Inbev and ABv10

InBevAcquires Anheuser-Busch

An Analysis of the deal

Bill Hoeker Amanda Frier Evelyn Mortenson Darcy Ward

Table of Contents

Introduction....................................................................................................................................2

InBev...............................................................................................................................................2

InBev’s Overview & History........................................................................................................2

InBev’s Strategy..........................................................................................................................3

InBev’s Joint Ventures & Acquisitions.........................................................................................3

Geographical Breakdown for InBev............................................................................................4

InBev’s Brands............................................................................................................................5

Anheuser-Busch Companies, Inc....................................................................................................6

Overview........................................................................................................................................6

Financial Highlights.....................................................................................................................9

Strengths and Weaknesses.......................................................................................................10

Marketing Channels..................................................................................................................11

Competitive Landscape.................................................................................................................11

Market Update.............................................................................................................................25

Why Do the Deal?.........................................................................................................................26

Synergies......................................................................................................................................30

Integration Plan............................................................................................................................31

Communication Plan.....................................................................................................................32

Cultural Issues...............................................................................................................................34

Regulatory Issues..........................................................................................................................35

Why would the Busch family sell now?........................................................................................38

Financial Valuation (DCF and Multiple Models)............................................................................39

Synergies......................................................................................................................................40

Combined Firm Financials.............................................................................................................40

Deal Structure...............................................................................................................................41

Conclusion....................................................................................................................................41

1

Introduction

Our group is analyzing the acquisition of the Anheuser-Busch Company by InBev. We

believe InBev will acquire the Anheuser-Busch Company to maintain the top position in

the beer industry and to increase the company’s market share in specific geographic

markets. These companies would want to take advantage of the fast moving

consolidation in the industry. This move reinforces InBev’s strategy focusing on

becoming “The Biggest to the Best.”

InBev

InBev’s Overview & History

Inbev was formed in 2004 when Interbrew acquired Brazil’s Companhia de Bebidas das

Americas (Ambev). This created the world’s largest brewer by volume which controlled

14% of the global beer market. The company’s origins date all the way back to 1366

when the Artois brewery was founded. Before the merger with Ambev, Interbrew was

the third largest brewing company in the world by volume. Inbev is still the world’s

leading brewer and is headquartered in Leuven, Belgium. It sells a portfolio of 200

premium and specialty beers and lagers in over 130 countries.1 The company has

diversified portfolio including Beck’s, Brahma, Leffe, Skol, Cass, and Stella Artois.

InBev’s core business is beer, but it also has a presence in the soft drink market in Latin

America. InBev employs about 89,000 people worldwide and operates facilities in more

than 30 countries. InBev is listed on the EuroNext Exchange and the New York Stock

Exchange. 2007 is the third full year of the integrated InBev. InBev had revenue of 14.4

billion euro resulting in 3,048 million in profit in 2007. By volume, Inbev sold 271

million hectoliters. EBITDA grew by 16.5% with an EBITDA margin of 34.6% in 2007.

At year end 2007, InBev had a market capitalization of €35,057 million.2 Over the past

three years, InBev’s EBITDA margin has increase from 26.1% in 2004 to the 34.6% in

2007.

2

InBev’s Strategy

InBev’s strategy is to focus on cost management and connect to consumers through

innovation initiatives. InBev works to increase their margins and have a disciplined use

of capital to increase shareholder value. The company implemented effective

productivity programs to enable the company to offset rising costs and inflation. InBev

focuses on a range of initiatives including the Voyager Plant Optimization program,

which is bringing about a real step-change in brewery performance. It also entails raising

the status of the procurement processes to maximize purchasing power, helping it gain

the best results when Inbev is purchasing a whole range of goods and services including

media, and IT. InBev is also optimizing its network of breweries and sharing best

practices, all of which will lead to a more integrated business. Zero-Based Budgeting is a

crucial element of world class efficiency, and one of the tools which helps InBev

prioritize and control costs.1 It has now been introduced in all zones. The concept is

simple; implementing it is much more difficult, but for InBev employees, Zero-Based

Budgeting has become a way of life. InBev generates revenues through two business

divisions: beer (92.5% of the total revenues during fiscal year 2006) and non-beer

(7.5%).3 InBev’s strategic approach is to build their brands and focus on sales execution.

InBev’s Annual Report lists three long term objectives: deliver volume growth ahead of

industry growth; to grow revenue ahead of volumes; and ensure that cost remain below

inflation.

InBev’s Joint Ventures & Acquisitions

Throughout InBev’s history, the company has been involved in several acquisitions,

alliances and joint ventures. InBev formed an alliance with PepsiAmericas in 2005 to

introduce Beck’s in Poland. InBev acquired Russian based Tinkoff Breweries and

Chinese based KK Brewery in 2005. The company increased its shares in Quinsa

Industrial, the largest brewer in Argentina, Bolivia, Paraguay, and Uruguay. In 2006,

InBev acquired full ownership of Interbrew Efes Brewery in Romania. Fujian Sedrin

Brewery in China became part of the company in June 2006. In November 2006, InBev

and Anheuser-Busch signed agreement to import InBev’s premium brand to the US.1

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InBev uses these joint ventures and acquisitions to help leverage their brands and expand

their geographical reach.

Geographical Breakdown for InBev

2007 Volumes

4.6%

37.3%

11.3%13.3%

18.2%

13.4%1.9%

North America

Latin America North

Latin America South

Western Europe

Central & Eastern Europe

Asia Pacific

Global Export & Holding Companies

Volume by Geography(in Thousand Hectoliters)

2007 2006 2007 2006

North America 12,572 14,342 4.6% 5.3%Latin America North 100,877 94,586 37.3% 35.0%Latin America South 30,524 22,566 11.3% 8.3%Western Europe 36,068 39,147 13.3% 14.5%Central & Eastern Europe 49,137 43,201 18.2% 16.0%Asia Pacific 36,380 30,924 13.4% 11.4%Global Export & Holding Companies 5,054 1,763 1.9% 0.7%

Total 270,612 13,308

Year % of Total Volume

Revenue by Geography(in Million Euro)

2007 2006 2007 2006

North America 1,564 1,831 10.8% 13.8%Latin America North 4,904 4,268 34.0% 32.1%Latin America South 1,003 733 7.0% 5.5%Western Europe 3,455 3,646 23.9% 27.4%Central & Eastern Europe 2,198 1,820 15.2% 13.7%Asia Pacific 994 912 6.9% 6.9%Global Export & Holding Companies 312 99 2.2% 0.7%

Total 14,430 13,308

Year % of Total Revenue

Source: InBev 2007 Annual Report

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Volumes grew by 5.2% in 2007, with 4.7% growth in beer and 8.6% in soft drinks. The

beer industry overall has seen sluggish gains and an increase in competition with liquor

and wine. There were three main issues that hurt the volume performance of InBev:

market share performance in China and UK and industry contraction in Western Europe.

