1,974 1,564 2,192 1,819 1,229 + Interest Expense, Net 3,371 2,749 2,443 1,859 1,757 1,673 1,494 + Interest Expense 3,522 3,065 2,767 2,065 2,043 2,008 1,833 - Interest Income 151 316 324 206 286 335 339 + Other Investment (Inc) Loss -1 -5 — — — — — + Foreign Exch (Gain) Loss -160 -113 26 103 295 -319 -378 + (Income) Loss from Affiliates -513 -521 -623 -624 -294 -9 -10 + Other Non-Op (Income) Loss 580 180 128 226 434 474 123 Pretax Income (Loss), Adjusted 6,781 8,756 10,588 11,163 11,979 13,484 12,519 - Abnormal Losses (Gains) -882 1,074 773 12 -6,555 -317 58 + Merger/Acquisition Expense — — 5 72 183 77 55 + Abnormal Derivatives — — — — -384 -509 214 + Disposal of Assets -148 -67 -66 -89 -62 -162 -544 + Early Extinguishment of Debt 629 925 540 — — — — + Asset Write-Down — — -12 — — — 82 + Impairment of Goodwill — — — — — — — + Gain/Loss on Sale/Acquisition of Business -1,516 -36 -45 -7 -6,410 — — + Legal Settlement — — — — — — 80 + Restructuring 153 252 351 36 118 277 171 Pretax Income (Loss), GAAP 7,663 7,682 9,815 11,151 18,534 13,801 12,461 - Income Tax Expense (Benefit) 1,786 1,920 1,856 1,717 2,016 2,499 2,594 + Current Income Tax 1,419 2,249 2,073 1,884 1,998 2,314 2,395 + Deferred Income Tax 367 -329 -217 -167 18 185 199 Income (Loss) from Cont Ops 5,877 5,762 7,959 9,434 16,518 11,302 9,867 - Net Extraordinary Losses (Gains) 0 0 0 0 0 0 0

+ Discontinued Operations 0 0 0 0 0 0 0 + XO & Accounting Changes 0 0 0 0 0 0 0 Profit / Income (Loss) Incl. MI 5,877 5,762 7,959 9,434 16,518 11,302 9,867 - Minority Interest 1,264 1,736 2,104 2,191 2,124 2,086 1,594 Net Income, GAAP 4,613 4,026 5,855 7,243 14,394 9,216 8,273 - Preferred Dividends 0 0 0 0 0 0 0 - Other Adjustments 0 0 0 0 0 0 0 Net Income Avail to Common, GAAP 4,613 4,026 5,855 7,243 14,394 9,216 8,273

Net Income Avail to Common, Adj 4,001.8 4,555.9 6,141.3 7,240.9 7,953.3 8,967.7 8,473

Net Abnormal Losses (Gains) -611.2 529.9 286.3 -2.1 -6,440.7 -248.3 200

Net Extraordinary Losses (Gains) 0.0 0.0 0.0 0.0 0.0 0.0 -

Balance Sheet: 2009 - 20015 In Millions of USD except Per Share FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Total Assets

+ Cash, Cash Equivalents & STI 3,744 5,152 5,423 13,878 9,962 8,658 6,978

+ Cash & Cash Equivalents 3,689 4,511 5,320 7,051 9,839 8,357 6,923

+ ST Investments 55 641 103 6,827 123 301 55

+ Accounts & Notes Receiv 2,478 2,702 2,605 2,803 2,973 3,426 3,262

+ Accounts Receivable, Net 2,432 2,604 2,572 2,736 2,935 3,363 3,241

+ Notes Receivable, Net 46 98 33 67 38 63 21

+ Inventories 2,354 2,409 2,466 2,500 2,950 2,974 2,862

+ Raw Materials 1,495 1,519 1,572 1,508 1,717 1,723 1,539

+ Work In Process 256 217 214 267 326 315 294

+ Finished Goods 434 497 590 656 761 795 819

+ Other Inventory 169 176 90 69 146 141 210

+ Other ST Assets 2,277 2,334 1,829 1,449 2,805 3,483 5,192

+ Prepaid Expenses 513 486 434 453 616 554 465

+ Derivative & Hedging Assets 706 1,059 659 398 607 1,737 3,268

+ Assets Held-for-Sale 66 32 1 34 84 101 48

+ Taxes Receivable 852 669 647 478 761 864 1,040

+ Misc ST Assets 140 88 88 86 737 227 371

Total Current Assets 10,853 12,597 12,323 20,630 18,690 18,541 18,294

+ Property, Plant & Equip, Net 16,461 15,893 16,022 16,461 20,889 20,263 18,952

+ Property, Plant & Equip 29,290 30,296 31,357 33,108 38,107 37,485 35,329

- Accumulated Depreciation 12,829 14,403 15,335 16,647 17,218 17,222 16,377

+ LT Investments & Receivables 277 243 244 256 193 118 48

+ LT Investments 151 242 220 231 170 97 31

+ LT Marketable Securities 126 1 24 25 23 21 17

+ Other LT Assets 84,934 85,609 83,838 85,274 101,894 103,628 97,341

+ Total Intangible Assets 75,290 75,857 75,120 76,137 99,265 100,681 94,738

+ Goodwill 52,125 52,498 51,302 51,766 69,927 70,758 65,061

+ Other Intangible Assets 23,165 23,359 23,818 24,371 29,338 29,923 29,677

+ Deferred Tax Assets 1,086 943 866 984 1,378 1,225 1,267

+ Derivative & Hedging Assets 680 585 613 241 120 507 295

+ Prepaid Pension Costs 10 13 10 12 10 10 2

+ Investments in Affiliates 6,744 7,295 6,696 7,090 187 110 212

+ Other LT Receivables 1,124 916 533 810 934 1,095 827

Total Noncurrent Assets 101,672 101,745 100,104 101,991 122,976 124,009 116,341

Total Assets 112,525 114,342 112,427 122,621 141,666 142,550 134,635

Liabilities & Shareholders' Equity

+ Payables & Accruals 9,870 10,760 12,343 13,761 16,050 16,845 16,808

+ Accounts Payable 5,657 6,704 7,709 8,476 9,834 10,913 11,616

+ Accrued Taxes 1,876 1,801 1,946 2,040 2,794 2,478 2,279

+ Interest & Dividends Payable 954 990 1,395 1,635 1,272 1,368 1,056

+ Other Payables & Accruals 1,383 1,265 1,293 1,610 2,150 2,086 1,857

+ ST Debt 2,043 2,933 5,567 5,390 7,852 7,492 5,925

+ ST Borrowings 28 14 2,295 2,088 2,071 2,252 2,100

+ ST Capital Leases 6 40 5 3 3 3 4

+ Current Portion of LT Debt 2,009 2,879 3,267 3,299 5,778 5,237 3,821

+ Other ST Liabilities 2,341 2,027 1,734 1,257 1,725 2,871 5,723

+ Deferred Revenue 77 59 66 69 899 1,693 1,523

+ ST Derivatives & Hedging 1,956 1,730 1,427 1,008 630 1,013 3,980

+ ST Provisions 308 238 241 180 196 165 220

Total Current Liabilities 14,254 15,720 19,644 20,408 25,627 27,208 28,456

+ LT Debt 47,049 41,961 34,598 38,951 41,274 43,630 43,541

+ LT Borrowings 47,005 41,886 34,478 38,813 41,142 43,500 43,419

+ LT Capital Leases 44 75 120 138 132 130 122

+ Other LT Liabilities 18,051 17,862 17,141 17,821 19,457 17,455 16,919

+ Pension Liabilities 2,611 2,746 3,440 3,699 2,862 3,050 2,725

+ Deferred Tax Liabilities 12,495 11,909 11,279 11,168 12,841 12,701 11,961

+ LT Derivatives & Hedging 1,374 1,216 508 273 159 64 315

+ Other Provisions & Creditors 1,571 1,991 1,914 2,681 3,595 1,640 1,918

Total Noncurrent Liabilities 65,100 59,823 51,739 56,772 60,731 61,085 60,460

Total Liabilities 79,354 75,543 71,383 77,180 86,358 88,293 88,916

+ Preferred Equity ------

+ Share Capital & APIC 19,247 19,268 19,291 19,308 19,343 19,356 19,356

+ Common Stock 1,732 1,733 1,734 1,734 1,735 1,736 1,736

+ Additional Paid in Capital 17,515 17,535 17,557 17,574 17,608 17,620 17,620

- Treasury Stock 659 588 1,137 1,000 874 819 1,626

+ Retained Earnings 10,448 13,656 17,820 21,677 31,004 35,174 35,949 - - + Other Equity 1,282 2,923 1,518 1,157 892 3,739 11,542

