On September 17, 2015, Anheuser-Busch InBev, the world largest brewer in the world, announced that it had reached an agreement to acquire SABMiller, the worlds second largest brewery. The deal would be the largest deal ever in the industrys history. The deal was an antitrust hurdle in Europe and the United States, and was allowed only after certain concessions to the Department of Justice and the European Commissioner for Competition. The acquisition afforded AB InBev many opportunities and followed a general industry trend of consolidation. Analysts argued that in a highly competitive market with slow demand growth, brewers have been leery of large investments in factories and distribution channels, and have seen acquisitions as a way to buy growth, since merging allows companies to simply consolidate preexisting distribution and manufacturing platforms without the need for costly capital investment. By acquiring SABMiller, AB InBevwhich had substantial business in North America, South America, Russia, and East Asiawould gain access to SABMillers distribution channels in Africa, Eastern Europe, Australia, and India. This would allow AB InBev to introduce its products without the costs of building new distribution networks and factories, in addition to avoiding extensive negotiations with governments for distribution rights. In addition to letting AB InBev bypass the investments required to enter African and Asia Pacific markets, the deal would contribute to AB InBevs strategy of providing a complement of global beer brands along with local ones in order to compete with the burgeoning micro-brew industry. By acquiring SABMiller, AB InBev would control a plurality of the worlds beer to be the worlds first truly global brewer. At the time of acquisition, AB InBevs brands included Budweiser, Corona, Stella Artois, Brahma, Antarctica, Modelo Especial, and many other regional brands. AB InBevs revenue was concentrated in the Americas (North and South), with 36.5% of total 2015 revenue coming from North America and 49.1% of total 2015 revenue coming from Latin America. SABMiller, the London-based multinational, controlled global brands including Brutal Fruit, Castle Lager, Miller, Redds Dry, Sarita, and others. Unlike AB InBev, only 48% of SABMillers revenue came from the Americas, with the majority coming from Africa, Europe, and Asian Pacific. AB InBev anticipated 1.4 billion of yearly operational synergies from the deal (mostly from layoffs) in the form of perpetuity. There would also exist 900 million implementation costs in order to realize those synergies which is distributed equally over the first three years (300 million per year for three years). The deal would be financed with 63% debt and 37% equity. Assume that the risk-free rate is 1.5%, the market risk premium is 8% and the corporate tax rate is 30%. The following table reports some financial characteristics of AB InBev and SABMiller: AB InBev SABMiller Share price on Sep 12, 2015 68.20 34.06 No. of shares (Bn) 1.72 1.60 Total debt ( Bn) 29.65 10.22 Equity beta 0.84 1.04 Cost of debt (%) 4.7% 3.8%

It is recommended that you answer the following questions in the order they are asked. In answering each question, you can use information from proceeding questions, but not from subsequent questions. For example, in answering question (c) you can use information that you learn from question (b), but not what you learn from question (d). (a) Explain why the following are or are not good reasons for AB InBev to acquire SABMiller: (i) To gain entry into the Asian and African market (ii) To cut costs by exploiting synergies in human capital

(b) Find the WACC and the unlevered cost of capital for both AB InBev and SABMiller as stand- alone firms pre-merger.

(c) Assuming that synergies in the merger have the same business risk as that of SABMillers cash flows, find the WACC and the unlevered cost of capital for the synergies.

(d) What is the total value created in this deal?

(e) Is the value created in the deal (estimated in (d)) higher or lower than that in an average merger?

(f) What is the maximum cash price that AB InBEv can afford to pay for SABMiller?

(g) Suppose that the actual takeover price was 43.50 in cash per share of SABMiller. How does the premium offered to SABMillers shareholders compare with that in a typical merger?

(h) When the deal was announced on September 17, 2015. SABMillers share price increased from 39.87 to 42.10. Why? Why didnt the price reach the offer price of 43.50?

(i) When all the details of the deal were announced on October 12, 2015, SABMillers share price decreased in value and the share price fell from 42.43 to 42.09. Why?

(j) On July 20, 2016, before the completion of the deal, the United States Department of Justice (DOJ) announced that it would require AB InBev to divest SABMillers stake in Miller Coors in order to proceed with the acquisition. Miller Coors was a joint venture with the Canadian Molson Coors Brewing company in which SABMiller owned a majority stake. AB InBev agreed and the deal was completed in October of 2016. Why would DOJ require such a divesture to allow the acquisition? Please elaborate.

(k) The stock price of two other rivals of SABMiller and AB InBev, Carlsberg and Heineken, had dropped after the announcement of the deal but it increased on the announcement of the DOJs request on July 20, 2016 elaborated in (j). What does this suggest?

(l) Using Heineken and Carlsberg as comparable firms, estimate the stand alone value for SABMiller on September 12, 2015 (SABMillers stand-alone projected EBITDA at the time was estimated at 3.1 (Bn)). Assume the growth rates of SABMiller, Heineken and Carlsberg were similar. Why is the estimated value of SABMiller smaller than the actual SABMillers value on September 12, 2015?