InBev’s UK volumes declined 10.3% in beer which result in a market share loss. InBev’s

beer volumes were also down in Germany and Belgium but InBev either maintained or

increased market share. Inbev had organic volume growth of 3.0% in China which was

lower than the market.2 InBev’s volumes were strong in Latin America North, Latin

America South, and Central and Eastern Europe. InBev is looking to increase their

premium portfolio across the continents. EBITDA margin grew in five out of the six

geographic zones. Western Europe was the only region to decrease. North America

benefited from the addition of the Lakeport brands which grew throughout the year and

the increase in distribution of the European imports in the U.S. InBev should focus on

increasing their market share in China, UK, and U.S. InBev has the opportunity to

increase its sales in the Russian and Chinese markets since these markets have the

greatest potential growth in overall beer sales.

InBev’s Brands

InBev’s brands include Beck’s, Stella Artois, Hoegaarden, Brahma, Leffe, Beck’s Green

Lemon, Staropramen, Skol, Chernigivske, Cass and Bergenbier. Beck’s is the number 1

German brand in the world and is distributed in more than 120 countries. Stella Artois is

a premium lager that is distributed in more than 80 countries and has strong global

potential. Hoegaarden is a Belgian wheat beer or white beer. In 2007, Hoegaarden grew

by 9% overall. It also grew by 9% in the U.S. and tripled in Russia. Brahma is very

popular in Brazil and has strong growth potential in Russia. Leffe is a Belgian brand of

the Abbey beer. Leffe had a strong year in Western Europe and has a growing presence

in North America. (See list of InBev Brands).

5

Anheuser-Busch Companies, Inc.

OverviewAnheuser-Busch Companies, Inc. (A-B) is the top U.S. brewer and third largest world-

wide brewer. A-B is best known for its Budweiser brands. The company was founded in

1852 as the Bavarian Brewery and was renamed to Anheuser-Busch companies in 1919.

Anheuser-Busch is based in St. Louis, Missouri. A-B employs 30,183 people worldwide

and is traded on the New York Stock Exchange under the ticker: BUD. It owns 50% of

Mexico’s leading brewer, Grupo Modelo, and 27% of China’s number one brewer

Tsingtao. A-B also manufactures aluminum cans and operates a number of U.S.-based

theme parks.

Anheuser-Busch operates under four segments: U.S. Beer operations, International Beer

Operations, Packaging Operations and Entertainment Operations.

1. U.S. Beer Operations: The domestic division is operated by ABI, a subsidiary of the company. This segment not only includes its beer manufacturing and wholesale companies but also its operations in rice, barley and hops. The Budweiser, Michelob, Busch, and Natural brands are the core domestic brands of ABI. Also included in the domestic segment are specialty beers, malt beverages, non-alcoholic beers, craft and imported beers, waters, and energy drinks. A-B has developed partnerships with other companies to expand its business to provide long-term growth. A typical wholesaler now carries an average of 147 brands.Premium lights, crafts, imports and specialty beers have been key market drivers with today’s consumers who want more choices. A-B formed partnerships with a number of companies to participate in this growth.

Craft beer sales increased 14.4% in 2007. ABI developed partnerships with brewers to take advantage of this growing market. A-B has alliances with Ray hill, Starr Hill, Widmer, Redhook, Kona, Goose Island, Old Dominion and Fordham and is now the third largest player in the craft beer segment.4

Import sales increased 1.1% in 2007. AB has import rights for a number of Asian and European brands such as Stella Artois, Beck’s, Bass pale Ale and other InBev brands. 4

A-B partnered with Cadbury Schweppes and developed new specialty beers including Budweiser and Bud Light Chelada.

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The sales of energy drinks are increasingly quickly and A-B participates with its alliances with Hansen Natural Corp to make and produce the 180 Energy Drinks and Monster Energy Drinks.

2. International Beer Operations: Through Anheuser-Busch International (ABII) and Anheuser-Busch Europe Limited (ABEL), ABI brands are distributed worldwide. Breweries in the UK and China are operated by ABII. ABII also negotiates licenses with other foreign brewing companies and manages investments in foreign partners. International sales volume increased 5.2% in 2007 to 57 million barrels. Net Income increased 13.4% in 2007. 4 The international segment includes activities in the following countries:

Mexico: A-B owns 50% of Mexico’s largest brewer, Grupo Modelo. Modelo is Mexico’s only importer of the Budweiser brands and sales increased 27% in 2007. A-B received a cash dividend of $403 million in 2007, an increase of $160 million. The market value of A-B’s investment in Modelo is worth $10 billion (original investment was $1.6 billion) 4

China: China is the fastest growing beer market in the world. Budweiser is the top premium brand of beer in China. However, premium lagers hold only 19.9% of the China beer market by value and are far eclipsed by Standard lagers which hold 79.2%. A-B also own 27% of China brewer Tsingtao Brewing Co., Ltd. Tsingtao is China’s second largest brewer with a 14% market share based on volume. China Resources Snow Breweries is the number one brewer in China based on volume with a 16.5% market share. SABMiller holds a 49% interest in China Resources Snow Breweries. A-B is currently building a brewery in Foshan, China, and it is scheduled to be completed later in 2008. it also owns China’s oldest brewery, Wuhan International Brewing and Harbin Brewery.

India: A-B formed a joint venture with Crown Beers international LTD to brew, market and distribute Budweiser and other brands in India.

United Kingdom: Beer sales in the UK have been declining due in part to an increase in excise taxes and a smoking ban in pubs and restaurants. A-B is making efforts to reduce costs and increase its marketing to maintain the Budweiser image in the country.

Canada: A-B has a partnership and joint venture agreement with Labatt Brewing Company, Ltd. Budweiser is the #1 beer in Canada and Bud Light is #7. Bud Light’s volume in sales grew 30% in 2007. 4

3. Packaging Operations: Anheuser-Busch Packaging Corp (ABPG) provides packaging materials for AB and helps the company to control the supply , cost and quality. ABPG operates under the following entities:

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Metal Container Corp: produces more than 60% of the cans and 70% of the lids the company requires. It also supplies material to PepsiCo, Coca-Cola and Hansen natural Corp.

Anheuser-Busch Recycling Corp: one of the world’s largest recyclers of aluminum cans. It recycled 800 million pounds of aluminum in 2007 (equivalent to 26 billion cans) 4

Precision Printing and Packaging: prints the labels for A-B and other food and beverage companies. The company has been implementing process improvements to reduce costs and increase efficiency.

Longhorn Glass Corp: produces 8% of A-B’s total glass bottle requirements, more than 800 million bottles in 2007. 4 Longhorn leads the industry in workforce safety standards.