Equity Before Minority Interest 30,318 35,259 37,492 41,142 50,365 49,972 42,137

+ Minority/Non-Controlling Interest 2,853 3,540 3,552 4,299 4,943 4,285 3,582

Total Equity 33,171 38,799 41,044 45,441 55,308 54,257 45,719

Total Liabilities & Equity 112,525 114,342 112,427 122,621 141,666 142,550 134,635

Appendix – SAB Miller Historical Financial Statements

Income Statement 2009-2015

In Millions of USD except Per Share FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Revenue 14,195 15,145 16,713 17,458 16,704 16,534 14,895

+ Sales & Services Revenue 14,195 15,145 16,713 17,458 16,704 16,534 14,895

Gross Profit ------

+ Other Operating Income 279 388 513 362 381 343 209

- Operating Expenses 11,346 12,124 13,283 13,405 12,616 12,385 11,078

+ Selling, General & Admin 2,054 2,249 2,562 2,582 2,468 2,428 2,132

+ Selling & Marketing 2,054 2,249 2,562 2,582 2,468 2,428 2,132

+ Research & Development 4 7 7 4 4 5 4

+ Other Operating Expense 9,288 9,868 10,714 10,819 10,144 9,952 8,942

Operating Income (Loss) 3,128 3,409 3,943 4,415 4,469 4,492 4,026 ------Non-Operating (Income) Loss 335 506 614 497 581 494 516

+ Interest Expense, Net 492 484 579 822 736 629 473

+ Interest Expense 552 532 634 861 760 648 489

- Interest Income 60 48 55 39 24 19 16 - - + Foreign Exch (Gain) Loss 60 -5 10 23 36 120 15 ------+ (Income) Loss from Affiliates 873 1,024 1,152 1,244 1,226 1,083 1,108 - - - - + Other Non-Op (Income) Loss 106 39 51 98 55 160 104

Pretax Income (Loss), Adjusted 3,463 3,915 4,557 4,912 5,050 4,986 4,542 - - Abnormal Losses (Gains) 534 289 1,046 200 227 156 468

+ Merger/Acquisition Expense 24 - 135 - - - 74 - + Abnormal Derivatives 8 7 -2 12 ------+ Disposal of Assets 39 -5 15 - 17 18 32

+ Early Extinguishment of Debt - - - - - 48 -

+ Asset Write-Down 45 84 - - - - 379

+ Impairment of Goodwill ------

+ Impairment of Intangibles - 14 ------+ Sale/Acquisition of Business - - 1,248 - - - 86 - + Legal Settlement - - 42 - - - -

+ Restructuring 342 296 235 232 236 208 133

- - + Sale of Investments -2 159 103 - - -1 - - + Unrealized Investments - - 66 ------+ Other Abnormal Items 78 52 60 20 8 81 -

Pretax Income (Loss), GAAP 2,929 3,626 5,603 4,712 4,823 4,830 4,074

- Income Tax Expense (Benefit) 848 1,069 1,126 1,201 1,173 1,273 1,152

+ Current Income Tax 802 909 1,094 1,288 1,284 1,591 1,187 - - - - + Deferred Income Tax 46 160 32 87 111 318 35

Income (Loss) from Cont Ops 2,081 2,557 4,477 3,511 3,650 3,557 2,922

- Net Extraordinary Losses (Gains) ------

+ Discontinued Operations ------

+ XO & Accounting Changes ------

Income (Loss) Incl. MI 2,081 2,557 4,477 3,511 3,650 3,557 2,922

- Minority Interest 171 149 256 237 269 258 223

Net Income, GAAP 1,910 2,408 4,221 3,274 3,381 3,299 2,699

- Preferred Dividends ------

- Other Adjustments ------Net Income Avail to Common, GAAP 1,910 2,408 4,221 3,274 3,381 3,299 2,699

Net Income Avail to Common, Adj 2,294 2,621 3,447 3,407 3,547 3,551 3,073 - Net Abnormal Losses (Gains) 384 213 774 133 166 252 374

Net Extraordinary Losses (Gains) ------

Balance Sheet: 2009 - 20015 In Millions of USD except Per Share FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Total Assets + Cash, Cash Equivalents & STI 780 1,067 746 2,171 2,081 965 1,430 + Cash & Cash Equivalents 779 1,067 745 2,171 2,081 965 1,430 + ST Investments 1 - 1 - - - - + Accounts & Notes Receiv 1,244 1,219 1,389 1,584 1,345 1,265 1,308 + Accounts Receivable, Net 1,244 1,219 1,389 1,584 1,345 1,265 1,308 + Notes Receivable, Net ------+ Inventories 1,295 1,256 1,255 1,175 1,168 1,030 993 + Raw Materials 760 746 675 691 669 588 568 + Work In Process 146 122 123 123 121 89 91 + Finished Goods 389 388 457 361 378 353 334

+ Other Inventory ------+ Other ST Assets 576 702 1,352 776 791 1,099 774 + Prepaid Expenses 123 125 183 145 189 166 153 + Derivative & Hedging Assets 20 16 24 111 141 463 281 + Assets Held-for-Sale — 66 79 23 - — — + Taxes Receivable 135 152 482 159 174 190 59 + Misc ST Assets 298 343 584 338 287 280 281 Total Current Assets 3,895 4,244 4,742 5,706 5,385 4,359 4,505 + Property, Plant & Equip, Net 8,915 9,330 9,299 9,059 9,065 7,961 7,750 + Property, Plant & Equip 14,043 15,132 14,803 14,640 14,716 12,676 12,524 - Accumulated Depreciation 5,128 5,802 5,504 5,581 5,651 4,715 4,774 + LT Investments & Receivables 31 35 30 22 22 21 19 + LT Marketable Securities 31 35 30 22 22 21 19 + Other LT Assets 24,663 25,499 41,580 41,507 39,279 32,570 31,315 + Total Intangible Assets 15,938 16,313 30,029 29,497 27,029 21,624 20,794 + Goodwill 11,584 11,952 20,128 19,862 18,497 14,746 14,268 + Other Intangible Assets 4,354 4,361 9,901 9,635 8,532 6,878 6,526 + Deferred Tax Assets 164 184 117 71 115 163 209 + Derivative & Hedging Assets 409 330 732 732 628 770 565 + Investments in Affiliates 8,035 8,532 10,466 10,963 11,368 9,887 9,626 + Misc LT Assets 117 140 236 244 139 126 121 Total Noncurrent Assets 33,609 34,864 50,909 50,588 48,366 40,552 39,084 Total Assets 37,504 39,108 55,651 56,294 53,751 44,911 43,589

Liabilities & Shareholders' Equity + Payables & Accruals 3,837 4,136 4,958 5,459 4,947 4,908 4,698 + Accounts Payable 1,058 1,103 1,262 1,236 1,333 1,404 1,478 + Accrued Taxes 1,134 1,212 1,541 2,062 1,680 1,749 1,373 + Other Payables & Accruals 1,645 1,821 2,155 2,161 1,934 1,755 1,847 + ST Debt 1,605 1,345 1,062 2,469 4,519 1,961 2,926 + ST Borrowings 1,600 1,341 1,057 2,461 4,511 1,951 2,913 + ST Capital Leases 5 4 5 8 8 10 13 + Other ST Liabilities 535 532 770 598 534 463 485 + Deferred Revenue 6 6 6 5 6 4 2 + Derivatives & Hedging 174 50 40 34 78 101 213 + Misc ST Liabilities 355 476 724 559 450 358 270 Total Current Liabilities 5,977 6,013 6,790 8,526 10,000 7,332 8,109 + LT Debt 7,809 7,115 18,164 16,079 12,528 10,583 8,814 + LT Borrowings 7,802 7,110 18,148 16,052 12,485 10,540 8,766 + LT Capital Leases 7 5 16 27 43 43 48 + Other LT Liabilities 3,119 3,221 4,684 4,229 3,741 2,641 2,578 + Accrued Liabilities ------+ Deferred Revenue 16 14 8 4 3 4 - + Deferred Tax Liabilities 2,374 2,578 3,917 3,507 3,246 2,275 2,250 + Derivatives & Hedging 147 85 69 52 37 10 26 + Misc LT Liabilities 582 544 690 666 455 352 302

