Increasing Shareholder Value:

Acquisition
Merger Proposition

BARLEYS CAPITAL

Lawrence Ho
Peter Kang
Sean Smith
Kevin Sun
Jenny Zhang
Barclays Investment Banking Competition

E X E C U T I V E S U M M A RY
Barleys Capital is pleased to present a feasibility analysis of a merger transaction between
Anheuser-Busch InBev and PepsiCo

Anheuser-Busch currently leads the beer industry and is well positioned to grow into other sectors and capture additional
market share

PepsiCo is a top industry player with a business model that comprises of both a beverage segment and snacks segment

PepsiCo has a long-standing partnership with Anheuser-Busch InBev and the two have recently teamed up on joint
promotions and in-store marketing

PepsiCo is a strategic fit to Anheuser-Busch InBevs business model, but an impractical merger

Anheuser-Busch InBev can increase shareholder value by strengthening its global distribution network in combination
with PepsiCo

The two companies have a long-standing partnership that has already realized cost synergies, thus making grounds for a
friendly merger

PepsiCos snacks segment, however, is an inappropriate fit with Anheuser-Buschs product line and brand name

As Anheuser-Busch InBevs trusted advisors, we recommend against a merger with PepsiCo

due to logistical infeasibility

In addition to significant complications associated with a merger of equals, a later divestiture of PepsiCos snacks
segment would be unfeasible

We evaluated several alternative transactions and identified an acquisition of Tsingtao as the optimal strategy because it
enables AB InBev to become the worlds first truly global beer brand

Tsingtao is a strategic alternative that is financially viable and will allow AB InBev to capture a growing Chinese market

I N D U S T RY E X P L O R A T I O N
S OFT D RINK I NDUSTRY O VERVIEW

M AIN C OMPETITORS

Earnings have decreased overall due to rising production costs. Despite

having achieved revenue growth, beverage manufacturers earnings have declined
over the past five years due to a volatile commodities markets and rising crude oil
prices, which have inflated the price of key inputs. Additionally:
Industry profitability has declined and is estimated at 4.8% of industry
revenue at the end of 2014
Demand is increasing for packaged beverages in emerging markets.
Profitability is highest in BRIC and other growing countries due to lower
production costs, lower wage costs and lenient regulatory oversight
The strengthening economies of emerging markets supported adoption of
beverages and fruit juices while same figures continue to fall in the US market

Nestle SA: Switzerland-based holding company of the Nestle Group that is

principally engaged in the development and production of food and beverage

The Coca-Cola Company: Beverage company that owns, licenses, and markets
more than 500 nonalcoholic beverage brands including Coca-Cola, Diet Coke,
Fanta, and Sprite

10%
5%
0%
-5%

Fruit
Beverages
RTD
Coffee

Energy
Drinks

Bottled
Water

Sports
Drinks

Soft
Drinks

Flavored
Water

RTD
Tea

-10%

R ECENT T RENDS
Growing health concerns have curbed the demand for sugary beverages.
Producers have responded to this shift in consumer taste by introducing low- and
zero-calorie brand extensions, but a growing awareness of the adverse health
effects of consuming artificial sweeteners has caused demand for even these
products to decline
Leading soft drink manufacturers have vertically integrated. Major industry
players like the Coca-Cola Company and PepsiCo have expanded their operations
to significantly boost their industry-relevant revenue and also their performance in
North America
Companies have engaged in high expenditure in branding and advertising.
Advertising and brand awareness are crucial driver of demand for beverages. As
producers increasingly advertised their products in foreign markets, consumers
around the world have demanded innovative products that are often only produces
abroad

Coca-Cola FEMSA, S.A.B. de C.V.: Mexico-based producer and distributor of

beverages, bottle water, juices, teas, isotonics and beer. The Company operates
domestically as well as abroad in Guatemala, Nicaragua, Costa Rica, Panama,
Colombia, Venezuela, Brazil and Philippines

K EY

CONSIDERATIONS

The beverage industry has only achieved moderate recent growth. Despite
improving economic conditions around the world, repressed disposable
income levels have placed downward pressure on industry growth
The strengthening economies of emerging markets have driven growth of
bottled water, soft drinks and non-carbonated beverage consumption in the
Middle East, Africa, and Asia
Industry profitability suffered due to the growing cost for inputs and costs
associated with mergers and acquisitions
The industry is expected to face a number of different challenges, including
eroding demand for sugary beverages in Europe and North America and the
growing obesity epidemic, which is curbing the consumption of sugary
beverages in the long term

Source: Bloomberg, Industry Research Reports

S I T UA T I O N A L O V E R V I E W : A N H E U S E R - B U S C H

AND

PEPSICO

A NHEUSER-B USCH I NB EV NV

P EPSIC O

Anheuser-Busch InBev is a leading brewer with over 200 beer brands globally
Headquartered in Leuven, Belgium, Anheuser-Busch operates in 24 countries
worldwide through six geographic zones: North America, Mexico, Latin America
North, Latin America South, Europe, and Asia Pacific

PepsiCo is a leading global food and beverage company

Through its operations, authorized bottlers, contract manufacturers and other third
parties, PepsiCo makes, markets, sells, and distributes a wide variety of foods and
beverages, serving customers and consumers in more than 200 countries

Recent News
November 2014 Anheuser-Busch InBev announced it has signed a deal to buy
Oregon craft brewer 10 Barrel Brewing Co.