4. Entertainment Operations: Busch Entertainment Corporation owns ten adventure parks in the U.S. known as Worlds of Discovery. Each park offers unique adventures that allow guests to interact with the natural world. 2007 brought an increase in attendance and higher net profits.

History Timeline

The information for the following timeline was taken from Datamonitor and A-B’s Annual Report.

1984 Launched Budweiser in Japan and the UK. 1993 Invested 18% in Grupo Modelo in Mexico. 1995 Purchased majority interest in Chinese brewer Wuhan. 1996 Sold Campbell Taggart and Eagle Foods. 1997 Began brewing Kirin beers to increase its presence in the specialty beer

market. 1998 Increased investment from 18% to 50% in Grupo Modelo. 1999 Sold its interest in Brazilian brewer Antarctica Paulista (now InBev). 2001 Purchased 20% Chilean brewer Compania Cervercias. 2002 Licensed Bacardi Silver Line 2003 Agreement with China brewer Tsingtao Brewery – ownership to increase to

27% within 7 years. 2004 Acquired Harbin Brewery in China. Launched BE brand, beer with caffeine

and various flavors. Added flavors to Bacardi Line. 2005 increased Tsingtao ownership to 27%. Berkshire Hathaway became large

shareholder in AB. 2006 Michelob Ultra Amber introduced. Secured exclusive agreements with CBS,

NBC and FOX for alcoholic marketing during the super bowl games in 2007-2011. Agreement with Hansen Natural to distribute Monster Energy Drink and

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other energy drinks. Purchased Rolling Rock from InBev USA. Launched Bud TV, internet based network to reach out to the growing of internet users. Launched energy drink 180 Blue. Signed exclusive agreement with Inbev to import InBev products.

2007 Agreement with Modelo to import Modelo’s beers into China. Formed alliance with Czech brewer Budejocky Budvar to import Czechvar Premium Czech Lager. Agreement with Hansen for AB to manage and coordinates sales & distribution of Monster Energy Drink to on-premise retailers. Agreement with Heineken for Heineken to import Budweiser in Columbia. JV with Crown Beers to brew and distribute Budweiser and other beers in India. Began importing Estrella Damm Marcelona in UK for Spanish brewer Grupo Damm. JV with Fordham Brewing Company to purchase old Dominion. Introduced Skipjack Amber.

Financial Highlights

Anheuser-Busch focuses its efforts on three primary objectives to increase shareholder

value:

1. Increase volume and profitability per barrel for the domestic segment.2. Increase profit growth for the international segment. A-B has invested in its

marketing strategy to make the Budweiser brands recognizable worldwide.3. Increase pretax profits and cash flow from packaging and entertainment segments.

AB has shown significant increases in both dollar terms and volume for the years 2005-

2007. Gross sales 4.1% from 2005 to 2006 and another 5.7% from 2006 to 2007. Net

income increased 12.7% from 2005 to 2006 and 7.6% from 2006 to 2007. Beer in

volume sold also increased each year. The number of barrels of US brands increased 2%

over 2006 and 1.2% over 2005. The international brands had more significant increases

due to the agreements with various companies to import international beers; 5.8% over

2006 and 9.3% over 2005. Each operating segment contributed to the increase in net sales

and will be discussed later in this report. Following is a table comparing key financial

information and volume sold per barrel for 2005, 2006 & 2007:

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(in Millions, except per share) 2007 % inc 2006 % inc 2005

Gross Sales 18,989$ 5.7% 17,958$ 4.1% 17,254$ Net Sales 16,686$ 6.2% 15,717$ 4.5% 15,036$ Pretax Income 2,423$ 6.4% 2,277$ 10.7% 2,057$ Equity Income 662$ 12.5% 589$ 18.2% 498$ Net Income 2,115$ 7.6% 1,965$ 12.7% 1,744$ Diluted Earnings per Share 2.79$ 10.3% 2.53$ 13.5% 2.23$

Volume in millions of barrels

U.S. 104.4 2.0% 102.3 1.2% 101.1International 24.0 5.8% 22.7 9.3% 20.8Equity partner brands 33.2 4.9% 31.6 19.7% 26.4Total Brands 161.6 3.2% 156.6 5.6% 148.3

Anheuser-Busch, IncFinancial Highlights

Years 2005-2007

Source: Anheuser-Busch Companies, Inc, 2007 Annual Report

Anheuser-Busch was rated “America’s Most Admired Beverage Company” in Fortune

Magazine’s 2007 “America’s most Admired Companies.” A-B ranked #1 in social

responsibility and shows this commitment by investing in advertising campaigns to

promote responsible drinking, environmental awareness and corporate philanthropy. A-B

has invested $675 million since 1982 to promote responsibility and discourage alcoholic

abuse and has worked with a number of cab companies to ensure more than 1 million safe

rides home. A-B has been a leader in recycling to protect the environment. A-B has

contributed more than $360 million to organizations that support education, health, social

services, environmental conservation and more.4

Strengths and Weaknesses

Based on Data Monitor’s 2007 SWOT analysis, A-B has a leading market position,

48.4% of US market and is one of the largest importers of international brands. A-B also

has strong brand recognition and a strong network of breweries. Budweiser is one of the

leading brands worldwide. Its Michelob and Busch brands are also popular in the US.

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Having strong brands makes A-B more competitive in the global market and will be

discussed in the competition section of this paper.

Weaknesses of A-B include high dependence on domestic beer division and poor

liquidity position. In 2007, domestic beer sales account for 73% of the total net sales

while the other segments total 27%. Debt increased in 2007 and the current and quick

ratios are low, 89% and 57% respectively. Low ratios mean that the company does not

have enough current assets to cover the debt.

While A-B already has a presence in China and Russia, there is still room to expand.

Consumers are starting to be a little more health conscious and there is a growing trend in

consumption of energy drinks and non-alcoholic or low calorie beverages. A-B has

partnered with Hansen to distribute Monster Energy and has also developed the 180

brand. Changing consumer behavior is also considered a threat to A-B. Whether it is

consumers turning to the non-alcoholic beverage or trying new brands of beer, there

could be a decline in beer sales. Government regulations also can be costly and increase

the cost of doing business in various countries.

Marketing Channels

The marketing channels are categorized as on-premise or off-premise. On-premise

channels consist of bars, restaurants, and theme parks. Off-premise includes grocery

stores, liquor outlets, convenience stores and any other form of retail outlet. The U.S. has

a three tiered system consisting of manufacturers, distributors, and retailers.

Manufacturers sell to distributors that sell to the retailer. Manufacturers in the U.S. are

not permitted to sell directly to the retailer. Unlike the U.S., the UK has a two tiered

system. Manufacturers sell directly to the retailer.

Competitive LandscapeThe global beer market is fragmented, with the top three players holding an aggregate

share of around 30% of the total market by volume. Beer producers are considered

players and retailers and on-trade companies (clubs, restaurants, etc.) are considered

buyers. In many countries the market can be easily entered by microbreweries.

