Increasing Shareholder Value: Acquisition Merger Proposition
BARLEYS CAPITAL
Lawrence Ho Peter Kang Sean Smith Kevin Sun Jennyy Zhang Jenn Barclays Investment Banking Competition
EXECUTIVE SUMMARY Barleys Capital is pleased to present a feasibility analysis of a merger transaction between Anheuser-Busch InBev and PepsiCo !
Anheuser-Busch Anheuser-Busch currently leads leads the beer industry industry and is well positioned positioned to grow into other sectors and and capture additional 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 InBev’s business model, but an impractical merger !
Anheuser-Busch Anheuser-Busch InBev InBev can increase increase shareholder shareholder value by strengthening its global distribution network network in combination combination with PepsiCo
!
The two companies companies have have a long-standing long-standing partnership that that has already realized cost synergies, synergies, thus thus making grounds for for a friendly merger
!
PepsiCo’s snacks segment, however, is an inappropriate fit with Anheuser-Busch’s product line and brand name
As Anheuser-Busch InBev’s trusted advisors, advisor s, 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 PepsiCo’s snacks segment would be unfeasible We We evaluated evaluated several alternative alternative transactions transactions and identified identified an acquisition of of Tsingtao Tsingtao as the optimal optimal strategy because it enables AB InBev to become the world’s 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
INDUSTRY EXPLORATION 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: 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 economies of emerging markets supported adoption adoption of ! The strengthening economies 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: Company: Beverage company that owns, licenses, and markets more than 500 nonalcoholic beverage brands including Coca-Cola, Diet Coke, Fanta, and Sprite
!
producer and distributor of Coca-Cola FEMSA, S.A.B. de C.V.: Mexico-based producer 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
10% 5% 0% -5%
Fruit Beverages RTD Coffee
Energy Drinks
Bottled Water
Sports Drinks
Soft Drinks
Flavored Water
RTD Tea
-10%
ECENT T RENDS R ECENT !
!
!
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, 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 awareness are crucial driver of demand for beverages. beverages. As producers increasingly advertised their products in foreign markets, consumers around the world have demanded innovative products that are often only produces abroad Source: Bloomberg, Industry Research Reports
EY CONSIDERATIONS K EY !
The beverage industry has only achieved achieved moderate recent growth. 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 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 including eroding demand for sugary beverages in Europe and North America and the growing obesity epidemic, which which is curbing the consumption of sugary beverages in the long term
S I T U A 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 A N D P E P S I C O A NHEUSER NHEUSER - B USCH I NB EV N V
P EPSIC O
Anheuser-Busch InBev InBev is a leading brewer with over over 200 beer brands brands globally !Headquartered in Leuven, Belgium, Anheuser-Busch operates in 24 countries worldwide through through six geographic zones: North North America, Mexico, Mexico, Latin America North, Latin America South, Europe, and Asia Pacific
PepsiCo is a leading global food and beverage company operations, authorized bottlers, bottlers, contract manufacturers manufacturers and other other third ! Through its operations, parties, PepsiCo makes, markets, markets, sells, and distributes a wide variety of foods and beverages, beverages, serving customers and consumers in more than 200 countries
Recent News Anheuser-Busch InBev announced it has signed a deal to to buy "November 2014 – Anheuser-Busch Oregon craft brewer 10 Barrel Brewing Co.