Recent News
November 2014 Tingyi, the Chinese instant noodles and drunks group and
PepsiCos partner in the country, reported that Chinas economic slowdown has
reduced third quarter revenues by 13 percent

July 2014 In the past two years, Anheuser-Busch InBev has spent $1.4 billion
refurbishing breweries and on other capital expenditures in China the company
hopes to duplicate the legendary success of Coca-Cola in China

November 2014 PepsiCo Inc. President Zein Abdalla is leaving the company
following CEO Indra Nooyis departure, thinning the management bench at PepsiCo

F INANCIAL S UMMARY
In Millions USD
Total Revenue
Growth Over Prior Year
Gross Profit
Margin %
EBIT
Margin %
Net Income
Margin %

2012A
39,758.0
1.8%
23,336.0
58.7%
12,595.0
31.7%
7,160.0
18.0%

Public Market Overview

Share Price: As of 11/17/14
52 Week Low & High
Number of Shares
Equity Value
+ Total Debt
- Cash Balance
Enteprise Value

2013A
43,195.0
8.6%
25,601.0
59.3%
13,907.0
32.2%
14,394.0
33.3%

$111.85
$93.72 - $116.65
1607 mm
$179,728
$55,511
$8,845
$231,252

F INANCIAL S UMMARY
LTM
46,756.0
8.2%
28,154.0
60.2%
15,166.0
32.4%
9,208.0
19.7%

In Millions USD
Total Revenue
Growth Over Prior Year
Gross Profit
Margin %
EBIT
Margin %
Net Income
Margin %
Public Market Overview
Share Price: As of 11/17/14
52 Week Low & High
Number of Shares
Equity Value
+ Total Debt
- Cash Balance
Enteprise Value

2012A
65,492.0
(1.5%)
34,153.0
52.1%
9,535.0
14.6%
6,178.0
9.4%

2013A
66,415.0
1.4%
35,232.0
53.0%
10,050.0
15.1%
6,733.0
10.1%

LTM
66,853.0
0.7%
35,708.0
53.4%
10,197.0
15.3%
6,935.0
10.4%

$98.07
$77.01 - $98.96
1497 mm
$146,700
$29,509
$9,678
$166,500

Source: Capital IQ, Bloomberg, Company Financials

TRANSACTION RATIONALE & FEASIBILITY

Proposed Transaction

AB InBev and PepsiCo shareholders will negotiate a share exchange ratio between the two stocks
Given that AB InBevs historical acquisitions involved significant debt and subsequent divestitures, we do not recommend issuing debt or using cash
The $19.5bn deal will be financed with 100% equity by issuing and redistributing 1763.31mm new shares at $110.77 per share

Deal Feasibility

The proposed transaction values PepsiCo at a 30% premium, creating a strong incentive for its stakeholders to accept
AB InBevs acquisition of PepsiCo makes strategic sense but is ultimately unfeasible
A merger of such size with the proposed premium would push AB InBevs current shareholders ownership below 50%
The deal would be financially feasible if PepsiCo were to divest its Frito-Lays North America snack segment post-merger, which is strategically
unrealistic

S TRATEGIC R ATIONALE

G ROWTH O PPORTUNITIES

FOR

P EPSIC O

Opportunities in the Beverage and Snacks Industry

Growth in the beer industry is stagnating with an average annual growth of only
0.8% in the past five years
PepsiCos soda and snacks businesses are growth opportunities that both appeal to
AB InBev, considering its waning profitability in the beer space

Stagnating Growth
PepsiCo is already an industry leader, yet its top line growth has been stagnating
around 1 percent for the past several years
The integration of PepsiCo with AB InBev will allow PepsiCo to tap into the beer
beverage market and reach new geographic markets

Long-standing Partnership
PepsiCo has been a strategic partner for AB InBev since 1997, and the partnership is
set to expire in 2017
The two companies have recently agreed to jointly purchase certain indirect goods
and services for U.S. operations, such as information technology hardware, office
supplies, travel and facilities services, transportation, etc., to achieve cost savings

Benefits of Synergies
The issuance of AB InBev equity as part of the proposed transaction would allow
PepsiCo shareholders to benefit from the synergies created between the two
companies

Global Distribution Network

A merger between AB InBev and PepsiCo would create a comprehensive distribution
network of drinks, beers, and sodas
The resulting distribution channels could potentially lead to cost savings and
contribute to the bottom line
In Line with Current Acquisition Strategy
AB InBev has historically opted for inorganic growth through mergers and takeovers,
i.e. AmBev and Interbrew merged ten years ago for growth in sales beyond Latin
America
A merger with PepsiCo would require a divestiture of its snacks segments, a complex
deal that AB InBev has not shied away from in the past. This past year AB InBev spun
off Modelo brands to mitigate antitrust laws