Switching costs are not high but buyers like the large retailers need to offer a wide variety 11

so overall buyer power is moderate although it can be stronger in some countries

depending on regulations. Major players may offer specialty beers, but much of their

business involves products for the mass market. The need to operate large breweries

implies high fixed costs and low margins which boosts competition. Economies of scale

of production become more important. Beer manufacturers can differentiate themselves

via strong brands. Main inputs for beer include malted grain, hops, bottles and barrels.

For the most part, beer makers are non-vertically integrated however some of the large

players like SABMiller grow their own hops, weakening supplier power. However, the

quality of the inputs is very important so supplier power is moderate. Access to a strong

distribution is not a big barrier to entry as in many countries the smaller players

(microbreweries) can also run their own pubs and outlets and can convince the local

supermarkets and on-trade businesses to carry their products. In some countries, the

distribution and sale of alcohols is highly regulated and access to a distribution channel is

a barrier to entry. 5

The global beer market generated revenues of $401.4 billion in 2007, representing a

CAGR of 2.1% for the period 2003 – 2007. The performance of the market is forecasted

to follow a similar pattern for the five year period 2007 – 2012 with a CAGR of 2.2% and

a market value of $446.4 billion by the end of 2012. Europe is the leading region in the

global beer market, with 49.5% share of the market’s value followed by the Americas

with 28.6% and then Asia-Pacific with 21.9%.

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TOP GLOBAL BREWERS

USD, $ millions

CompanyMarket Value as of 4/18/08 FY07 Sales

InBev 56,427.4 21,097.4

Diageo PLC 52,995.4 15,419.2

Anheuser-Busch Cos. Inc. 34,544.2 16,685.7

SABMiller PLC 33,148.2 20,057.0

Heineken N.V. 29,043.5 18,369.2

Kirin Holdings Co. Ltd. 18,508.2 16,122.9

Fomento Economico Mexicano S.A. 15,894.2 13,519.5

Grupo Modelo S.A.B. de C.V. 15,105.3 6,773.5

Scottish & Newcastle PLC 14,854.7 6,635.0

Molson Coors Brewing Co. (Cl B) 9,823.3 6,190.6

Asahi Breweries Ltd. 9,813.3 13,105.4

Foster's Group Ltd. 9,455.8 4,165.1

San Miguel Corp. 4,872.8 5,246.8

Constellation Brands Inc. (Cl A 3,909.4 4,030.8

Sapporo Holdings Ltd. 3,188.5 4,019.3

Asia Pacific Breweries Ltd. 2,515.1 1,302.6

Tsingtao Brewery Co. Ltd. 2,470.5 1,673.8

Central European Distribution C 2,395.5 1,189.8

Vidrala S.A. 750.2 445.7

Boston Beer Co. (Cl A) 606.7 341.6

Pyramid Breweries Inc. 14.4 47.7

Source: Reuters On-line Global Fundamentals

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The Segments

Anheuser-Busch has four segments: domestic beer (aka U.S. beer), international beer,

packaging and entertainment. For the full FY ended December 31, 2007, % of Net Sales

by segment was as follows:

% Net SalesUS Beer 73%International 7%Packaging 10%Entertainment 8%Corporate & Elims 2%

Source 6: Anheuser-Busch press release, Anheuser-Busch Cos. Reports Increased Sales and Earnings for the Fourth Quarter and Full

Year 2007, Jan 31, 2008

U.S. (Domestic) Beer Segment

The U.S. (Domestic) beer division includes U.S. beer manufacturing and company-

owned beer wholesale sales operations, including vertically integrated rice, barley and

hops operations. In addition to investing in its core brands (Budweiser, Michelob,

Busch and Natural), Anheuser-Busch is responding to market demands from more

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choices. Craft beer sales were up 14.4% in 2007 in the U.S. market. A-B has developed

its own specialty beers and forged partnerships with several craft brewers. A-B is now

the third-largest player in the craft beer segment. Imports were up 1.1% in 2007. A-B

has secured the import rights for a number of premium Asian and European brands,

including Stella Artois and other select Inbev brands. A-B now has a 7% direct market

share of the import segment.7

The US beer market grew by 1.3% in 2007 to reach a value of $78.3 billion. The

compound annual growth rate of the market for the period spanning 2003 – 2007 was

1.4%. The market is forecasted to follow a similar pattern for the five-year period 2007

– 2012 and will grow to $83.2 billion by the end of 2012 and is forecasted at a 1.2%

CAGR. .

The US beer market is concentrated, with the top three players holding an aggregate share of approximately 80% of the total market by volume.

Anheuser Busch Co., Inc. 57.6%

SABMiller 20.1%

Molson Coors Brewing Co. 12.0%.

Other 10.3%

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International Segment

The International Beer segment includes Anheuser-Busch International (ABII), a wholly

owned subsidiary. It operates in the UK and China. And it negotiates licenses and

brewing agreements on behalf of A-B with foreign brewers and negotiates and manages

equity investments in foreign brewing partners. ABI brands are marketed, distributed

and sold in more than 30 countries.

Here are some important international markets where ABII has a presence.

Mexico: The Mexican market grew with a CAGR of 2.3%, over the 2003 – 2007 period, to reach a value of $10.2 billion in 2007. The Mexican market will grow to $11.1 billion by the end of 2012 and is forecasted at 1.8% CAGR. 8 A-B has a 50% equity interest in Grupo Modelo, Mexico’s leading brewer. Modelo’s flagship brand is Corona, the fifth

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best-selling beer in world. Modelo maintains a 56% market share of the Mexico market. FEMSA is #2 in Mexico with 43.2% market share by volume.7

China:

The Chinese beer market remains fragmented with the top three brewers owning only

30% of the market. SAB Miller owns a 49% interest in China’s largest brewer, China

Resources Snow Breweries. A-B has a 27% interest in Tsingtao Brewery. A-B has a

97% equity interest in Budweiser Wuhan International Brewing. A-B owns 100% of

Harbin Brewery Group, the fifth largest brewer in China. Harbin has 13 breweries in

NorthEast China. 9

China generates approximately 37.8% of the overall Asia-Pacific beer market. The Chinese beer market grew by 8.6% in 2007 to reach a value of $33.2 billion. This represents a CAGR of 8.7% for the period spanning 2003 – 2007. In 2012, the Chinese beer market is forecasted to have a value of $48.7 billion, an increase of 46.9% since 2007. The performance of the market is forecasted to decelerate, with a forecasted CAGR of 8% for the period spanning 2007 – 2012. 10

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India: A-B and Crown Brews International, Ltd formed a joint venture to brew, market

and distribute Budweiser and other brands in India. The JV includes a new state of the

art brewery in Hyberabad that was completed in March 2007. In June, the first locally

produced Budweiser became available in southern and western India, just after the

introduction of Armstrong, the JV’s new premium strong beer. With its strong economy,

large population and a growing middle class, India offers good long-term potential for A-

B. 7

The India beer market grew by 10.2% in 2007 to reach a value of $2.5 billion. In 2012,

the Indian beer market is forecasted to have a value of $3.9 billion, an increase of 53.9%

since 2007. CAGR for the period 2003 – 2007 was 10%. The market is forecasted to

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decelerate with an anticipated CAGR of 9% for the five year period 2007 – 2012. The

beer market in India is dominated by large, multinational breweries with United

Breweries owning 45.5% of the market and SABMiller owning 34.20% of the market.