Recent News instant noodles and drunks group and "November 2014 – Tingyi, the Chinese instant PepsiCo’s partner in the country, reported that China’s economic slowdown has reduced third quarter revenues by 13 percent
" July
Anheuser-Busch InBev has spent $1.4 billion 2014 – In the past two years, Anheuser-Busch refurbishing breweries and on other capital expenditures in China – the company hopes to duplicate the legendary success success of Coca-Cola in China
"November
2014 – PepsiCo Inc. President Zein Abdalla is leaving the company following CEO Indra Nooyi’s departure, thinning the management bench at PepsiCo
F INANCIAL S UMMARY Total Total Revenue Gr owth Over Prior Year Gross Profit Margin % EBIT Margin % Net Income Margin %
F INANCIAL S UMMARY
39,758.0
43,195.0
46,756.0
1.8%
8.6%
8.2%
23,336.0
25,601.0
28,154.0
58.7%
59.3%
12,595.0
13,907.0
60.2% 15,166.0
31.7%
32.2%
32.4%
7,160.0
14,394.0
9,208.0
18.0%
33.3%
19.7%
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
Source: Capital IQ, Bloomberg, Company Financials
Total Revenue Growth Over Prior Year Gross Profit Margin % EBIT Margin % Net Income Margin %
65,492.0
66,415.0
(1.5%)
1.4%
0.7%
34,153.0
35,232.0
35,708.0
52.1%
53.0%
53.4%
9,535.0
10,050.0
10,197.0
14.6%
15.1%
15.3%
6,178.0
6,733.0
6,935.0
9.4%
10.1%
10.4%
Public Market Overview
$111.85 $93.72 - $116.65 1607 mm $179,728 $55,511 $8,845 $231,252
Share Price: As of 11/17/14 52 Week Low & High Number of Shares Equity Value + Total Debt - Cash Balance Enteprise Value
66,853.0
$98.07 $77.01 - $98.96 1497 mm $146,700 $29,509 $9,678 $166,500
A T I O N A L E & F E A S I B I L I T Y T R A N S A C T I O N R A ! AB
Proposed Transac Transaction tion
InBev and PepsiCo PepsiCo shareholders will negotiate negotiate a share exchange exchange ratio between between the two stocks stocks Given that AB InBev’s historical acquisitions involved involved significant debt and subsequent divestitures, we do not recommend issuing debt or using cash will be financed with 100% 100% equity by issuing issuing and redistributing redistributing 1763.31mm new shares at $110.77 $110.77 per share ! The $19.5bn deal will !
! !
Deal Feasibilit Feasibilityy
The proposed transaction transaction values PepsiCo PepsiCo at a 30% premium, creating a strong incentive incentive for its stakeholders stakeholders to accept accept AB InBev’s acquisition of PepsiCo makes strategic sense sense but is ultimately ultimately unfeasible would push AB InBev’s InBev’s current current shareholders’ ownership ownership below 50% ! A merger of such size with the proposed premium would financially feasible if PepsiCo were to divest its Frito-Lays North America snack segment segment post-merger, post-merger, which is strategically strategically ! The deal would be financially unrealistic
S TRATEGIC R ATIONALE
G ROWTH O PPORTUNITIES
FOR P EPSIC O
Opportunities in the Beverage and Snacks Industr y average annual growth of only !Growth in the beer industry is stagnating with an average 0.8% in the past five years PepsiCo’s soda and snacks businesses are growth opportunities that both appeal to !PepsiCo’s AB InBev, InBev, considering its its waning profitability in the 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 PepsiCo to tap into the beer ! The integration of PepsiCo with AB InBev will allow PepsiCo 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 have recently agreed agreed to jointly purchase purchase certain indirect goods ! The two companies have 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 transaction would allow allow ! The issuance of AB InBev equity as part of the proposed transaction PepsiCo shareholders to benefit from the synergies created between the two companies
Global Distribution Network between AB InBev and PepsiCo PepsiCo would create create a comprehensive comprehensive distribution ! A merger between network of drinks, beers, beers, and sodas distribution channels could potentially lead to cost cost savings and ! The resulting distribution contribute to the bottom line In Line with Current Acquisition Strategy historically opted for inorganic growth through through mergers and takeovers takeovers,, ! AB InBev has historically i.e. AmBev and Interbrew merged ten years ago for growth in sales beyond Latin America PepsiCo would require a divestiture divestiture of its snacks segments, segments, a complex complex ! A merger with PepsiCo 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
Source: Capital IQ, Bloomberg, Company Financials
ISKS T RANSACTION R ISKS Unlikely Divestiture Divestiture !Due to regulations, pressure from activists, and its dilutive nature, PepsiCo’s snacks segment would have have to be spun off following the merger PepsiCo may not approve approve of a divestiture divestiture ! As an established company and brand, PepsiCo Merger Complications Two well-seasoned executives, executives, Messrs Messrs Abdalla and Cornell, are departing, departing, thus ! Two thinning the management bench at PepsiCo power ! A “merger of equals” could lead internal politics and complication with power sharing and effectively combining the cultures of the two very different firms
A L U A T I O N A N A L Y S I S V A F OOTBALL F IELD
FOR P EPSIC O
S YNERGY A NALYSIS NALYSIS Revenue & Cost Synergies
DCF without Synergies
Expand current cost saving par tnerships to include drink production costs ! AB
Inbev and PepsiCo PepsiCo have existing existing cost savings on on office supplies, other 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 ! As
52-week trading Current Share Price: $97.72
Precedent Transactions Transactions
Offer Share Price: $126.75
$50
$100
$150
$200
$250
beer and soft drinks drinks are seen as complementary complementary products, products, marketing efforts can be combined to target similar consumers and occasions However, AB Inbev and PepsiCo already have advertising, bottling and !However, distribution partnerships in place, minimizing any drastic cost synergies Diversify business segmentation to improve top-line growth !Expanding
into soft drink products could improve AB Inbev’s 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 Offer Price Control Premium
100% Equity $126.75 30%
New Shares Issued
$195,321.75 mm 1763.31 mm
Share Price Issued
$110.77
Equity Purchase Price
Implied Multiples Implied EV/Revenue
3.2x
Implied EV/EBITDA
20.4x
Implied Equity Value/Net Income
23.9x
Source: Capital IQ, Bloomberg, Company Financials
Accretion/Dilution Accretion/Dilution Analysis ! While
the deal will be accretive accretive in the the first year, the deal will be 7.64% dilutive dilutive by the third year, due to a lack of significant revenue and cost synergies synergies
! AB !