T RANSACTION R ISKS
Unlikely Divestiture
Due to regulations, pressure from activists, and its dilutive nature, PepsiCos snacks
segment would have to be spun off following the merger
As an established company and brand, PepsiCo may not approve of a divestiture
Merger Complications
Two well-seasoned executives, Messrs Abdalla and Cornell, are departing, thus
thinning the management bench at PepsiCo
A merger of equals could lead internal politics and complication with power
sharing and effectively combining the cultures of the two very different firms

Source: Capital IQ, Bloomberg, Company Financials

V A L UA T I O N A N A L Y S I S
F OOTBALL F IELD

FOR

P EPSIC O

S YNERGY A NALYSIS
Revenue & Cost Synergies

DCF without
Synergies

Expand current cost saving partnerships to include drink production costs

AB Inbev and PepsiCo have existing cost savings on office supplies, other
operational materials, in-store advertising and bottling
Both companies can improve profit margins by integrating production facilities
and selling beer and soft drinks through the same distribution channels both
domestically and abroad

DCF with
Synergies
Comparables
Companies

Integration of sales & marketing campaigns

52-week trading
Current Share Price: $97.72

Precedent
Transactions

Offer Share Price: $126.75

$50

$100

$150

$200

$250

Offer Price
Control Premium
Equity Purchase Price
New Shares Issued

Diversify business segmentation to improve top-line growth

Expanding into soft drink products could improve AB Inbevs declining
revenue growth in a stagnating beer industry, especially in the U.S. market, where
consumer preference is shifting toward craft beers

V ALUATION C ONSIDERATIONS

P ROPOSED T RANSACTION
Consideration Structure

As beer and soft drinks are seen as complementary products, marketing efforts
can be combined to target similar consumers and occasions
However, AB Inbev and PepsiCo already have advertising, bottling and
distribution partnerships in place, minimizing any drastic cost synergies

100% Equity
$126.75

Accretion/Dilution Analysis
While the deal will be accretive in the first year, the deal will be 7.64% dilutive
by the third year, due to a lack of significant revenue and cost synergies

30%

AB Inbev is too high in debt and low on cash for the merger to be accretive

$195,321.75 mm
1763.31 mm

If AB Inbev were to make an offer, it would be forced to pay at least a 30%

premium in new shares to satisfy stockholders and management

Share Price Issued

$110.77

Implied Multiples

Implied EV/Revenue

3.2x

Implied EV/EBITDA

20.4x

Implied Equity Value/Net Income

23.9x

Range Selection
Heavier emphasis was placed on valuation outputs from the comparable
companies and discounted cash flow analyses
Due to the unique nature of the cross-industry merger, the precedent
transaction analysis does not give an accurate portrayal of the valuation

Source: Capital IQ, Bloomberg, Company Financials

C o m p a r a b l e C o m p a n i e s & P r e c e d e n t Tr a n s a c t i o n s P e p s i C o
Comparable Analysis

Ticker
KO
DPS
MNST
BCB
FIZZ
PLSB

Company Name
The Coca-Cola Company
Dr Pepper Snapple Group Inc.
Monster Beverage Corporation
Cott Corporation
National Beverage Corp.
The Pulse Beverage Corporation

Current Share Price

42.73
70.1
107.92
6.71
26.29
0.27

High
Median
Mean
Low

Shares Out.
4380.1
194.4
167.6
93
46.3
52.8

Equity Value
187161.67
13627.44
18087.39
624.03
1217.23
14.26

Enterprise Value
205481.2
15,903.10
17,095.10
1,183.90
1,201.20
14.10

EV/EBITDA
15.0x
10.9x
23.7x
6.8x
15.1x
NM

EV/Sales
4.5x
2.6x
7.1x
0.6x
1.9x
4.5x

P/E
23.8x
19.7x
43.2x
NM
26.6x
NM

23.7x
15.0x
14.3x
6.8x

7.1x
3.6x
3.5x
0.6x

43.2x
26.6x
28.7x
19.7x

Precedent Transaction

Date
9/9/13
10/18/12
10/16/12
8/1/12
7/9/12
6/29/12
9/5/11
4/26/11
High
Median
Mean
Low

Acquirer
Suntory Beverage & Food Limited
Archer Daniels Midland Company
Savola Group Company
Suntory Beverage & Food Asia Pte
Campbell Investment Company
Anheuser-Busch InBev SA/NV
Temasek Sejati Sdn Bhd
Societe pour le Financement

Target
GlaxoSmithKline, Lucozade and Ribena Brands
Grain Corp. Ltd
Almarai Company Limited
Cerebos Pacific Limited
Wm Bolthouse Farms
Group Modelo, S.A.B. de C.V
DXN Holdings Bhd
Parmalat SpA