Canada: In Canada, A-B has a very successful partnership with Labatt Brewing

Company which is owned by Inbev. A-B and Labatt first partnered in 1980 and today

have a licensed brewing, distribution and joint marketing agreement. Budweiser is the

No. 1 beer in Canada, and Bud Light is the fastest growing beer.

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In Canada, the provincial governments regulate the beer industry, particularly the

regulation of pricing, mark-up, container management, sale, distribution and advertising

of beer. Distribution and retailing of alcoholic products involves a wide range and varied

degree of Canadian government control through their respective provincial liquor boards.

The Canadian brewing industry is a mature market. It is characterized by aggressive

competition for volume and market share from regional brewers, microbrewers and

foreign brewers as well as Molson and Inbev. These competitive pressures require

significant annual investment in marketing and selling activities.11

In 2007, the Canadian beer market grew 1.7% to reach a value of $10.1 billion. In 2012,

the Canadian beer market is forecast to have a value of $10.9 billion, and increase of

7.7% since 2007. This represents a CAGR of 1.5%.

In 2007, Inbev holds a 46.5% market share by volume, Molson holds a 42%, Moosehead

holds 6.10% and other companies hold the remaining 5.3%. 12

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United Kingdom: Budweiser, Bud Ice, Bud Silver, Michelob, and Michelob ULTRA are brewed and packaged at the Stag Brewery near London, England. A-B’s volume in the UK was down 9.6% in 2007. A-B attributes this to increases in excise tax, new smoking bans and unfavorable weather.7 The UK beer market grew by 1.1% in 2007 to reach a value of $43.2 billion. This represented a CAGR of 1.4% for the period 2003 – 2007. The performance of the market is forecast to decelerate, with an anticipated CAGR of 0.9% for the five year period 2007 – 2012, which is expected to drive the market to a value of $45.2 billion by the end of 2012. The UK accounts for 21.7% of the European beer market by value. Scottish & Newcastle is the leading company in the UK market, with a 26.9% share of the market’s volume. Molson Coors holds a 19.8% market share.13

23

24

Market UpdateOverall Environment

It’s getting more expensive to make beer - The cost of brewing beer has increased

worldwide and is impacting all brewers. Increased steel prices have resulted in the cost

of a keg doubling over the past five years to $165 USD. The price of aluminum for cans

is also going up. Energy prices are increasing. The prices of malt and hops have also

increased significantly in 2007 and 2008 due to worldwide shortages. Because hops have

sold for less than the price of other crops, the worldwide hops acreage decreased almost

51% from 1994 – 2006. These shortages are also attributable to increased demand for

beer, bad weather destroying crops, and increased demand for corn in the US and other

countries for the production ethanol.14

Tastes are changing - Over the past decade, sales of distilled liquor, wine and imported

beers have grown much faster than beer sales.

Consolidation Trend

A two year lull in large acquisitions in the brewing industry came to an end in October

2007.

SABMiller and MolsonCoors merge U.S. Operations: On October 9, 2007, London-

based SABMiller and Denver-based MolsonCoors announced they will be combining

their brewery operations in the U.S., creating a brewer called MillerCoors. This deal was

done in order to more effectively compete against Anheuser-Busch’s stronghold on the

U.S. market. This merger will result in estimated cost savings of $500 million for

MillerCoors. The merger will result in Coors and Miller gaining access to each other’s

distribution network and give both companies more exposure. The $500 million in

savings cost savings will help ease the impact of increasing price of materials and

ingredients. MillerCoors will be able to negotiate long-term pricing agreements that will

help them avoid unexpected, drastic price increases. And they’ll be able to reinvest in

their business. 14

Carlsberg and Heineken acquire Scottish & Newcastle25

Also in October 2007, Carlsberg and Heineken announced their intentions to acquire

Scottish & Newcastle, Britain’s largest brewer. Carlsberg and Heineken will divide

Scottish and Newcastle’s assets between them and share the bill, with Carlsberg taking a

slightly larger part. The deal is unusual because Heineken and Carlsberg are helping

each other in markets where they are direct competitors. They paid $15.4 billion USD

for the company which represents a 26% premium. 15

SABMiller to Acquire Grolsch

On November 19, 2007, SABMiller announced it had entered into an agreement to

acquire Dutch brewer Grolsch for $1.2 billion USD. The Grolsch brewery dates back to

1615. Grolsch accepted a bid of 48.25 Euros a share in cash which is 79% more than

Grolsch's previous close.16

SABMiller Overtakes InBev to Become the World’s Largest Brewer

Size matters in the beer market as larger companies can negotiate more favorable terms

with suppliers and distributors. Large brewers have more brewing facilities which mean

lower distribution costs and fresher product – they often don’t have the ship their product

as far as smaller brewers with fewer brewing plants.

Typically size is measured in terms of volume and barrels per year. According to Reuters

on February 5, 2008, “Global brewing group SABMiller moved ahead of Belgium’s

InBev to become the largest brewer due to growth in China and its purchase of Grolsch.

The London-based brewer of Miller Lite, Peroni and Castle recently became the leading

brewer in the world’s biggest beer market of China led by the success of its Snow beer -

and agreed to buy Grolsch…As a result of its acquisition of Scottish & Newcastle, Dutch

brewer Heineken jumped ahead of Anheuser Busch to become the third largest brewer.”17

Why Do the Deal?In 2008, both the Wall Street Journal and Financial Times have reported that InBev and

A-B were in talks. The SABMiller MolsonCoors JV increases the speculation of an

InBev A-B acquisition. However, talk of InBev acquiring Anheuser predates

SABMiller’s JV with MolsonCoors. The current weakness in the dollar is one reason

26

why it might make sense to do this deal now, however, it’s anticipated that the currency

will rebound. Therefore the weak dollar is a consideration but not a major reason to do

the deal. Here are some reasons why InBev and A-B would do the deal.

Aligned with InBev’s Strategy

InBev’s acquisition of A-B is aligned with InBev’s mission and strategy as stated in its

2007 Annual Report. “Our aim is for top line growth and strong brand equity…The goal

of targeted external growth is to strengthen our position in developed markets, and

continue to maximize opportunities in high-growth markets.”