Inbev is too high in debt debt and low on cash for the merger to be accretive accretive
If AB Inbev were to make an offer, it would would be forced to pay at least a 30% premium in new shares to satisfy stockholders and management
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
Comparable Companies & Precedent Transactions – PepsiCo Comparable Analysis Company Name The Coca-Cola Company Dr Pepper Snapple Group Inc. Monster Beverage Corporation
Ticker KO DPS MNST
Current Share Price 42.73 70.1 107.92
Shares Out. 4380.1 194.4 167.6
Equity Value 187161.67 13627.44 18087.39
Enterprise Value 205481.2 15,903.10 17,095.10 17,095.10
EV/EBITDA EV/EBITDA 15.0x 10.9x 23.7x
EV/Sales 4.5x 2.6x 7.1x
P/E 23.8x 19.7x 43.2x
Cott Corporation National Beverage Corp. The Pulse Beverage Corporation Corporation
BCB FIZZ PLSB
6.71 26.29 0.27
93 46.3 52.8
624.03 1217.23 14.26
1,183.90 1,201.20 14.10
6.8x 15.1x NM
0.6x 1.9x 4.5x
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
High Median Mean Low
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
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, GlaxoSmithKline, Lucozade and Ribena Brands Grain Corp. Ltd Almarai Company Limited Cerebos Pacific Limited Wm Bolthouse Farms Group Modelo, S.A.B. S.A.B. de C.V DXN Holdings Bhd Parmalat SpA
% Sought 100% 100% 100% 100% 100% 100% 100% 100%
Deal Value 2122.47 241.9 241.9 526 293.1 1555 14706.7 44.2 3590.5
EV/Sale s 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
High
5.5x
30.0x
Median Mean Low
2.1x 2.5x 0.8x
15.5x 16.9x 7.9x
Discounted Cash Flow Analysis – PepsiCo Enterprise Value
Extrapolation
In Millions USD
Years
2015E
2016E
2017E
2018E
2019E
Cumulative Cumulative Present Value Value of FCF
66,853.00
67,521.53
68,196.75
68,978.71
69,567.50
70,263.17
Terminal Value Value
0.70%
1.00%
1.00%
1.00%
1.00%
1.00%
31,243.00
31,085.00
31,601.88
31,849.71
32,099.33
32,350.75
32,604.00
35,172.00
35,768.00
35,919.65
36,347.04
36,779.39
37,216.75
37,659.18
2011A
2012A
2013A
66,504.00
65,492.00
66,415.00
15.00%
-1.50%
1.40%
COGS
31,547.00
31,291.00
Gross Profit
34,957.00
34,201.00
Revenue % Growth
% Margin
SG&A EBITDA % Margin
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
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
42,968.19
Terminal Year Year EBITDA (2024E)
11,618.09
Exit Multiple Terminal Value Value Discount Factor Present Value of Terminal Terminal Value
24.2x 281,363.72 1.66 169,952.95
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
Enterpri se Value
$212,921.1 5
32.80%
29.74%
27.97%
26.94%
28.59%
28.59%
28.59%
28.59%
28.59%
Less: Total Debt
23,489.00
EBIAT
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
Less: Preferred Securities
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
1
2
3
4
5
% Margin
Tax paid Effective Tax Rate
(Change in WC)
Discount Period Discount Factor Present Value Value of Free Cash Flow (FCF)
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
126.75
0. 0.50%
0.75%
1.00%
1.25%
1.50%
4.67%
13 132.19
139.74
148.32
158.16
169.54
4.92%
12 122.88
129.44
5.17%
1 14 14.60
120.33
5.42%
10 107.19
112.23
5.67%
10 100.52
104.98
Source: Capital IQ, Bloomberg, Company Financials
136.83
145.23
154.85
13 133.98
142.20
117.84
124.12
131.20
109.91
115.40
121.55
126.75
Less: Non-controlling interest
41.00 116.00
Plus: Option Execution Proceeds
1,170.02
Plus: Cash and Cash Equivalents
7,282.00
Implied Equity Value Number of Shares Implied Share Price
Terminal Year Year EBITDA EBITDA (2024E)
Terminal Growth Rate
Implied Equity and Share Price
$192,727.17 1560.0 $126.75
Implied Perpetuity Growth Rate
Sensitivity Sensitivit y Analysis: Value/Share
e t a R ) t C n C u A o W c s ( i D
79.82% $212,921.15
% of Enterprise Value Value Enterprise Value
WACC WACC
$11,618.09 5.17%
Terminal Value Value
$281,363.72
Implied Per petuity Growth Rate
1.00%
Implied EV/EBITDA Enterprise Value
$212,921.15
2014 Q3 LTM EBITDA
$10,442.00
Implied EV/EBITDA
20.4x
Merger Analysis – PepsiCo Combined Income Statement
Transaction Transac tion 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 Outstanding Shares Issued Total Total Shares Outstanding 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