Total Noncurrent Liabilities 10,928 10,336 22,848 20,308 16,269 13,224 11,392 Total Liabilities 16,905 16,349 29,638 28,834 26,269 20,556 19,501 + Preferred Equity ------+ Share Capital & APIC 6,477 6,550 6,646 6,748 6,815 6,920 7,017 + Common Stock 165 166 166 167 167 168 168 + Additional Paid in Capital 6,312 6,384 6,480 6,581 6,648 6,752 6,849 - Treasury Stock — — — — — — — + Retained Earnings 7,525 8,991 11,863 13,710 15,885 17,746 19,005 + Other Equity 5,908 6,467 6,564 5,914 3,619 -1,494 -3,130 Equity Before Minority Interest 19,910 22,008 25,073 26,372 26,319 23,172 22,892 + Minority/Non Controlling Interest 689 751 940 1,088 1,163 1,183 1,196 Total Equity 20,599 22,759 26,013 27,460 27,482 24,355 24,088 Total Liabilities & Equity 37,504 39,108 55,651 56,294 53,751 44,911 43,589

Appendix – AB InBev Restated Financial Statements

Analytical Income Statement 2009-2015 Income Statement 2009 2010 2011 2012 2013 2014 2015 Revenue 36,758 36,297 39,046 39,758 43,195 47,063 43,604 Cost of Goods Sold -15,186 -14,197 -14,647 -14,437 -15,461 -16,486 -14,998 Distribution Expenses -2,560 -2,786 -3,201 -3,679 -3,943 -4,430 -4,136 Sales/Mkting/Ad Expenses -4,673 -4,375 -4,743 -4,865 -5,511 -6,555 -6,455 General and Administrative Expenses -1,978 -1,678 -1,797 -1,949 -2,261 -2,441 -2,213 Other Operating (Income)/Expense - Net 609 609 699 684 1,169 1,391 1,037 Non-recurring Items (incl. Depreciation) 1,417 -185 -245 -32 6,240 -77 218 EBITDA 14,387 13,685 15,112 15,480 23,428 18,465 17,057 Depreciation -2,012 -1,954 -1,987 -2,010 -2,133 -2,270 -2,139 Amortization -806 -831 -795 -736 -735 -1,083 -976 Impairment -1,388 265 277 31 -6,357 196 -174 Operating Profit before non-recurring items 10,181 11,165 12,607 12,765 14,203 15,308 13,768 Non-recurring Items Depreciation 1,388 -268 -278 -32 6,240 -197 136 EBIT / Operating Income 11,569 10,897 12,329 12,733 20,443 15,111 13,904 Income Tax -1,786 -1,920 -1,856 -1,717 -2,016 -2,499 -2,594 Tax shield from Net Financial Expenses -1,105 -1,001 -634 -360 -245 -239 -302 Share of result of associates 513 521 623 624 294 9 10 NOPAT 9,191 8,497 10,462 11,280 18,476 12,382 11,018 Financial Expenses -4,291 -3,336 -3,035 -2,532 -3,047 -2,797 -2,417 Financial Income 501 525 438 344 561 969 1,178 Non-recurring net finance cost -629 -925 -540 -18 283 509 -214 Tax on Net Financial Expenses 1,105 1,001 634 360 245 239 302 Net Financial Expenses -3,314 -2,735 -2,503 -1,846 -1,958 -1,080 -1,151 Profit After Tax 5,877 5,762 7,959 9,434 16,518 11,302 9,867 Total Dividends Paid 1,313 1,924 3,088 3,632 6,253 7,400 7,966

Analytical Balance Sheet 2009-2015 Balance Sheet 2009 2010 2011 2012 2013 2014 2015 Net Operating Assets

Inventories 2,354 2,409 2,466 2,500 2,950 2,974 2,862 Accounts Receivable 2,478 2,702 2,605 2,803 2,973 3,426 3,262 Prepaid Expenses 513 486 434 453 616 554 465 Tax Receivable 852 669 647 478 761 864 1,040 Current Assets 6,197 6,266 6,152 6,234 7,300 7,818 7,629

Goodwill 52,125 52,498 51,302 51,766 69,927 70,758 65,061 Other Intangible Assets 23,165 23,359 23,818 24,371 29,338 29,923 29,677 Total Intangible Assets 75,290 75,857 75,120 76,137 99,265 100,681 94,738

Property, Plant & Equip 29,290 30,296 31,357 33,108 38,107 37,485 35,329 Accumulated Depreciation -12,829 -14,403 -15,335 -16,647 -17,218 -17,222 -16,377

Property, Plant & Equip, Net 16,461 15,893 16,022 16,461 20,889 20,263 18,952

Investments in Affiliates 6,744 7,295 6,696 7,090 187 110 212 Deferred Tax Assets 1,086 943 866 984 1,378 1,225 1,267 Other LT Receivables 1,124 916 533 810 934 1,095 827 Non-current Assets 100,705 100,904 99,237 101,482 122,653 123,374 115,996

Accounts Payable 9,870 10,760 12,343 13,761 16,050 16,845 16,808 Deferred Revenue 77 59 66 69 899 1,693 1,523 Deferred Tax Liabilities 12,495 11,909 11,279 11,168 12,841 12,701 11,961 Other Provisions & Creditors 1,571 1,991 1,914 2,681 3,595 1,640 1,918 ST Provisions 308 238 241 180 196 165 220 Non-interest Bearing Debt 24,321 24,957 25,843 27,859 33,581 33,044 32,430

Net Operating Assets 82,581 82,213 79,546 79,857 96,372 98,148 91,195

Invested Capital

Common Stock 1,732 1,733 1,734 1,734 1,735 1,736 1,736 Additional Paid in Capital 17,515 17,535 17,557 17,574 17,608 17,620 17,620 Treasury Stock -659 -588 -1,137 -1,000 -874 -819 -1,626 Retained Earnings 10,448 13,656 17,820 21,677 31,004 35,174 35,949 Reserves 1,282 2,923 1,518 1,157 892 -3,739 -11,542 Equity Before Minority Interest 30,318 35,259 37,492 41,142 50,365 49,972 42,137 Non-controlling Interest 2,853 3,540 3,552 4,299 4,943 4,285 3,582 Total Equity 33,171 38,799 41,044 45,441 55,308 54,257 45,719

ST Debt 2,043 2,933 5,567 5,390 7,852 7,492 5,925 LT Debt 47,049 41,961 34,598 38,951 41,274 43,630 43,541 Pension Liabilities 2,611 2,746 3,440 3,699 2,862 3,050 2,725 Derivatives & Hedging Liabilities 3,330 2,946 1,935 1,281 789 1,077 4,295 Interest Bearing Debt 55,033 50,586 45,540 49,321 52,777 55,249 56,486

Cash and Cash Equivalents 3,744 5,152 5,423 13,878 9,962 8,658 6,978 Other ST Assets 912 1,179 748 518 1,428 2,065 3,687 LT Investments & Receivables 277 243 244 256 193 118 48 Derivative & Hedging Assets 680 585 613 241 120 507 295 Prepaid Pension Costs 10 13 10 12 10 10 2 Financial Assets 5,623 7,172 7,038 14,905 11,713 11,358 11,010