% Sought
100%
100%
100%
100%
100%
100%
100%
100%

Deal Value
2122.47
241.9
526
293.1
1555
14706.7
44.2
3590.5

EV/Sales
2.7x
1.1x
4.2x
2.0x
2.2x
5.5x
1.5x
0.8x

EV/EBIT
NM
12.7x
30.0x
13.9x
15.5x
22.1x
7.9x
16.2x

5.5x
2.1x
2.5x
0.8x

30.0x
15.5x
16.9x
7.9x

Discounted Cash F low Analysis PepsiCo

In Millions USD

2015E

2016E

2017E

2018E

2019E

Cumulative Present Value of FCF

66,853.00

67,521.53

68,196.75

68,978.71

69,567.50

70,263.17

Terminal Value

1.40%

0.70%

1.00%

1.00%

1.00%

1.00%

1.00%

31,291.00

31,243.00

31,085.00

31,601.88

31,849.71

32,099.33

32,350.75

32,604.00

34,201.00

35,172.00

35,768.00

35,919.65

36,347.04

36,779.39

37,216.75

37,659.18

2011A

2012A

2013A

Revenue

66,504.00

65,492.00

66,415.00

15.00%

-1.50%

COGS

31,547.00

Gross Profit

34,957.00

% Growth

% Margin

SG&A
EBITDA

Enterprise Value

Extrapolation

Years

2014LTM

52.56%

52.22%

52.96%

53.50%

53.20%

53.30%

53.40%

53.50%

53.60%

25,145.00

24,680.00

25,184.00

25,326.00

25,578.65

25,834.44

26,066.05

26,330.61

26,613.25

42,968.19

Terminal Year EBITDA (2024E)

11,618.09

Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal
Value
% of Enterprise Value
Enterprise Value

24.2x
281,363.72
1.66
169,952.95

9,812.00

9,521.00

9,988.00

10,422.00

10,340.99

10,512.60

10,713.34

10,866.13

11,045.93

% Margin

14.75%

14.54%

15.04%

15.62%

15.32%

15.05%

15.11%

15.23%

15.27%

Dep. & Amort.

2,581.00

2,493.00

2,466.00

2,445.00

2,700.86

2,727.87

2,755.15

2,782.70

2,810.53

EBIT

7,231.00

7,028.00

7,522.00

7,997.00

7,640.13

7,784.73

7,958.19

8,103.43

8,235.41

10.87%

10.73%

11.33%

11.96%

11.32%

11.42%

11.55%

11.65%

11.72%

-2,372.00

-2,090.00

-2,104.0

-2,154.0

-2,184.00

-2,225.70

-2,275.29

-2,316.82

-2,354.55

Enterprise Value

$212,921.15

Less: Total Debt

23,489.00

% Margin

Tax paid

32.80%

29.74%

27.97%

26.94%

28.59%

28.59%

28.59%

28.59%

28.59%

EBIAT

Effective Tax Rate

4,859.00

4,938.00

5,418.00

5,843.00

5,455.78

5,559.03

5,682.90

5,786.62

5,880.86

Plus: Dep. & Amort.

2,581.00

2,493.00

2,466.00

2,445.00

2,700.86

2,727.87

2,755.15

2,782.70

2,810.53

691.00

-956.00

182.00

817.00

71.22

71.93

72.65

73.37

74.11

(CapEX)

3,339.00

2,714.00

2,795.00

2,838.00

2,835.35

2,876.24

2,907.11

2,930.50

2,962.92

Unlevered Free Cash Flow

3,410.00

5,673.00

5,271.00

4,633.00

5,250.07

5,388.73

5,458.28

5,565.44

5,565.44

(Change in WC)

Discount Period

Discount Factor

1.05

1.11

1.16

1.22

1.29

4,991.96

4,826.70

4,692.18

4,549.08

4,394.54

Present Value of Free Cash Flow (FCF)

Implied Equity and Share Price

Less: Preferred Securities

Less: Non-controlling interest
Plus: Option Execution Proceeds
Plus: Cash and Cash Equivalents
Implied Equity Value
Number of Shares
Implied Share Price

41.00
116.00
1,170.02
7,282.00
$192,727.17
1560.0
$126.75

Implied Perpetuity Growth Rate

Sensitivity Analysis: Value/Share

Terminal Year EBITDA (2024E)

Terminal Growth Rate

Discount Rate
(WACC)

79.82%
$212,921.15

WACC

$11,618.09
5.17%

126.75

0.50%

0.75%

1.00%

1.25%

1.50%

4.67%

132.19

139.74

148.32

158.16

169.54

4.92%

122.88

129.44

136.83

145.23

154.85

5.17%

114.60

120.33

126.75

133.98

142.20

5.42%

107.19

112.23

117.84

124.12

131.20

Enterprise Value

5.67%

100.52

104.98

109.91

115.40

121.55

2014 Q3 LTM EBITDA

$10,442.00

Implied EV/EBITDA

20.4x

Terminal Value

$281,363.72

Implied Perpetuity Growth Rate

1.00%

Implied EV/EBITDA
$212,921.15

Source: Capital IQ, Bloomberg, Company Financials

Merger Analysis PepsiCo

Combined Income Statement

Transaction Assumptions
Buyer Name

Anheuser-Busch InBev

Seller Name

PepsiCo

30%

Per Share Purchase Price

126.75

Equity Purchase Price

195,321.75

Premium Paid

% Cash

0.0%

Cash Used

---------

% Debt

0.0%

Debt Issued

---------

% Stock

100.0%

New Shares Issued (in

Millions)