Anheuser-Busch InBev InBev Income Statement Statement Revenue COGS SG&A and Other Operating Income Investment Income Pretax Income Income Tax Net Income Shares Outstanding Outstanding (in millions) Earnings Per Share
s e i g r e n y S %
(5.07)% 1.50% 2.50% 3.50% 4.50% 5.50%
PepsiCo Income Statement
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
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 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%
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
breweries in Business Model: Tsingtao is one of the largest and most prestigious breweries 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 50 percent of China’s total beer exports exports ! Tsingtao
Tsingtao Tsingtao has a significant share in the Chinese Chinese market, which accounts accounts for more than 40% of industr y growth Tsingtao, AB InBev can much more effectively expand into such a !By acquiring Tsingtao, competitive competitive and traditional industry than attempting to grow organically and become a truly global brand
!
Tsingtao has had a formal Long-standing partnership with AB InBev: Tsingtao partnership with Anheuser-Busch since April 2003. The Chinese brewery provides Anheuser-Busch Anheuser-Busch with a production production base and sales network network in the Chinese market market AB InBev has increased increased its stake in Tsingtao Tsingtao from five percent to almost 30 30 ! percent in this time
Total Revenue Growth Over Prior Year Gross Profit
4,136.1
4,673.1
4,860.3
12.6%
13.0%
4.0%
1,660.1
1,863.7
1,881.6
Margin %
40.1%
39.9%
38.7%
EBIT
312.2
309.2
335.5
Margin %
7.5%
6.6%
6.9%
Net Income
282.2
326.0
323.9
Margin %
6.8%
7.0%
6.7%
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
Source: Capital IQ, Bloomberg, Company Financials
$7.13 $6.08 - $8.15 1351 mm $9,166 $55 $1,493 $7,703
An acquisition of Tsingtao Tsingtao would be in line with AB InBev’s InBev’s current growth strategy transaction history that includes deals comparable to the the potential ! AB InBev has a transaction takeover takeover of Tsingtao Tsingtao " Grupo Modelo: In 2012, AB InBev acquired Grupo Modelo to gain dominance in Latin America and thus adding Corona held significant stake stake in the Korean " Oriental Brewery: AB InBev originally held brewery, brewery, but sold the shares in 2009 to pay down the debt from the Anheuser-Busch Anheuser-Busch Co. takeover takeover.. AB InBev recently recently repurchased Oriental Oriental from KKR for $5.8 billion AB InBev held a 27% stake stake in Tsingtao Tsingtao until 2009 deals to finance its acquisitions acquisitions ! AB InBev’s stake was sold in two separate deals !Industry conditions now present the optimal time to acquire Tsingtao and capture the Chinese market Anheuser-Busch can offer Western Western prestige to the Tsingtao Tsingtao brand Tsingtao can incorporate a desired Western Western prestige ! As a subsidiary of AB InBev, Tsingtao into their brand image while still maintaining its traditional Chinese brand
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 T r e n d s M ACROECONOMIC O VERVIEW
S YNERGY A NALYSIS NALYSIS Revenue Synergy: significant market share through securitizing its ! AB InBev stands to gain significant position in the fast-growing Chinese beer industry by acquiring a local brand Tsingtao has high growth potential and high margins margins compared to competitors, ! Tsingtao which would have have positive positive impacts on AB InBev’s InBev’s margins Tsingtao is already one of Tsingtao stands to fully develop develop into Western Western regions. Tsingtao ! Tsingtao the top players in the Chinese market – as par t of AB InBev, InBev, they can also fully incorporate Western Western sales. AB InBev also adds Western Western prestige to the national Chinese brand Cost Synergy Tsingtao has an established distribution distribution system that AB InBev can incorporate. ! Tsingtao To reduce reduce pollution, China has strict traffic limitations which makes it near near impossible for AB InBev to develop their own distribution channels in the region Tsingtao’s existing breweries breweries instead of significant ! AB Inbev can incorporate Tsingtao’s capital expenditures to build and develop their own
!