Invested Capital 82,581 82,213 79,546 79,857 96,372 98,148 91,195

Check ------

Appendix – SAB Miller Restated Financial Statements

Analytical Income Statement 2009-2015 Income Statement 2009 2010 2011 2012 2013 2014 2015 Revenue 18,020 19,408 21,760 23,213 22,311 22,130 19,833 Cost of Goods Sold -8,390 -8,903 -10,096 -10,871 -10,318 -10,148 -9,115 Selling, Marketing and Distribution Expenses -2,054 -2,249 -2,562 -2,582 -2,468 -2,428 -2,132 Administrative Expenses -1,985 -2,240 -2,502 -2,704 -2,491 -2,483 -2,232 Other Operating Income/Expenses -1,617 -1,514 -1,621 685 850 691 743 EBITDA 3,974 4,502 4,979 7,741 7,884 7,762 7,097 Depr. -407 -542 -655 -1,362 -1,424 -1,395 -1,287 Amortization of Intangible Assets -199 -209 -264 -483 -436 -423 -350 Share of result of associates Pre-Tax -277 -188 -73 -1,504 -1,585 -1,485 -1,450 Operating Profit before exceptional items 3,091 3,563 3,987 4,392 4,439 4,459 4,010 Exceptional Items -472 -436 1,026 -200 -197 -75 -556 EBIT / Operating Income 2,619 3,127 5,013 4,203 4,242 4,384 3,454 Income Tax -848 -1,069 -1,126 -1,201 -1,173 -1,273 -1,152 Tax shield from Net Financial Expenses -160 -148 -155 -198 -168 -166 -133 Share of result of associates Post-Tax 873 1,024 1,152 1,244 1,226 1,083 1,126 NOPAT 2,484 2,934 4,884 4,048 4,127 4,028 3,295 Financial Expenses -879 -883 -1,093 -1,417 -1,055 -1,047 -763 Financial Income 316 358 531 682 410 410 257 Tax on Net Financial Expenses 160 148 155 198 168 166 133 Net Financial Expenses -403 -377 -407 -537 -477 -471 -373 Profit After Tax 2,081 2,557 4,477 3,511 3,650 3,557 2,922 Total Dividends Paid 633 800 971 1,103 1,227 1,278 1,397

Analytical Balance Sheet 2009-2015 Balance Sheet 2009 2010 2011 2012 2013 2014 2015 Net Operating Assets

Inventories 1,295 1,256 1,255 1,175 1,168 1,030 993 Accounts Receivable 1,244 1,219 1,389 1,584 1,345 1,265 1,308 Prepaid Expenses 123 125 183 145 189 166 153 Tax Receivable 135 152 482 159 174 190 59 Current Assets 2,797 2,752 3,309 3,063 2,876 2,651 2,513

Goodwill 11,584 11,952 20,128 19,862 18,497 14,746 14,268 Other Intangible Assets 4,354 4,361 9,901 9,635 8,532 6,878 6,526 Total Intangible Assets 15,938 16,313 30,029 29,497 27,029 21,624 20,794

Property, Plant & Equip, Net 8,915 9,330 9,299 9,059 9,065 7,961 7,750

Investments in Affiliates 8,035 8,532 10,466 10,963 11,368 9,887 9,626 Deferred Tax Assets 164 184 117 71 115 163 209 Other LT Receivables 117 140 236 244 139 126 121

Non-current Assets 33,169 34,499 50,147 49,834 47,716 39,761 38,500

Accounts Payable 3,837 4,136 4,958 5,459 4,947 4,908 4,698 Deferred Revenue 22 20 14 9 9 8 2 Deferred Tax Liabilities 2,374 2,578 3,917 3,507 3,246 2,275 2,250 Misc ST Liabilities 937 1,020 1,414 1,225 905 710 572 Non-Interest Bearing Debt 7,170 7,754 10,303 10,200 9,107 7,901 7,522

Net Operating Assets 28,796 29,497 43,153 42,697 41,485 34,511 33,491

Invested Capital

Preferred Equity ------Share Capital 6,477 6,550 6,646 6,748 6,815 6,920 7,017 Common Stock 165 166 166 167 167 168 168 Additional Paid in Capital 6,312 6,384 6,480 6,581 6,648 6,752 6,849 Retained Earnings 7,525 8,991 11,863 13,710 15,885 17,746 19,005 Other Equity 5,908 6,467 6,564 5,914 3,619 -1,494 -3,130 Equity Before Minority Interest 19,910 22,008 25,073 26,372 26,319 23,172 22,892 Minority/Non-Controlling Interest 689 751 940 1,088 1,163 1,183 1,196 Total Equity 20,599 22,759 26,013 27,460 27,482 24,355 24,088

ST Debt 1,605 1,345 1,062 2,469 4,519 1,961 2,926 LT Debt 7,809 7,115 18,164 16,079 12,528 10,583 8,814 Derivatives & Hedging 321 135 109 86 115 111 239 Interest Bearing Debt 9,735 8,595 19,335 18,634 17,162 12,655 11,979

Cash and Cash Equivalents 780 1,067 746 2,171 2,081 965 1,430 Other ST Assets 318 425 687 472 428 743 562 LT Investments & Receivables 31 35 30 22 22 21 19 Derivative & Hedging Assets 409 330 732 732 628 770 565 Financial Assets 1,538 1,857 2,195 3,397 3,159 2,499 2,576

Invested Capital 28,796 29,497 43,153 42,697 41,485 34,511 33,491

Check ------

Appendix – SAB Miller Forecast Drivers 5Y 2016 2017 2018 2019 2020 SAB Miller I/S Forecast Driver 2011 2012 2013 2014 2015 Average Est Est Est Est Est - Revenue Growth 12% 7% -4% -1% 10% 1% 1% 1% 1% 1% 1% CoGS %Revenue 46% 47% 46% 46% 46% 46% 46% 46% 46% 46% 46% Selling, Mkting & Distr. %Revenue 12% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% Admin. %Revenue 11% 12% 11% 11% 11% 11% 11% 11% 11% 11% 11% Other Operating Income/Expenses %Revenue -7% 3% 4% 3% 4% 1% 1% 1% 1% 1% 1% Depreciation(t) %PPE net (t-1) 7% 15% 16% 15% 16% 14% 14% 14% 14% 14% 14% Amortization(t) %Intangibles (t-1) 2% 2% 1% 2% 2% 2% 2% 2% 2% 2% 2% Income Tax %EBIT 22% 29% 28% 29% 33% 28% 28% 28% 28% 28% 28% Financial Expense(t) % (ST Debt + LT Debt)(t-1) 13% 7% 6% 6% 6% 8% 8% 8% 8% 8% 8% Financial Income (t) % Cash & Cash Equivalents (t-1) 50% 91% 19% 20% 27% 22% 22% 22% 22% 22% 22% Payout Ratio 31% 34% 36% 48% 49% 40% 40% 40% 40% 40% 40% Tax 28% 27% 26% 26% 26% 27% 27% 27% 27% 27% 27%