1763.31

Debt Interest Rate

4.7%

Foregone Cash
Interest Rate

0.5%

Synergy Cost Savings

Forgone Interest on Cash
Interest Paid on Debt
Net Income

2015E
2,859.00
------------------19,339.31

2016E
2,884.21
------------------20,388.79

2017E
2,908.27
------------------22,101.48

Shares Outstanding
Shares Outstanding
Shares Issued
Total Shares Outstanding

1,650.00
1,763.31
3413.31

1,650.00
1,763.31
3413.31

1,650.00
1,763.31
3413.31

Earnings Per Share (EPS)

Accretion (Dilution):
Accretion (Dilution) %:

5.67
0.14
2.51%

5.96
(0.08)
(1.41%)

6.48
(0.54)
(7.64%)

2015E
67,521.53
31,601.88
25,578.65
10,340.99
(796.35)
9,544.64
2,184.36
7,360.28

2016E
68,196.75
31,849.71
25,834.44
10,512.60
(804.32)
9,708.28
2,225.70
7,482.59

2017E
68,878.71
32,099.33
26,066.05
10,713.34
(812.36)
9,900.98
2,275.29
7,625.69

1,560.00
4.72

1,560.00
4.80

1,560.00
4.89

PepsiCo Income Statement

Anheuser-Busch InBev Income Statement

Revenue
COGS
SG&A and Other
Operating Income
Investment Income
Pretax Income
Income Tax
Net Income
Shares Outstanding (in millions)
Earnings Per Share

2015E
48,943.00
19,113.00
13,350.00
16,480.00
--------15,005.00
3,371.00
9,120.00

2016E
51,788.00
19,932.00
13,762.00
18,094.00
--------16,654.00
3,908.00
9,972.00

2017E
54,796.88
20,787.08
14,298.72
18,799.67
--------18,485.94
4,533.28
11,567.52

1,650.00
5.53

1,650.00
6.04

1,650.00
7.01

% Synergies

(5.07)%
1.50%
2.50%
3.50%
4.50%
5.50%

0.50%
-3.32%
-0.13%
3.06%
6.24%
9.43%

Revenue
COGS
SG&A and Other
Operating Income
Investment Income
Pretax Income
Income Tax
Net Income
Shares Outstanding (in millions)
Earnings Per Share

2013 Accretion/Dilution %
% Terminal Growth
0.75%
1.00%
-5.64%
-8.11%
-2.53%
-5.08%
0.58%
-2.05%
3.70%
0.98%
6.81%
4.02%

1.25%
-10.74%
-7.80%
-4.85%
-1.91%
1.04%

1.50%
-13.55%
-10.70%
-7.85%
-5.00%
-2.15%
8

A l t e r n a t i v e P r o p o s a l Ts i n g t a o B r e w e r y C o .
B USINESS O VERVIEW

S TRATEGIC R ATIONALE

Business Model: Tsingtao is one of the largest and most prestigious breweries in
China. Its operates in 19 provinces and regions in China and the brand is sold in
more than 70 countries worldwide.
Tsingtao accounts for more than 50 percent of Chinas total beer exports

Tsingtao has a significant share in the Chinese market, which accounts for
more than 40% of industry growth
By acquiring Tsingtao, AB InBev can much more effectively expand into such a
competitive and traditional industry than attempting to grow organically and become a
truly global brand

Long-standing partnership with AB InBev: Tsingtao has had a formal

partnership with Anheuser-Busch since April 2003. The Chinese brewery provides
Anheuser-Busch with a production base and sales network in the Chinese market
AB InBev has increased its stake in Tsingtao from five percent to almost 30
percent in this time
In Millions USD
Total Revenue
Growth Over Prior Year
Gross Profit
Margin %
EBIT
Margin %
Net Income
Margin %

2012A
4,136.1
12.6%
1,660.1
40.1%
312.2
7.5%
282.2
6.8%

Public Market Overview

Share Price: As of 11/17/14
52 Week Low & High
Number of Shares
Equity Value
+ Total Debt
- Cash Balance
Enteprise Value

2013A
4,673.1
13.0%
1,863.7
39.9%
309.2
6.6%
326.0
7.0%

$7.13
$6.08 - $8.15
1351 mm
$9,166
$55
$1,493
$7,703

LTM
4,860.3
4.0%
1,881.6
38.7%
335.5
6.9%
323.9
6.7%

An acquisition of Tsingtao would be in line with AB InBevs current growth

strategy
AB InBev has a transaction history that includes deals comparable to the potential
takeover of Tsingtao
Grupo Modelo: In 2012, AB InBev acquired Grupo Modelo to gain
dominance in Latin America and thus adding Corona
Oriental Brewery: AB InBev originally held significant stake in the Korean
brewery, but sold the shares in 2009 to pay down the debt from the
Anheuser-Busch Co. takeover. AB InBev recently repurchased Oriental from
KKR for $5.8 billion
AB InBev held a 27% stake in Tsingtao until 2009
AB InBevs stake was sold in two separate deals to finance its acquisitions
Industry conditions now present the optimal time to acquire Tsingtao and capture the
Chinese market
Anheuser-Busch can offer Western prestige to the Tsingtao brand
As a subsidiary of AB InBev, Tsingtao can incorporate a desired Western prestige
into their brand image while still maintaining its traditional Chinese brand