!
The Chinese economy has has expanded rapidly over over the past three three decades, 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 policymakers employ a range of monetary, 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 China’s weak economy will force the central bank to pump cheap money into the financial system.
!
The forthcoming launch of the Hong Kong-Shanghai stock stock connect, which which will give foreign investors unprecedented access to the Shanghai market, has stoked bullishness, amid expectations expectations a wave of foreign inflows will life demand for shares once the pilot program gets under way Source: Bloomberg, Industry Research Reports
R ISKS ISKS !
The acquisition would need approval approval from the Chinese Chinese Ministry of chance that the government government may reject the the proposal, Commerce. While there is a chance the transaction would allow AB InBev to realize major synergistic benefits if approved
!
There are well-known risks risks associated with the Chinese Chinese M&A market. Foreign investors are aware that risks such as questionable business practices, environmental exposure, exposure, and lack of intellectual property protection, are inherent in Chinese transactions previously acquired Chinese brands, brands, such such as Ginsberg and ! AB InBev has previously 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. capacity. This allows less flexibility for any growth strategies the Company may wish to employ
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 & T r 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 Enterpri se Value
EV/EBITDA
EV/Sales
P/E
Sapporo Holdings Ltd. Molson Coors Brewing Beijing Yanjing Brewery Brewer y China Foods Limited Grupo Modelo, SAB de CV Asahi Group Holdings Holdings Kirin Holdings Company
TSE:2501 NYSE:TAP SZSE:000729 SEHK:506 S EHK: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
10.2x 12.0x 11.3x NM NM 9.6x 8.5x
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
12.0x 10.8x 10.5x 8.5x
High Median Mean Low
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 Craft Brew Alliance Russell Breweries Inc Labatt Brewing Company Limited Greene King plc Marston's plc
Target Kona Brewing Co., Inc
% Sought 100%
Deal Value 15.47 15.47
EV/Revenue 0.5x
EV/EBITDA 10.0x
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
68.53% 100% 100% 100% 100% 100% 100%
243.77 1878.86 57.91 5.17 163.52 457.05 457.05 87.65
2.1x 2.9x 1.0x 1.8x 2.6x 2.2x 2.5x
6.0x 9.7x 6.2x 10.9x 10.5x 10.8x 8.7x
2.9x 2.2x 2.0x 0.5x
10.9x 9.9x 9.1x 6.0x
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 T A O Enterprise Value
Extrapolation
In Millions USD
Years
2011A
Revenue
2012A
2013A
2014LTM
2015E
2016E
2017E
2018E
Cumulative Cumulative Present Value 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
SG&A EBITDA % Margin
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
1,139.20
Terminal Value Value Terminal Year Year EBITDA (2024E)
692.13
Exit Multiple Terminal Value Value Discount Factor Present Value of Terminal Terminal Value
26.1x 18,033.06 2.37
% of Enterprise Value Value Enterprise Value
86.96% $8,735.63
7,596.43
9.1%
7.5%
6.6%
6.9%
7.2%
7.2%
7.2%
7.2%
7.2%
Dep. & Amort.