5Y SAB Miller B/S Forecast Driver 2011 2012 2013 2014 2015 Average 2016 2017 2018 2019 2020 Inventories %CoGS 12% 11% 11% 10% 11% 11% 11% 11% 11% 11% 11% Receivables %Revenue 6% 7% 6% 6% 7% 6% 6% 6% 6% 6% 6% Prepaid Expenses %Revenue 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Tax Receivable %Revenue 2% 1% 1% 1% 0% 1% 1% 1% 1% 1% 1% Intangible Assets %Revenue 138% 127% 121% 98% 105% 118% 118% 118% 118% 118% 118% PPE %Revenue 43% 39% 41% 36% 39% 39% 39% 39% 39% 39% 39% Investments in Affiliates %Revenue 48% 47% 51% 45% 49% 48% 48% 48% 48% 48% 48% Deferred Tax Assets %Revenue 1% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% Misc LT Assets %Revenue 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Payables %CoGS 49% 50% 48% 48% 52% 49% 49% 49% 49% 49% 49% Deferred Revenue %Revenue 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Deferred Tax Liabilities %Revenue 18% 15% 15% 10% 11% 14% 14% 14% 14% 14% 14% Misc ST Liabilities %Revenue 6% 5% 4% 3% 3% 4% 4% 4% 4% 4% 4% Common stock - constant Additional Paid in Capital - constant Other Equity - constant Retained Earnings (t)= Retained Earnings (t-1)+ Profit After Tax for Equity holders (t) - Dividends (t) ST Debt %Current Assets 49% 32% 81% 157% 74% 116% 92% 92% 92% 92% 92% LT Debt constant Derivatives & Hedging %Revenue 1% 1% 0% 1% 1% 1% 1% 1% 1% 1% 1% Cash from Cash Flow Statement Other ST Assets %Revenue 2% 3% 2% 2% 3% 3% 3% 3% 3% 3% 3% LT Inv & Receivables %Revenue 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Derivative & Hedging Assets %Revenue 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Appendix – AB InBev Pro forma Statements 2011-2020 Income Statement 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est Revenue 39,046 39,758 43,195 47,063 43,604 45,317 47,098 48,949 50,872 52,871 Cost of Goods Sold -14,647 -14,437 -15,461 -16,486 -14,998 -16,228 -16,865 -17,528 -18,217 -18,932 Distribution Expenses -3,201 -3,679 -3,943 -4,430 -4,136 -4,122 -4,284 -4,452 -4,627 -4,809 Sales/Mkting/Ad Expenses -4,743 -4,865 -5,511 -6,555 -6,455 -5,970 -6,205 -6,449 -6,702 -6,966 General and Administrative Expenses -1,797 -1,949 -2,261 -2,441 -2,213 -2,266 -2,355 -2,448 -2,544 -2,644 Other Operating (Income)/Expense - Net 699 684 1,169 1,391 1,037 1,047 1,088 1,131 1,175 1,221 Non-recurring Items (incl. Depreciation) -245 -32 6,240 -77 218 EBITDA 15,112 15,480 23,428 18,465 17,057 17,778 18,477 19,203 19,958 20,742 Depreciation -1,987 -2,010 -2,133 -2,270 -2,139 -2,253 -2,341 -2,433 -2,529 -2,628 Amortization -795 -736 -735 -1,083 -976 -958 -958 -958 -958 -958 Impairment 277 31 -6,357 196 -174 0 0 0 0 0 Operating Profit before non-recurring items 12,607 12,765 14,203 15,308 13,768 14,568 15,178 15,812 16,471 17,156 Non-recurring Items Depreciation -278 -32 6,240 -197 136 EBIT / Operating Income 12,329 12,733 20,443 15,111 13,904 14,568 15,178 15,812 16,471 17,156 Income Tax -1,856 -1,717 -2,016 -2,499 -2,594 -2,144 -2,234 -2,327 -2,424 -2,525 Tax shield from Net Financial Expenses -634 -360 -245 -239 -302 -427 -381 -346 -313 -277 Share of result of associates 623 624 294 9 10 NOPAT 10,462 11,280 18,476 12,382 11,018 11,997 12,563 13,139 13,734 14,354 Financial Expenses -3,035 -2,532 -3,047 -2,797 -2,417 -3,058 -3,120 -3,192 -3,275 -3,370 Financial Income 438 344 561 969 1,178 589 915 1,189 1,463 1,771 Non-recurring net finance cost -540 -18 283 509 -214 0 0 0 0 0 Tax on Net Financial Expenses 634 360 245 239 302 427 381 346 313 277 Net Financial Expenses -2,503 -1,846 -1,958 -1,080 -1,151 -2,041 -1,823 -1,656 -1,498 -1,322 Profit After Tax 7,959 9,434 16,518 11,302 9,867 9,956 10,739 11,482 12,235 13,032

Total Dividends Paid 3,088 3,632 6,253 7,400 7,966 8,064 8,699 9,301 9,910 10,556

Tax % 20% 16% 11% 18% 21% 17% 17% 17% 17% 17%

Balance Sheet 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est

Net Operating Assets Inventories 2,466 2,500 2,950 2,974 2,862 2,862 3,048 3,167 3,292 3,421 Accounts Receivable 2,605 2,803 2,973 3,426 3,262 3,262 3,331 3,462 3,598 3,740 Prepaid Expenses 434 453 616 554 465 465 558 580 602 626 Tax Receivable 647 478 761 864 1,040 1,040 833 866 900 935 Current Assets 6,152 6,234 7,300 7,818 7,629 7,629 7,770 8,075 8,392 8,722

Total Intangible Assets 75,120 76,137 99,265 100,681 94,738 94,738 94,738 94,738 94,738 94,738

Property, Plant & Equip, Net 16,022 16,461 20,889 20,263 18,952 19,696 20,470 21,275 22,111 22,979

Investments in Affiliates 6,696 7,090 187 110 212 212 212 212 212 212 Deferred Tax Assets 866 984 1,378 1,225 1,267 1,267 1,267 1,267 1,267 1,267 Other LT Receivables 533 810 934 1,095 827 827 827 827 827 827 Non-current Assets 99,237 101,482 122,653 123,374 115,996 116,740 117,514 118,319 119,155 120,023

Accounts Payable 12,343 13,761 16,050 16,845 16,808 16,151 16,786 17,445 18,131 18,843 Deferred Revenue 66 69 899 1,693 1,523 862 896 931 968 1,006 Deferred Tax Liabilities 11,279 11,168 12,841 12,701 11,961 12,791 13,293 13,816 14,358 14,923 Other Provisions & Creditors 1,914 2,681 3,595 1,640 1,918 2,524 2,623 2,727 2,834 2,945 ST Provisions 241 180 196 165 220 216 224 233 242 252 Non-interest Bearing Debt 25,843 27,859 33,581 33,044 32,430 32,544 33,823 35,152 36,533 37,968

Net Operating Assets 79,546 79,857 96,372 98,148 91,195 91,825 91,461 91,242 91,014 90,777

Invested Capital Common Stock 1,734 1,734 1,735 1,736 1,736 1,736 1,736 1,736 1,736 1,736 Additional Paid in Capital 17,557 17,574 17,608 17,620 17,620 17,620 17,620 17,620 17,620 17,620 Treasury Stock -1,137 -1,000 -874 -819 -1,626 -1,626 -1,626 -1,626 -1,626 -1,626 Retained Earnings 17,820 21,677 31,004 35,174 35,949 37,841 39,881 42,063 44,387 46,863 Reserves 1,518 1,157 892 -3,739 -11,542 -11,542 -11,542 -11,542 -11,542 -11,542 Equity Before Minority Interest 37,492 41,142 50,365 49,972 42,137 44,029 46,069 48,251 50,575 53,051 Non-controlling Interest 3,552 4,299 4,943 4,285 3,582 3,582 3,582 3,582 3,582 3,582 Total Equity 41,044 45,441 55,308 54,257 45,719 47,611 49,651 51,833 54,157 56,633

ST Debt 5,567 5,390 7,852 7,492 5,925 6,820 7,849 9,035 10,399 11,969 LT Debt 34,598 38,951 41,274 43,630 43,541 43,541 43,541 43,541 43,541 43,541 Pension Liabilities 3,440 3,699 2,862 3,050 2,725 2,725 2,725 2,725 2,725 2,725 Derivatives & Hedging Liabilities 1,935 1,281 789 1,077 4,295 4,295 4,295 4,295 4,295 4,295 Interest Bearing Debt 45,540 49,321 52,777 55,249 56,486 57,381 58,410 59,596 60,960 62,530

Cash and Cash Equivalents 5,423 13,878 9,962 8,658 6,978 10,839 14,085 17,327 20,976 25,113 Other ST Assets 748 518 1,428 2,065 3,687 1,755 1,978 2,292 2,499 2,643 LT Investments & Receivables 244 256 193 118 48 188 196 203 211 220 Derivative & Hedging Assets 613 241 120 507 295 381 339 362 415 408 Prepaid Pension Costs 10 12 10 10 2 2 2 2 2 2 Financial Assets 7,038 14,905 11,713 11,358 11,010 13,166 16,600 20,187 24,103 28,387

Invested Capital 79,546 79,857 96,372 98,148 91,195 91,825 91,461 91,242 91,014 90,777

Check 0 0 0 0 0 0 0 0 0 0

Cash Flow Statement 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est

Cash Flow from Operating Activities Profit After Tax 7,959 9,434 16,518 11,302 9,867 9,956 10,739 11,482 12,235 13,032

Depreciation & Impairment 3,060 2,778 -3,372 3,550 2,979 3,210 3,299 3,391 3,486 3,586