Upside from Applying Cost Efficiencies to A-B’s Operations

Cost savings is the key motivator for this deal. InBev has proven itself adept at its

strategy of relentless focus on World Class Efficiency through initiatives like Voyager

Plant Optimization, Zero Based Budgeting and maximizing purchasing power. Ambev

has been a driving force behind this focus on efficiency. Inbev could apply these same

efficiency programs to Anheuser-Busch. According Citigroup Analyst Philip Morrisey,

“InBev would be interested in a deal with A-B due its historical track record of value

creation and potential for significant cost savings and greater geographic stability.” “In

an analysis we determined that the combination of the two could generate anywhere from

$4 billion to $10 billion,” said Citigroup Analyst Bonnie Herzog. 18 Per Trevor Stirling,

analyst at Sanford C. Bernstein, “We believe that the combination of A-B and InBev has

the potential to create significant economic value…In our view, the direct synergies are

relatively modest. We believe direct synergies are limited to duplicated costs in China,

the U.S., the UK and corporate headquarters. In total, we estimate such synergies could

boost annual operating profits by a modest $350 - $370 million per year. The biggest

hypothetical upside would come from applying “Brazilian cost control techniques to A-

B’s operations in the USA.”19 According to a February 5, 2008, Dow Jones article,

“Inbev’s investors are likely to favor another major move. After all, they saw significant

value delivered from the Ambev and Interbrew merger that created InBev in 2004.

Financially, an A-B takeover makes sense. Based on the 1.8% savings to total costs

when Interbrew bought AmBev, a combined InBev-Anheuser could have synergies of

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around EUR120 million. Taxed at 19% and capitalized at 7%, those savings are the

equivalent to EUR 1.1Billion in today’s money, assuming they are achieved in three

years. An offer of $59 a share would represent a bout a 10% premium to A-B’s share

price high of $54 in early January.”20

Geographic Logic

InBev dominates Brazil and has large stakes in Europe and China while Anheuser-Busch

controls almost 50% of the U.S. market. While Anheuser-Busch has a strong presence in

Mexico and a growing presence in China, they still get over 73% of their revenues from

the U.S. Beer Segment. The International Beer Segment accounts for only 7% of

revenues. InBev’s acquisition of Anheuser-Busch makes geographic sense as there are

not a lot of overlaps and no major divestitures would be needed.19 Per Bear Stearns

Analyst Craolo Laboy, “Anheuser would be the most viable candidate” for an InBev

acquisition because the two have minimal geographic overlap. Combined the brewers

would control 25% of the global beer market…The combination would have market

leading positions in the U.S., Brazil, Germany and China, the top four beer markets in the

world in terms of volume.21

Anheuser Needs a Broader Earnings Base

According to the Wall Street Journal, “the attraction for Bud’s perspective would be

increased access to emerging markets.” New CEO August Busch IV has stated his desire

to regain the company’s global leadership position. At a Lehman Brothers Consumer

Conference in September 2007, August Busch IV said, “We do have aspirations to regain

our global beer leadership position…We need to look to diversify our global footprint in

the years ahead…there are numerous strategic studies underway.” A-B’s international

presence lags InBev and SABMiller. A-B’s relatively small international presence is one

factor driving speculation around an InBev A-B combination.22

In July 2007, Citigroup analysts said they believed merging with another large brewer

was A-B’s “only option” to compete in the global beer market. A-B’s growth is lagging

behind its rivals such as InBev, SAB Miller and Heineken all of whom have a greater

presence in emerging markets. Shares of these companies created from international

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partnerships have performed better than A-B’s. Per analyst Bonnie Herzog, “They [A-B]

can introduce new products and they can have a number of initiatives, but they still face

execution risk and at the end of the day, it’s a global beer industry.”18

Core Brands Declining

Sales of the company’s core brands declined slightly last year, which heightened

concerns about A-B’s future. While A-B dominates the domestic beer market, it faces

increased competition from craft brewers, imports and distilled spirits and wines.

Anheuser’s stock price trades approximately where it did five years ago. 23 One UBS

analyst said in July 2007, “We expect sequential improvements in A-B’s fundamentals

over the next twelve months, but valuation and concerns on the core business keep us on

the sideline…while import deals are off-setting the weakness, we believe A-B needs to

improve the performance of its core brands which still generates the bulk of its profits.” 24

According to a February 1, 2008 article in the Wall Street Journal, “InBev and Anheuser

already held discussions…they have become more serious, and deal is possible this year,

people in the industry say….Yesterday, Anheuser declined to discuss speculation of a

deal with InBev. But the company reported fourth–quarter financial results that

underscored why some analysts believe it may want a merger. U.S. beer sales to retailers

rose only 1.3% by volume, with growth coming from import brands rather than

Anheuser’s domestic brews.”25

Distribution Agreement

InBev and Anheuser-Busch formed a distribution agreement in November of 2006.

Anheuser-Busch agreed to become the exclusive U.S. importer of certain InBev brands

effective February 1, 2007. 26 These brands included Stella Artois, Beck’s, Bass Pale

Ale, Hoegaareden, Leffe, and some other selected InBev brands. Anheuser will be

responsible for their sales, promotion and distribution in the United States. “These InBev

brands, which had sales volume of about 1.9 million hectoliters (or about 1.5 million

barrels) in 2005, will be available to Anheuser-Busch’s U.S. wholesaler network where

possible.” 26 InBev’s Canadian Brands, including the Labatt products, are not included in

this agreement. The terms of the agreement were not included in the filing. The 2007

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InBev annual report includes that the agreement permits either party to terminate the

agreement without penalty if there is a change in control with respect to the other party

becoming or acquiring an affiliate of a competitor. Anheuser-Busch’s president stated

that this agreement helped the company with the strategy of increasing its participation in

the high-end U.S. beer segment and in diversifying their products. InBev’s CEO

commented that it helped InBev increase its access to the U.S. consumer and increase

their growth. 2007 was the first full year of this agreement. This agreement continued

the strong growth of Stella Artois. The rumors are flying around the industry that this

distribution agreement is seen as a precursor to a merger. Also, InBev subsidiary Labatt,

has a license to brew Bud Light in Canada. A-B lists the Acquisition of InBev brands

import rights on their 2007 balance sheet as being worth $65.9 million.

SynergiesTogether, InBev and Anheuser-Busch would represent the largest worldwide beer company. By combining the efforts of both companies, InBev could recognize several cost cutting and revenue enhanced synergies. A-B already has an agreement in-place to import the InBev brands and through the acquisition by InBev, the company could reduce costs while still reaching out to the U.S. beer segment. Synergies incluse the following:

Reduce redundancies by laying off employees who do the same type of work. This would include management, administrative, marketing and manufacturing jobs. This would also optimize the production process. InBev closed its Connecticut office after exclusive import rights were agreed upon with A-B.