110.03
134.62
145.19 145.19
143.19 143.19
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
Enterpri se Value
$8,735.63
46.1%
57.8%
69.6%
69.5%
56.1%
56.1%
56.1%
56.1%
56.1%
Less: Total Debt
0.67
EBIAT
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
1
2
3
4
5
% Margin
Tax paid Effective Tax Rate
Unlevered Free Cash Flow Discount Period Discount Factor
Present Value Value of Free Cash Flow (FCF)
1.09
1.19
1.30
1.41
1.54
123.14
123.11
121.94
119.67
116.35
e t a R ) t C n C u A o W c s ( i D
8.03%
4.75%
5.00%
5.25%
5.50%
9. 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. 7.96
8.40
9.53%
6.21
6.45
6.71
7.00
7.33
10.03%
5.63
5.82
6.02
6.25
6.50
Source: Capital IQ, Bloomberg, Company Financials
7.57
3.95
Plus: Option Execution Proceeds Plus: Cash and Cash Equivalents Implied Equity Value Number of Shares Implied Share Price
Terminal Year EBITDA EBITDA (2024E)
Terminal Growth Rate 4.50%
Less: Non-controlling interest
1,492.70 $10,223.70 1350.1 $7.57
Implied Perpetuity Growth Rate
Sensitivity Sensitivit y Analysis: Value/Share
7.57
Implied Equity and Share Price
WACC WACC
$692.13 9.03%
Terminal Value Value
$18,033.06
Implied Perpetuity Growth Rate
5.00%
Implied EV/EBITDA Enterprise Value
$8,735.63
2014 Q3 LTM EBITDA
$335.53
Implied EV/EBITDA
26.0x
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 Transacti on Assumptions Buyer Name
Anheuser-Busch InBev InBev
Seller Name
TsingTao
20%
Per Share Purchase Price
$ 7.63
Equity Purchase Price
$ 10,303.96
Premium Paid
% Cash
20.0%
Cash Used
$ 2,060.79
% Debt
80.0%
Debt Issued
$ 8,243.17
% Stock
0.0%
New Shares Issued (in Millions)
0.00
Debt Interest Rate
3.0%
Foregone Cash Interest Rate
0.5%
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 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): (Dilution): Accretion (Dilution) (Dilution) %:
5.71 0.18 3.31%
6.26 0.22 3.66%
7.28 0.27 3.79%
Anheuser-Busch InBev InBev Income Statement Statement Revenue COGS SG&A and Other Operating Income Investment Income Pretax Income Income Tax Net Income Shares Outstanding Outstanding (in millions) Earnings Per Share
TsingTao Tsing Tao Income Income Statement
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
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 Outstanding (in millions) Earnings Per Share
1350.10 0.22
1350.10 0.25
1350.10 0.29
2016 Accretion/Dilution %
2017 Accretion/Dilution %
% Cash 3.66% t b e D %
% Cash
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%
3.79% t b e D %
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%
3.45%
3.40%
3.35%
3.30%
3.24%
90.00%
3.61%
3.57%
3.52%
3.48%
3.43%
100.00%
3.14%
3.09%
3.04%
2.99%
2.93%
100.00%
3.34%
3.30%
3.25%
3.21%
3.17%
A p p e n d i x E – H i s t o r i c R e p u r c h a s e a n d A l t e r n a t i v e A c q u i s i t i o n s
•
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 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
Tsingtao poses to be a better better transaction in in the current moment. The unconquered Chinese market • Although logical, Tsingtao 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, sodas, juices, and teas. Its namesake brand is Monster, Monster, the No. 2 ranked energy drink second only to Red Bull
•
Similar to Dr. Pepper Snapple, Monster Beverage Beverage Company provides AB InBev with an opportunity to enter the soft drinks industry without a large snack segment liability. liability. Furthermore, the company is very high growth with its Monster brand and recent consumer trends
InBev, however, however, already owns distribution distribution rights rights to the Monster Energy brand. Thus, Thus, although Monster still offers • AB InBev, growth potential, the additional synergies to be realized are marginal. Critiques of the energy drinks health effects have also been detrimental to the company’s earnings, earnings, which poses a risk for AB InBev as an acquirer
Monster Beverage Company •
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 InBev’s InBev’s strategy to capture high craft craft beer growth involves involves acquiring regionally regionally strong brands that lack national national
distribution and awareness but has more scaling potential by AB InBev, InBev, Goose Island Brewery’s Brewery’s production volume volume has grown much faster than craft leader leader • After being acquired by Boston Beer
Dogfish Head Brewery
Source: Capital IQ, Industry Research Reports
already picked up four major craft breweries across the country. country. Ultimately, Ultimately, it will be difficult difficult to match match • AB InBev has already the success of Goose Island with Dogfish Head