Source: Capital IQ, Bloomberg, Company Financials

A p p e n d i x A S y n e r g i s t i c B e n e f i t s , R i s k s & M a c r o e c o n o m i c Tr e n d s
M ACROECONOMIC O VERVIEW

S YNERGY A NALYSIS
Revenue Synergy:
AB InBev stands to gain significant market share through securitizing its
position in the fast-growing Chinese beer industry by acquiring a local brand
Tsingtao has high growth potential and high margins compared to competitors,
which would have positive impacts on AB InBevs margins
Tsingtao stands to fully develop into Western regions. Tsingtao is already one of
the top players in the Chinese market as part of AB InBev, they can also fully
incorporate Western sales. AB InBev also adds Western prestige to the national
Chinese brand
Cost Synergy
Tsingtao has an established distribution system that AB InBev can incorporate.
To reduce pollution, China has strict traffic limitations which makes it near impossible
for AB InBev to develop their own distribution channels in the region
AB Inbev can incorporate Tsingtaos existing breweries instead of significant
capital expenditures to build and develop their own

The Chinese economy has expanded rapidly over the past three decades, with
annual growth averaging around 10 percent per annum. This has been underpinned
by a range of economic reforms that have made the economy more market
oriented and encouraged growth of the productive capacity of the economy
Chinese monetary and fiscal policy are tightly coordinated by the central
government. Chinese policymakers employ a range of monetary, fiscal and
regulatory policy instruments to manage aggregate demand
Chinese equities have outperformed every leading market in the world for the past
three months. The CSI 300, an index of large companies listed in Shanghai and
Shenzhen, is up 13 percent.
Investors are betting that Chinas weak economy will force the central bank to
pump cheap money into the financial system.
The forthcoming launch of the Hong Kong-Shanghai stock connect, which will
give foreign investors unprecedented access to the Shanghai market, has stoked
bullishness, amid expectations a wave of foreign inflows will life demand for shares
once the pilot program gets under way

R ISKS
The acquisition would need approval from the Chinese Ministry of
Commerce. While there is a chance that the government may reject the proposal,
the transaction would allow AB InBev to realize major synergistic benefits if
approved
There are well-known risks associated with the Chinese M&A market.
Foreign investors are aware that risks such as questionable business practices,
environmental exposure, and lack of intellectual property protection, are inherent
in Chinese transactions
AB InBev has previously acquired Chinese brands, such as Ginsberg and
started to establish Budweiser in the region. This experience will allow them
to mitigate such risks
Restrictions set by the Chinese government may inhibit growth prospects.
Due to severe pollution concerns, China has place limitations and several business
factors such as a limit on production capacity. This allows less flexibility for any
growth strategies the Company may wish to employ

Source: Bloomberg, Industry Research Reports

A p p e n d i x B C o m p a r a b l e C o m p a n i e s & Tr a n s a c t i o n s : Ts i n g t a o
Comparable Analysis
Company Name

Ticker

Share Price

Shares Out.

Equity Value

Enterprise Value

Sapporo Holdings Ltd.

Molson Coors Brewing
Beijing Yanjing Brewery
China Foods Limited
Grupo Modelo, SAB de CV
Asahi Group Holdings
Kirin Holdings Company

TSE:2501
NYSE:TAP
SZSE:000729
SEHK:506
BMV:GMODELO
TSE:2502
TSE:2503

4.31
77.75
1.15
0.38
9.17
29.24
12.4

389.8
185.3
2808.6
2797.2
4424.1
473.4
913.3

1680.038
14407.075
3229.89
1062.936
40568.997
13842.216
11324.92

3776.7
16768.6
3232.3
1590.6
34855
17359.6
19978.5

High
Median
Mean
Low

EV/EBITDA
10.2x
12.0x
11.3x
NM
NM
9.6x
8.5x

12.0x
10.8x
10.5x
8.5x

EV/Sales

P/E

0.8x
4.0x
1.4x
0.5x
5.9x
1.2x
1.1x

NM
25.9x
28.1x
NM
43.5x
24.3x
55.5x

5.9x
1.2x
2.1x
0.5x

55.5x
28.1x
35.5x
24.3x

Precedent Transaction

Date
8/3/10
12/7/09
5/8/09
11/13/07
5/30/07
2/1/07
8/22/05
4/27/05
High
Median
Mean
Low

Acquirer
Craft Brew Alliance
Asia Pacific Breweries Limited
Kohlberg Kravis Roberts & Co L.P
Craft Brew Alliance
Russell Breweries Inc
Labatt Brewing Company Limited
Greene King plc
Marston's plc

Target
Kona Brewing Co., Inc
PT Multi Bintang Indonesia Tbk
Oriental Brewery Co., Ltd.
Wildmer Brothers Brewing Company
Fort Garry Brewing Co. Ltd.
Lakeport Brewing Income Fund
The Belhaven Group plc
Jennings Brothers PLC