Reduce shipping distance: InBev would now be able to brew within the United States for domestic distribution and save on the shipping of imports. A-B also owns its own packaging division so the company would keep costs down by utilizing its own division for labels, bottling, etc.

Geographic diversification: Currently there is very little overlap so the two companies would be able to reach out to a bigger geographic area without building new facilities and applying for licensing in new countries. InBev could potentially reduce facilities in locations where there is overlap to consolidate the operations.

Increase Revenues: Revenue synergies will be gained from new sales opportunities of existing products. InBev and A-B could cross sell and market products through different distribution channels and geographic regions. The

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combined company could leverage the stronger relationships in particular markets.

Eliminate duplicate costs in China, U.K., U.S. and Russia: A-B already has a huge presence in China and duplicate costs could be eliminated by utilizing the facilities already owned by A-B. InBev has already announced layoffs in the U.K. of about 166 jobs. We estimate that such synergies could boost annual operating profits by $350-$375 million per year.

Increase EBITDA Margins & Reduce Costs: InBev has historical low COGS and SGA expenses in relation to sales. InBev could apply the same principles to the A-B companies to achieve low costs as well. InBev incorporated many of the cost cutting measures and financial efficiencies that were a way of life in AmBev. The Voyager Plant Optimization program and Zero-Based Budgeting initiatives could be applied to the A-B operations. Other costs synergies come from economies of scale such as greater purchasing power and elimination of some intermediaries in the supply chain.

Reduce R&D expenses: There should also be some cost synergies realized in Research & Development (R&D). The market has been shifting towards distilled liquor, wine, and imported beers. These companies are trying to invent new products to stay ahead of the curve. Combining companies would help cut down on the investments in these new products.

Integration PlanEmployee Retention

Get agreement from key execs to stay on and continue to lead the company Name August Busch IV President of the North America Business Unit. Prior to announcing the acquisition, identify other key execs and employees.

Reach out to them and motivate them to stay for a specific period of time to hit specific performance measures.

Integration Team

Appoint leadership from both Inbev and A-B Hold specific people accountable within each business group for achieving

performance targets. Appoint persons with significant amount of experience in M&A integration and

leverage this team across multiple mergers and acquisitions (the more mergers you do, the better you will get at it).

Monitor the team to increase performance

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Human Resources

Get the “me” questions answered quickly Immediately message to A-B community what they can expect over the next 30

days. Welcome to Inbev sessions Eliminate overlaps in IT, HR, Finance and Corporate. Act quickly and let

employees know who will be transitional and who will be permanent employees. Treat all employees with respect to maintain morale of both transitional and permanent employees.

HR benefits overview and enrollment Have on-site Inbev persons available for first 6 months following the

announcement. Identify persons who can’t make the adjustment to the new enterprise and culture

and help them put together an exit strategy.

Communication PlanInternal Communication

WebEx from leadership of both companies Establish an integration website(s) for both Inbev and A-B employees that is

updated frequently and contains all communications about the acquisition. Constant and ongoing communication – better too much than too little Establish a site on the Inbev intranet site to explain why Inbev acquired A-B, and

how to position it.

Customers

Messages to key customers including distributors, retailers and on-trade companies.

Include any value created for the customer as a result of the acquisition Be sure that A-B and Inbev account leads are talking with customers to

understand how to engage on a go forward basis- and how they would like to engage.

Meet with distributors who will expand their relationships with Inbev and A-B to set expectations and explain the increased competitiveness of the new organization and what it means to them: more choice and better service for retailers

Analysts and Press

Joint presentations to analysts explaining the value of the acquisition and why it was done

Be open and cooperative and answer their questions

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Shareholders

Information must be available immediately when the announcement regarding the acquisition is made. This information must detail potential synergies and create confidence that they are realizable.

Information regarding next steps and logistics must be made available immediately as well.

Government

File necessary documents with regulatory and other government entities to them know in detail about the acquisition.

Finance

Inbev has been in the process of centralizing its F&A functions and creating shared service centers at its Belgium HQ. Top leadership is also being centralized in Belgium. As with Ambev, identify appropriate and key A-B execs to transfer to Belgium HQ. (English is the business language at Inbev’s Belgium HQ).

Consolidate Inbev and A-B’s America’s F&A staff Appoint lead within A-B for Zero Based Budgeting initiative.

Systems

Get everyone onto Inbev’s systems and hardware as soon as possible.

Facilities & Manufacturing

Close and consolidate A-B and/or Inbev offices where possible Determine how to best leverage Inbev and A-B’ breweries so as to achieve

manufacturing efficiencies and allow beers to be brewed closer to their distributors.

Appoint lead within A-B for Voyager Plant Optimization initiative.

Marketing

Meeting with key marketing leads and brand managers from both Inbev and A-B to understand opportunities for cross selling – i.e., selling more high growth brands (Stella Artois, etc) the United States and Canada without cannibalizing existing sales of A-B

Understand opportunities to sell A-B around the world, particularly in high growth markets such as China and Russia.

Identify overlap and determine which brands to sell33

Review local markets and preferences Identify opportunities for cross-marketing and getting greater return on marketing

investments.

Procurement

Leverage scale to capitalize on opportunities for volume purchasing and more favorable supplier pricing

Set Clear Business and Financial Targets

These will correlated to the synergies

Sales

Leverage knowledge learned through distribution agreement Identify opportunities to cross sell brands through existing distribution channels Educate existing distributors about new products and positioning

Cultural Issues

InBev is based in Belgium and Anheuser-Busch is based in St. Louis, Missouri. The

combined company would face some difficulty in the integration process from blending

to company cultures based in two different countries. InBev has experience with this

integration process. InBev was formed in 2004 by the merger of Interbrew and Ambev.

Interbrew was based in Belgium and AmBev was based in Brazil. The experience of

blending these two large companies will be helpful in the integration of InBev and A-B.

The language barriers will not be a problem since English is the business language

spoken at InBev’s headquarters in Belgium. This process went smoothly in the Interbrew

and AmBev integration. The CEO at that time even learned Portuguese.33 The main

challenge would be the integration of InBev’s cost and financial discipline to A-B’s

environment. InBev has integrated this discipline into Interbrew’s systems since the

strong financial discipline was an AmBev characteristic. This cost cutting application has

helped the company increase its margins. Carlos Brito is the CEO of InBev. He held

various positions at AmBev including positions in finance, operations, and Sales.1 He

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was appointed CEO of AmBev in 2004 so he has experience with the AmBev and

Interbrew integration. He took over as CEO for InBev at the end of 2005. During the

Interbrew and Ambev integration process, the company used executive reward programs

to promote the successful integration of these two different companies. This system

focused on the business objectives and supported organizational alignment. Following

the integration plan listed above and using past experience and knowledge, will lead

InBev and A-B to a successful integration.