Change in Other LT Receivables 383 -277 -124 -161 268 0 0 0 0 0

Change in Investment in Affiliates 599 -394 6,903 77 -102 0 0 0 0 0

Change in Deffered Tax Assets 77 -118 -394 153 -42 0 0 0 0 0

Change in Inventories -57 -34 -450 -24 112 0 -186 -120 -124 -129

Change in Account Receivables 97 -198 -170 -453 164 0 -69 -131 -136 -141

Change in Prepaid Expenses 52 -19 -163 62 89 0 -93 -22 -23 -24

Change in Tax Receivable 22 169 -283 -103 -176 0 207 -33 -34 -35

Change in Account Payable 1,583 1,418 2,289 795 -37 -657 635 660 685 712

Change in Deferred Revenue 7 3 830 794 -170 -661 34 35 37 38

Change in Deferred Tax Liabilities -630 -111 1,673 -140 -740 830 503 522 543 564

Change in Other Provisions & Creditors -77 767 914 -1,955 278 606 99 103 107 111

Change in ST Provisions 3 -61 16 -31 55 -4 8 9 9 10

Others -592 -89 -10,323 278 1,576

Cash Flow from Operating Activities 12,486 13,268 13,864 14,144 14,121 13,280 15,176 15,897 16,785 17,723

Cash Flow from Investing Activities Change in CAPEX -1,858 -1,571 2,295 -2,896 -3,450 -3,954 -4,073 -4,195 -4,322 -4,454

Acquiring Intangibles

Others -873 -9,770 -12,576 -8,256 -1,776

Cash Flow from Investing Activities -2,731 -11,341 -10,281 -11,152 -5,226 -3,954 -4,073 -4,195 -4,322 -4,454

Cash Flow from Financing Activities Dividends Paid -3,088 -3,632 -6,253 -7,400 -7,966 -8,064 -8,699 -9,301 -9,910 -10,556

Interest Bearing Debt -5,046 3,781 3,456 2,472 1,237 895 1,030 1,185 1,364 1,570

Financial Assets less Cash and Cash equivalents 405 588 -724 -949 -1,332 1,705 -188 -344 -268 -146

Others -1,267 -575 3,862 2,022 -924

Cash Flow from Financing Activities -8,996 162 341 -3,855 -8,985 -5,464 -7,857 -8,460 -8,814 -9,132

Cash Beginning Balance 5,152 5,423 13,878 9,962 8,658 6,978 10,839 14,085 17,327 20,976

Total Cash Flow 759 2,089 3,924 -863 -90 3,861 3,247 3,242 3,649 4,137

Effect of FX rate changes -488 6,366 -7,840 -441 -1,590

Cash Ending Balance 5,423 13,878 9,962 8,658 6,978 10,839 14,085 17,327 20,976 25,113

Appendix – SAB Miller Pro forma Statements 2011-2020 Income Statement 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est Revenue 21,760 23,213 22,311 22,130 19,833 19,981 20,129 20,279 20,430 20,582 Cost of Goods Sold -10,096 -10,871 -10,318 -10,148 -9,115 -9,243 -8,111 -7,881 -7,950 -8,021 Selling, Marketing and Distribution Expenses -2,562 -2,582 -2,468 -2,428 -2,132 -2,225 -2,018 -2,032 -2,049 -2,066 Administrative Expenses -2,502 -2,704 -2,491 -2,483 -2,232 -2,269 -2,057 -1,612 -1,629 -1,646 Other Operating Income/Expenses -1,621 685 850 691 743 247 249 251 253 254 EBITDA 4,979 7,741 7,884 7,762 7,097 6,491 8,192 9,005 9,054 9,103 Depr. -655 -1,362 -1,424 -1,395 -1,287 -1,069 -1,088 -1,096 -1,104 -1,112 Amortization of Intangible Assets -264 -483 -436 -423 -350 -328 -371 -374 -377 -380 Share of result of associates Pre-Tax -73 -1,504 -1,585 -1,485 -1,450

Operating Profit before exceptional items 3,987 4,392 4,439 4,459 4,010 5,094 6,733 7,535 7,573 7,611 Exceptional Items 1,026 -200 -197 -75 -556

EBIT / Operating Income 5,013 4,203 4,242 4,384 3,454 5,094 6,733 7,535 7,573 7,611 Income Tax -1,126 -1,201 -1,173 -1,273 -1,152 -1,437 -1,900 -2,126 -2,137 -2,148 Tax shield from Net Financial Expenses -155 -198 -168 -166 -133 -156 -253 -75 104 317 Share of result of associates Post-Tax 1,152 1,244 1,226 1,083 1,126

NOPAT 4,884 4,048 4,127 4,028 3,295 3,501 4,580 5,334 5,540 5,780 Financial Expenses -1,093 -1,417 -1,055 -1,047 -763 -897 -859 -851 -850 -851 Financial Income 531 682 410 410 257 311 -93 570 1,240 2,043 Tax on Net Financial Expenses 155 198 168 166 133 156 253 75 -104 -317 Net Financial Expenses -407 -537 -477 -471 -373 -430 -699 -207 287 875 Profit After Tax 4,477 3,511 3,650 3,557 2,922 3,071 3,882 5,127 5,826 6,655

Total Dividends Paid 971 1,103 1,227 1,278 1,397 1,510 1,537 2,030 2,307 2,635

Tax 28% 27% 26% 26% 26% 27% 27% 27% 27% 27%

Balance Sheet 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est

Net Operating Assets

Inventories 1,255 1,175 1,168 1,030 993 1,028 902 876 884 892 Accounts Receivable 1,389 1,584 1,345 1,265 1,308 1,261 1,270 1,279 1,289 1,299 Prepaid Expenses 183 145 189 166 153 153 154 156 157 158 Tax Receivable 482 159 174 190 59 193 195 196 198 199 Current Assets 3,309 3,063 2,876 2,651 2,513 2,635 2,521 2,507 2,527 2,547

Goodwill 20,128 19,862 18,497 14,746 14,268

Other Intangible Assets 9,901 9,635 8,532 6,878 6,526

Total Intangible Assets 30,029 29,497 27,029 21,624 20,794 23,528 23,703 23,880 24,057 24,236

Property, Plant & Equip, Net 9,299 9,059 9,065 7,961 7,750 7,890 7,949 8,008 8,067 8,127

Investments in Affiliates 10,466 10,963 11,368 9,887 9,626 9,626 9,626 9,626 9,626 9,626 Deferred Tax Assets 117 71 115 163 209 126 127 128 129 130 Other LT Receivables 236 244 139 126 121 157 159 160 161 162 Non-current Assets 50,147 49,834 47,716 39,761 38,500 41,327 41,563 41,801 42,040 42,281

Accounts Payable 4,958 5,459 4,947 4,908 4,698 4,569 4,959 5,163 5,557 5,958

Deferred Revenue 14 9 9 8 2 8 8 8 8 8 Deferred Tax Liabilities 3,917 3,507 3,246 2,275 2,250 2,250 2,789 2,810 2,831 2,852 Misc ST Liabilities 1,414 1,225 905 710 572 876 883 889 896 902 Non-Interest Bearing Debt 10,303 10,200 9,107 7,901 7,522 7,703 8,638 8,870 9,292 9,720

Net Operating Assets 43,153 42,697 41,485 34,511 33,491 36,259 35,446 35,438 35,276 35,108

Invested Capital Preferred Equity - - - - -

Share Capital 6,646 6,748 6,815 6,920 7,017 7,017 7,017 7,017 7,017 7,017 Common Stock 166 167 167 168 168 168 168 168 168 168 Additional Paid in Capital 6,480 6,581 6,648 6,752 6,849 6,849 6,849 6,849 6,849 6,849 Retained Earnings 11,863 13,710 15,885 17,746 19,005 20,566 22,911 26,008 29,528 33,549 Other Equity 6,564 5,914 3,619 -1,494 -3,130 -3,130 -3,130 -3,130 -3,130 -3,130 Equity Before Minority Interest 25,073 26,372 26,319 23,172 22,892 24,453 26,798 29,895 33,415 37,436 Minority/Non-Controlling Interest 940 1,088 1,163 1,183 1,196 1,196 1,196 1,196 1,196 1,196 Total Equity 26,013 27,460 27,482 24,355 24,088 25,649 27,994 31,091 34,611 38,632