% Sought
100%
68.53%
100%
100%
100%
100%
100%
100%

Deal Value
15.47
243.77
1878.86
57.91
5.17
163.52
457.05
87.65

EV/Revenue
0.5x
2.1x
2.9x
1.0x
1.8x
2.6x
2.2x
2.5x
2.9x
2.2x
2.0x
0.5x

EV/EBITDA
10.0x
6.0x
9.7x
6.2x
10.9x
10.5x
10.8x
8.7x

10.9x
9.9x
9.1x
6.0x
II

A P P E N D I X C - D I S C O U N T E D C A S H F L O W A N A L Y S I S : T S I N G TA O

In Millions USD
Years

2011A

Revenue

2012A

Enterprise Value

Extrapolation

2013A

2014LTM

2015E

2016E

2017E

2018E

Cumulative Present Value of FCF

2019E

3,673.49

4,136.10

4,673.11

4,860.28

5,346.31

5,827.47

6,293.67

6,734.23

7,138.28

21.7%

12.6%

13.0%

4.0%

10.0%

9.0%

8.0%

7.0%

6.0%

COGS

2,133.17

2,476.04

2,809.36

2,978.70

3,207.78

3,496.48

3,776.20

4,040.54

4,282.97

Gross Profit

1,540.32

1,660.06

1,863.74

1,881.57

2,138.52

2,330.99

2,517.47

2,693.69

2,855.31

% Growth

% Margin

1,139.20

Terminal Value

Terminal Year EBITDA (2024E)

692.13

Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal
Value
% of Enterprise Value
Enterprise Value

26.1x
18,033.06
2.37

41.9%

40.1%

39.9%

38.7%

40.0%

40.0%

40.0%

40.0%

40.0%

1,204.33

1,347.82

1,554.51

1,546.05

1,751.16

1,908.77

2,061.47

2,205.77

2,338.12

335.99

312.24

309.23

335.53

387.36

422.22

456.00

487.92

517.20

9.1%

7.5%

6.6%

6.9%

7.2%

7.2%

7.2%

7.2%

7.2%

Dep. & Amort.

110.03

134.62

145.19

143.19

161.42

175.95

190.02

203.33

215.33

EBIT

225.96

177.62

164.04

192.33

225.94

246.28

265.98

284.60

301.67

6.2%

4.3%

3.5%

4.0%

4.2%

4.2%

4.2%

4.2%

4.2%

-104.27

-102.58

-114.24

-133.75

-126.66

-138.06

-149.11

-159.55

-169.12

Enterprise Value

$8,735.63
0.67

SG&A
EBITDA

% Margin

% Margin

Tax paid

Effective Tax Rate

46.1%

57.8%

69.6%

69.5%

56.1%

56.1%

56.1%

56.1%

56.1%

Less: Total Debt

121.69

75.04

49.80

58.58

99.28

108.21

116.87

125.05

132.55

Less: Preferred Securities

Plus: Dep. & Amort.

110.03

134.62

145.19

143.19

161.42

175.95

190.02

203.33

215.33

(Change in WC)

-15.44

-112.63

-528.48

-4.27

-194.34

-211.83

-228.78

-244.79

-259.48

(CapEX)

387.30

381.50

336.30

327.30

320.78

349.65

377.62

404.05

428.30

-140.13

-59.21

387.16

-121.25

134.26

146.34

158.05

169.11

179.26

Discount Period

Discount Factor

1.09

1.19

1.30

1.41

1.54

123.14

123.11

121.94

119.67

116.35

Present Value of Free Cash Flow (FCF)

Less: Non-controlling interest

3.95

Plus: Option Execution Proceeds

Plus: Cash and Cash Equivalents
Implied Equity Value
Number of Shares
Implied Share Price

1,492.70
$10,223.70
1350.1
$7.57

Implied Perpetuity Growth Rate

Sensitivity Analysis: Value/Share

Terminal Year EBITDA (2024E)

Terminal Growth Rate

Discount Rate
(WACC)

86.96%
$8,735.63

Implied Equity and Share Price

EBIAT

Unlevered Free Cash Flow

7,596.43

WACC

$692.13
9.03%

7.57

4.50%

4.75%

5.00%

5.25%

5.50%

8.03%

9.00

9.55

10.19

10.95

11.86

8.53%

7.83

8.23

8.69

9.22

9.84

9.03%

6.93

7.23

7.57

7.96

8.40

9.53%

6.21

6.45

6.71

7.00

7.33

Enterprise Value

10.03%

5.63

5.82

6.02

6.25

6.50

2014 Q3 LTM EBITDA

$335.53

Implied EV/EBITDA

26.0x

Terminal Value

$18,033.06

Implied Perpetuity Growth Rate

5.00%

Implied EV/EBITDA
$8,735.63

Source: Capital IQ, Bloomberg, Company Financials

III

A p p e n d i x D M e r g e r A n a l y s i s : Ts i n g t a o
Combined Income Statement

Transaction Assumptions
Buyer Name

Anheuser-Busch InBev

Seller Name

TsingTao

20%

Per Share Purchase Price

$ 7.63

Equity Purchase Price

$ 10,303.96

Cash Used

$ 2,060.79

Premium Paid

% Cash

20.0%

% Debt

80.0%

Debt Issued

$ 8,243.17

% Stock

0.0%

New Shares Issued (in

Millions)