ST Debt 1,062 2,469 4,519 1,961 2,926 2,425 2,321 2,308 2,326 2,345 LT Debt 18,164 16,079 12,528 10,583 8,814 8,814 8,814 8,814 8,814 8,814 Derivatives & Hedging 109 86 115 111 239 124 125 125 126 127 Interest Bearing Debt 19,335 18,634 17,162 12,655 11,979 11,363 11,259 11,248 11,267 11,286

Cash and Cash Equivalents 746 2,171 2,081 965 1,430 -426 2,620 5,705 9,398 13,596 Other ST Assets 687 472 428 743 562 531 535 539 543 547 LT Investments & Receivables 30 22 22 21 19 21 21 21 21 21 Derivative & Hedging Assets 732 732 628 770 565 626 630 635 640 645 Financial Assets 2,195 3,397 3,159 2,499 2,576 752 3,807 6,901 10,602 14,810

Invested Capital 43,153 42,697 41,485 34,511 33,491 36,259 35,446 35,438 35,276 35,108

Check ------

Cash Flow Statement 2011 2012 2013 2014 2015 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est

Cash Flow Operating Activities Profit After Tax 4,477 3,511 3,650 3,557 2,922 3,071 3,882 5,127 5,826 6,655 Depreciation & Amortization 919 1,845 1,860 1,818 1,637 1,397 1,459 1,470 1,481 1,492 Change in Deferred Tax Assets 67 46 -44 -48 -46 83 -1 -1 -1 -1 Change in Investments in Affiliates -1,934 -497 -405 1,481 261 - - - - - Change in Misc LT Assets -96 -8 105 13 5 -36 -1 -1 -1 -1 Change in Inventories 1 80 7 138 37 -35 126 26 -8 -8 Change in Accounts Receivable -170 -195 239 80 -43 47 -9 -9 -10 -10 Change in Prepaid Expenses -58 38 -44 23 13 -0 -1 -1 -1 -1 Change in Tax Receivables -330 323 -15 -16 131 -134 -1 -1 -1 -1 Change in Account Payables 822 501 -512 -39 -210 -129 390 204 394 401 Change in Deferred Revenue -6 -5 - -1 -6 6 0 0 0 0 Change in Misc ST Liabilities 394 -189 -320 -195 -138 304 7 7 7 7 Change in Deferred Tax Liabilities 1,339 -410 -261 -971 -25 - 539 21 21 21 90

-471 61 299 -711 128 Others Cash Flow from Operating Activities 4,954 5,101 4,559 5,129 4,666 4,573 6,388 6,841 7,707 8,554

Cash Flow Investing Activities

Change in CAPEX -686 -1,602 -1,418 -2,499 -1,498 -1,209 -1,147 -1,155 -1,164 -1,172 Purchase of intangibles -11,931 -61 -336 1,751 -237 -3,062 -546 -550 -554 -559 Cash Flow from Investing Activities - 12,617 - 1,663 - 1,754 - 748 - 1,735 - 4,271 - 1,693 - 1,705 - 1,718 - 1,731

Cash Flow from Financing Activities

Dividends Paid -971 -1,103 -1,227 -1,278 -1,397 -1,510 -1,537 -2,030 -2,307 -2,635 Change in Interest Bearing Debt 10,740 -701 -1,472 -4,507 -676 -616 -104 -12 19 19 Change in Other ST Assets -262 215 44 -315 181 31 -4 -4 -4 -4 Change in LT Investments & Receivables 5 8 - 1 2 -2 -0 -0 -0 -0 Change in Derivative & Hedging Assets -402 - 104 -142 205 -61 -5 -5 -5 -5 Others -1,615 -453 -284 859 -610

Cash Flow from Financing Activities 7,495 - 2,034 - 2,835 - 5,382 - 2,295 - 2,158 - 1,649 - 2,050 - 2,296 - 2,624

Cash Beginning Balance 1,067 746 2,171 2,081 965 1,430 - 426 2,620 5,705 9,398

Total Cash Flow -168 1,404 -30 -1,001 636 -1,856 3,046 3,085 3,693 4,199

Effect of FX rate changes - 153 21 - 60 - 115 - 171

Cash Ending Balance 746 2,171 2,081 965 1,430 - 426 2,620 5,705 9,398 13,596

Appendix - AB InBev & SAB Miller: Suppliers and Customers Analysis

SAB Miller: Suppliers and Customers Analysis

Source: Bloomberg

Appendix – Kraft Heinz: Cash Conversion Cycle Inventory Days Inventory Outstanding (DIO) = * 365 Cost of Goods Sold Accounts Payable Days Payable Outstanding (DPO) = * 365 Cost of Goods Sold Accounts Receivable Days Sales Outstanding (DSO) = * 365 Sales Cash Conversion Cycle (CCC) = DSO +DIO - DPO

1) Method I

Kraft Heinz Cash Conversion Cycle 2009 2010 2011 2012 2013 2014 2015 2016

Days Sales Outstanding (DSO) 38.91 27.64 43.13 31.51 34.00 41.25 11.58 10.60 Days Inventory Outstanding (DIO) 70.12 68.04 78.44 64.59 67.16 56.54 53.62 60.53 Days Payable Outstanding (DPO) 62.38 61.53 72.29 58.42 66.73 84.50 87.36 90.12 Cash Conversion Cycle (CCC) 46.65 34.16 49.28 37.68 34.42 13.29 -22.15 -18.99 2) Method II Accounts Payable Days Payable Outstanding (DPO) = ∗ 365, Purchases with Purchases = CoGS - Beginning Inventory + Ending Inventory

Kraft Heinz Cash Conversion Cycle 2009 2010 2011 2012 2013 2014 2015 2016

Revenue 10,011 10,495 10,707 11,508 11,529 10,922 27,447 26,487 CoGS 6,442 6,701 6,754 7,513 7,243 7,645 17,820 16,184 Accounts Receivable (A/R) 1,067 795 1,265 994 1,074 1,234 871 769 Inventories 1,238 1,249 1,452 1,329 1,333 1,184 2,618 2,684 Accounts Payables (A/P) 1,101 1,130 1,338 1,202 1,310 1,651 4,168 3,996 Purchases N/A 6,712 6,956 7,391 7,427 7,497 19,254 16,250 Days Sales Outstanding (DSO) 38.91 27.64 43.13 31.51 34.00 41.25 11.58 10.60 Days Inventory Outstanding (DIO) 70.12 68.04 78.44 64.59 67.16 56.54 53.62 60.53 Days Payable Outstanding (DPO) N/A 61.53 72.29 58.42 66.73 84.50 87.36 90.12 Cash Conversion Cycle (CCC) N/A 34.26 51.39 36.71 35.14 17.40 -13.82 -18.63 Source: Bloomberg, 10-K reports.

Appendix: Brewing Industry Cash Conversion Cycle Days Inventory Outstanding (DIO) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 AB InBev 65 66 82 55 54 53 55 57 58 62 SAB Miller 38 48 50 56 51 45 39 41 37 40 Carlsberg 54 57 51 53 48 48 46 51 48 38 Heineken 44 45 48 38 43 45 49 45 49 48 Molson Coors 34 34 36 39 38 36 33 30 30 32 Industry average 87 80 79 81 77 76 78 78 79 80

Days Sales Outstanding (DSO) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 AB InBev 49 45 57 26 26 25 25 24 25 28 SAB Miller 20 27 30 30 30 29 31 32 29 32 Carlsberg 54 51 39 38 35 39 43 44 41 35 Heineken 44 43 40 45 39 36 36 36 36 38 Molson Coors 52 50 56 75 74 70 64 55 47 46 Industry average 42 40 39 41 41 42 43 44 51 60

Days Payable Outstanding (DPO) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 AB InBev 102 119 127 115 139 158 180 185 202 242 SAB Miller 60 55 62 74 86 86 93 99 115 128 Carlsberg 84 86 75 101 105 114 118 135 135 114 Heineken 171 49 345 360 156 176 172 187 183 198 Molson Coors 40 36 34 37 42 45 51 126 143 99 Industry average 59 67 70 75 78 66 69 70 72 82

Cash Conversion Cycle (CCC) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AB InBev 12 -9 13 -33 -59 -79 -100 -104 -119 -151 SAB Miller -2 20 18 12 -5 -12 -23 -26 -49 -57 Carlsberg 23 21 15 -10 -21 -27 -29 -41 -45 -42 Heineken -83 39 -258 -276 -75 -96 -87 -106 -98 -112 Molson Coors 46 48 57 78 70 62 45 -40 -67 -21 Industry average 70 53 48 48 39 52 52 51 57 57 Source: Bloomberg, Annual Reports.