0.00

Foregone Cash
Interest Rate

0.5%

Debt Interest Rate

3.0%

Synergy Cost Savings

Forgone Interest on Cash
Interest Paid on Debt
Net Income

2015E
256.02
10.30
247.30
9,421.61

2016E
279.06
10.30
247.30
10,336.78

2017E
301.38
10.30
247.30
12,005.85

Shares Outstanding
Shares Outstanding
Shares Issued
Total Shares Outstanding

1,650.00
0.00
1,650.00

1,650.00
0.00
1,650.00

1,650.00
0.00
1,650.00

Earnings Per Share (EPS)

Accretion (Dilution):
Accretion (Dilution) %:

5.71
0.18
3.31%

6.26
0.22
3.66%

7.28
0.27
3.79%

TsingTao Income Statement

Anheuser-Busch InBev Income Statement

Shares Outstanding (in millions)

Earnings Per Share

2016E
51,788.00
19,932.00
13,762.00
18,094.00
--------16,654.00
3,908.00
9,972.00

2017E
54,796.88
20,787.08
14,298.72
18,799.67
--------18,485.94
4,533.28
11,567.52

1,650.00
5.53

1,650.00
6.04

1,650.00
7.01

2016 Accretion/Dilution %
% Cash

% Debt

3.66%

Revenue
COGS
Other Operating Expenses
Operating Income
Investment Income
Pretax Income
Income Tax
Net Income

2015E
5,346.31
3,207.78
1,912.58
225.94
87.45
313.39
126.66
303.19

2016E
5,827.47
3,496.48
2,084.71
246.28
103.51
349.78
138.06
343.32

2017E
6,293.67
3,776.20
2,251.49
265.98
128.97
394.94
149.11
394.54

Shares Outstanding (in millions)

Earnings Per Share

1350.10
0.22

1350.10
0.25

1350.10
0.29

2017 Accretion/Dilution %

0.00%

10.00%

20.00%

30.00%

40.00%

60.00%

4.38%

4.33%

4.28%

4.23%

4.17%

70.00%

4.07%

4.02%

3.97%

3.92%

3.86%

80.00%

3.76%

3.71%

3.66%

3.61%

3.55%

90.00%

3.45%

3.40%

3.35%

3.30%

3.24%

100.00%

3.14%

3.09%

3.04%

2.99%

2.93%

% Cash
3.79%
% Debt

Revenue
COGS
SG&A and Other
Operating Income
Investment Income
Pretax Income
Income Tax
Net Income

2015E
48,943.00
19,113.00
13,350.00
16,480.00
--------15,005.00
3,371.00
9,120.00

0.00%

10.00%

20.00%

30.00%

40.00%

60.00%

4.41%

4.37%

4.32%

4.28%

4.23%

70.00%

4.15%

4.10%

4.06%

4.01%

3.97%

80.00%

3.88%

3.83%

3.79%

3.74%

3.70%

90.00%

3.61%

3.57%

3.52%

3.48%

3.43%

100.00%

3.34%

3.30%

3.25%

3.21%

3.17%
IV

Appendix E Historic Repurchase and Alter native Acquisitions

Dr. Pepper Snapple Group is the bottle and distributor of Dr. Pepper soda and Snapple drinks. Serving Canada,
Mexico, and the US, the company offers a vast portfolio of non-alcoholic beverages. Its brands include A&W Root
Beer, Hawaiian Punch, Motts, and Schweppes
Dr. Pepper Snapple provides AB InBev with an opportunity to enter the soft drinks industry without a large snack
segment liability
Although logical, Tsingtao poses to be a better transaction in the current moment. The unconquered Chinese market
shows that AB InBev still has major room for growth in the beer industry before tapping into other sectors

Dr. Pepper Snapple Group

Monster Beverage Company serves up a variety of alternative sodas, juices, and teas. Its namesake brand is Monster,
the No. 2 ranked energy drink second only to Red Bull
Similar to Dr. Pepper Snapple, Monster Beverage Company provides AB InBev with an opportunity to enter the soft
drinks industry without a large snack segment liability. Furthermore, the company is very high growth with its Monster
brand and recent consumer trends

Monster Beverage
Company

AB InBev, however, already owns distribution rights to the Monster Energy brand. Thus, although Monster still offers
growth potential, the additional synergies to be realized are marginal. Critiques of the energy drinks health effects have
also been detrimental to the companys earnings, which poses a risk for AB InBev as an acquirer
Dogfish Head is a rapidly growing craft brewery. The company exhibited nearly 400% growth from 2003 to 2006 and
its products are distributed mainly in Delaware and surrounding states
AB InBevs strategy to capture high craft beer growth involves acquiring regionally strong brands that lack national
distribution and awareness but has more scaling potential
After being acquired by AB InBev, Goose Island Brewerys production volume has grown much faster than craft leader
Boston Beer

Dogfish Head Brewery

AB InBev has already picked up four major craft breweries across the country. Ultimately, it will be difficult to match
the success of Goose Island with Dogfish Head

Source: Capital IQ, Industry Research Reports