Appendix – AB InBev 2016 Balance Sheet (as reported) Net Operating Assets Invested Capital Inventories 3,913 Common Stock 19,356 Account Receivables 4,572 Treasury Stock -8,980 Prepaid Expenses 316 Retained Earnings 28,214 Taxes Receivable 1,681 Other Equity 32,749 (+) Current Assets 10,482 Equity Before Minority Interest 71,339 Minority/Non-Controlling Interest 10,086

Total Intangible Assets 181,101 (+) Total Equity 81,425 Property, Plant & Equip, Net 27,522

Investments in Affiliates 4,324 ST Borrowings 2,237 Deferred Tax Assets 1,366 ST Capital Leases 26 Misc. LT Assets 769 Current Portion of LT Debt 6,539 (+) Non-current Assets 215,082 ST Debt 8,802

Accounts Payable 25,315 LT Borrowings 113,733 Deferred Revenue 1,693 LT Capital Leases 208 Deferred Tax Liabilities 16,678 LT Debt 113,941 Misc. LT Liabilities 2,736

Misc. ST Liabilities 3,043 Pension Liabilities 3,014 (-) Non-interest Bearing Debt 49,465 LT Derivatives & Hedging 471 ST Derivatives & Hedging 1,263

(=) Net Operating Assets 176,099 (+) Interest Bearing Debt 127,491

Cash & Cash Equivalents 8,579 ST Investments 5,659 Cash and Cash Equivalents 14,238

Derivative & Hedging Assets 971 Assets Held-for-Sale 16,439 Misc. ST Assets 931 Other ST Assets 18,341

LT Investments 58 LT Marketable Securities 24 LT Investments & Receivables 82 Derivative & Hedging Assets 146 Prepaid Pension Costs 10 (-) Financial Assets 32,817

Source: Bloomberg, Author’s elaboration (=) Invested Capit 176,099

Appendix – AB InBev Debt Maturity Profile

Source: AB InBev Full Year 2016 Results presentation, 2 March 2017.

Appendix – Debt Repayment Schedule

Interest Rate Payments Principal Maturity Actual Principal Currency Interest Rate 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 Amount Year Interest Rate Amount (USD) 4,000 USD 1.900% 2019 1.90% 4,000 76 76 76 ------1,750 EUR 0.625% 2020 0.63% 1,936 12 12 12 12 ------1,250 EUR 3M EURIBOR + 75 bps 2020 1.75% 1,383 24 24 24 24 ------7,500 USD 2.650% 2021 2.65% 7,500 199 199 199 199 199 ------500 USD 3M LIBOR +126 bps 2021 2.26% 500 11 11 11 11 11 ------2,000 EUR 0.875% 2022 0.88% 2,212 19 19 19 19 19 19 ------6,000 USD 3.300% 2023 3.30% 6,000 198 198 198 198 198 198 198 ------2,500 EUR 1.500% 2025 1.50% 2,765 41 41 41 41 41 41 41 41 41 ------11,000 USD 3.650% 2026 3.65% 11,000 402 402 402 402 402 402 402 402 402 402 ------3,000 EUR 2.000% 2028 2.00% 3,319 66 66 66 66 66 66 66 66 66 66 66 66 ------6,000 USD 4.700% 2036 4.70% 6,000 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 282 ------2,750 EUR 2.750% 2036 2.75% 3,042 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 84 ------11,000 USD 4.900% 2046 4.90% 11,000 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 1,470 USD 4.915% 2046 4.92% 1,470 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 72 60,720 62,127 2,026 2,026 2,026 1,950 1,914 1,704 1,684 1,486 1,486 1,445 1,043 1,043 977 977 977 977 977 977 977 977 611 611 611 611 611 611 611 611 611 611

Assumptions: 2016 EUR/USD = 0.904 3M LIBOR/EURIBOR = 1% Principal Amount Payment Principal Maturity Actual Principal Currency Interest Rate 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 Amount Year Interest Rate Amount (USD) 4,000 USD 1.900% 2019 1.90% 4,000 - - 4,000 ------1,750 EUR 0.625% 2020 0.63% 1,936 - - - 1,936 ------1,250 EUR 3M EURIBOR + 75 bps 2020 1.75% 1,383 - - - 1,383 ------7,500 USD 2.650% 2021 2.65% 7,500 - - - - 7,500 ------500 USD 3M LIBOR +126 bps 2021 2.26% 500 - - - - 500 ------2,000 EUR 0.875% 2022 0.88% 2,212 - - - - - 2,212 ------6,000 USD 3.300% 2023 3.30% 6,000 ------6,000 ------2,500 EUR 1.500% 2025 1.50% 2,765 ------2,765 ------11,000 USD 3.650% 2026 3.65% 11,000 ------11,000 ------3,000 EUR 2.000% 2028 2.00% 3,319 ------3,319 ------6,000 USD 4.700% 2036 4.70% 6,000 ------6,000 ------2,750 EUR 2.750% 2036 2.75% 3,042 ------3,042 ------11,000 USD 4.900% 2046 4.90% 11,000 ------11,000 1,470 USD 4.915% 2046 4.92% 1,470 ------1,470 60,720 62,127 - - 4,000 3,319 8,000 2,212 6,000 - 2,765 11,000 - 3,319 ------9,042 ------12,470

Source: AB InBev 2016 Annual Report, Author’s elaboration

Appendix – Return On Invested Capital 2017-2020 AB 2017 2018 2019 2020 Revenue 47,098 48,949 50,872 52,871 NOPAT 12,563 13,139 13,734 14,354 Invested Capital 91,461 91,242 91,014 90,777 Return on Invested Capital 13.74% 14.40% 15.09% 15.81% Profit Margin 26.67% 26.84% 27.00% 27.15% Turnover Rate of Invested Capital 51.50% 53.65% 55.89% 58.24%

SAB 2017 2018 2019 2020 Revenue 20,129 20,279 20,430 20,582 NOPAT 3,394 3,534 3,660 3,800 Invested Capital 35,935 36,131 36,328 36,527 Return on Invested Capital 9.44% 9.78% 10.07% 10.40% Profit Margin 16.86% 17.43% 17.92% 18.46% Turnover Rate of Invested Capital 56.02% 56.13% 56.24% 56.35%

Weighted Average AB+SAB 2017 2018 2019 2020 Revenue 67,227 69,228 71,302 73,453 NOPAT 15,957 16,673 17,394 18,155 Invested Capital 127,396 127,373 127,342 127,304 Return on Invested Capital 12.53% 13.09% 13.66% 14.26% Profit Margin 23.74% 24.08% 24.39% 24.72% Turnover Rate of Invested Capital 52.77% 54.35% 55.99% 57.70%

AB&SAB (merged company) 2017 2018 2019 2020 Revenue 67,227 69,228 71,302 73,453 NOPAT 18,720 19,750 20,268 20,863 Invested Capital 187,627 187,400 187,010 186,605 Return on Invested Capital 9.98% 10.54% 10.84% 11.18% Profit Margin 27.85% 28.53% 28.43% 28.40% Turnover Rate of Invested Capital 35.83% 36.94% 38.13% 39.36%

Source: Pro Forma Financial Statements, Consolidated Financial Statements

Appendix – WACC

Source: Bloomberg

100

Appendix – Transaction Details

AB InBev Market Capitalization

SAB Miller Market Capitalization

SAB Miller Implied Enterprise Value ( Market Capitalization + Acquisition Premium)

Source: S&P Capital IQ

101

102