Regulatory Issues

“Facing low prospects for volume growth in mature, developed markets and increased competition, brewers continue to seek growth through acquisitions of other brewers or by aggressive participation in developing markets.”27

InBev acquiring Anheuser Busch would have to be approved by the Federal Trade

Commission in the United States and the European Commission for the European Union.

The Federal Trade Commission is an independent agency of the U.S. government and it

is responsible for preventing “anticompetitive” business practices. The Bureau of

Competition is the specific division of the FTC in charge of preventing “anticompetitive”

practices.28 This division reviews proposed mergers.

Monopolization is defined under the Sherman Antitrust Act. Section 1 states the

following “Every person who shall monopolize, or attempt to monopolize, or combine or

conspire with any other person or persons, to monopolize any part of the trade or

commerce among the several States, or with foreign nations, shall be deemed guilty of a

felony.” The government is responsible for investigating these situations. There are two

elements to section 2 that have set precedent. First, the defendant possess monopoly

power in a properly defined market and second that the defendant obtained that power

through conducted deemed unlawfully exclusionary. This conduct must exclude

competition on basis other than efficiency. The realization of economies of scale and

product improvement, product innovation is considered lawful since it is created by

normal economic forces. Recently, it has become more relaxed when ruling on

monopolies. Excluding rivals is considered lawful if supported by a “valid business 35

reason.” There is also a chance for an appeal and the FTC ruling can be overturned.

The FTC sued to block the merger of Whole Foods and Wild Oats on the basis that the

merger would “constitute an anticompetitive combination of the top two competitors in

the highly concentrated market for premium natural and organic marketplaces.”29 This

claim was based on the FTC’s reasoning that these were the only two “niche” type

supermarket chains and they would eliminate this niche market. The FTC did not prove

that if “Whole Foods/Wild Oats” (the new combined firm) raised prices that consumers

would not switch to alternative supermarkets to buy products. The merger of InBev and

Anheuser Busch would leave the same options for a consumer in the U.S. Inbev is a

much smaller player in the U.S. market and is already distributing many of their

European imports through A-B. U.S. consumers would not be hurt by this acquisition

since alternatives still remain in the market. As of the end of 2007 per the Datamonitor

report, Anheuser is holds the top position in the US by volume with 57.6%. SAB Miller

held 20.1% and Molson Coors held 12%. The announcement of the SAB Miller and

Molson Coors joint venture took place in October of 2007. Through this joint venture,

SAB Miller will have a 58% economic interest in the venture and Molson Coots will own

42%, but they will have equal voting rights. The two companies will conduct all of their

U.S. business through this joint venture. The transaction between InBev and Anheuser-

Busch seems much more feasible now that there is a joint venture between the number #2

and number #3 brewers in the U.S. and there has been an emergence of many smaller

brewers in the competitive landscape. The U.S. beer market generated total revenues of

$78.3 billion and 25.4 billion liters in 2007. 8 The SABMiller and Molson Coors joint

venture creates an estimated market share of 31%. It is estimated that A-B and InBev

combined would control 25 percent of the global beer market. 30 The combination would

have them in the leading market positions in the U.S., Brazil, Germany, and China, the

top four beer markets in the world by volume. InBev is the world’s largest brewer by

volume in the world until SABMiller completes its purchase of Grolsch. SABMiller’s

moves in the industry are setting precedence and will help in the antitrust clearance

process for the InBev and A-B transaction. The Herfindahl-Hirschman Index is being

pushed up by this joint venture and it doesn’t seem to be hurting their chances of gaining

regulatory approval under the Bush administration. The US Department of Justice did

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request further information from the companies in November to evaluate the joint venture

but many analysts say SABMiller and MC will still gain approval. The emergence of

smaller brewers would also make this deal more feasible. Supermarkets and restaurants

would play a large role in the antitrust review process. They are the two main buyers of

beer. InBev would have to prove that economies efficiencies would benefit the consumer

more than they would be harmed by any potential anticompetitive effects.

The merger of InBev and A-B would also have to gain approval in the European Union.

The European Commission is the executive arm of the European Union that handles

antitrust issues. The main legislation for merger decisions is the EC Merger Regulation

and the Implementing Regulation. “The Merger Regulation contains the main rules for

the assessment of concentrations, whereas the Implementing Regulation concerns

procedural issues (notification, deadlines, and right to be heard).” 31 The European

Commission has blocked mergers only when they would have left a single company

dominating a market. InBev had 23.9% of its revenue coming from Western Europe and

15.2% of its revenue coming from Central and Eastern Europe. Anheuser’s share is

smaller in the European Union and consumers will still have plenty of other options in

the marketplace. The European Union gave the SAB Miller and Molson-Coors joint

venture approval in early April. The InBev and A-B transaction should work out the

same.

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Source: Cartoonstock.com

Why would the Busch family sell now?

While the Busch family only controls less than 4 percent of A-B’s shares, it still holds a

lot of influence with other shareholders. The Busch family would lose its influence over

the shareholders and the board. August Busch IV was named President and CEO in May

2007. He is 43 years old. He took over this role from his father August Busch III who

remains chairman of the board. According to Forbes, Loyalty to he Busch family remain

strong although there has been some question of August Busch IV’s suitability for

leadership. August Busch IV probably won’t want to give up the company since he

hasn’t been in his CEO position for that long and he won’t want that to be his legacy. He

has a long-standing reputation as a “party boy” and “was involved in a car accident that

left a female companion dead in 1983 when he was an undergrad at the University of

Arizona in Tucson.”32 We would recommend changing InBev’s name to InBev Busch and

naming August Busch IV as the President of InBev Busch in the U.S. in order to

complete the deal. The Busch family’s influence would demand a take-over premium.

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Financial Valuation (DCF and Multiple Models)

We began by using the Discounted Cash Flow Model (DCF) to obtain a stand-alone value of both InBev and AB. (Appendices 1-6) We did this for a few reasons: 1) To screen the target, AB, in order to determine if we felt it was under- or over-valued 2) To screen our own stock price which would help us in determining our payment strategy should we decide to purchase AB.

Stand Alone Values, Based on our sensitivity analysis:

InBev ValuationsLow Medium High

44.86 € 51.52 € 60.30 €

A-B ValuationsLow Medium High

$43.63 $52.00 $63.11

InBev’s sales growth has increased 8.4% in 2007 and 14.2% in 2006. A-B sales growth has increased 6.2% in 2007 and 4.5% in 2006. These two companies are consistently beating the average market growth. We have scaled back on these assumptions based on the market forecast listed above for the next several years.

What we found was that based on relatively conservative assumptions, as outlined in the exhibit, the value of InBev stock is slightly over-valued and the value of AB’s stock is slightly under-valued. As an acquirer, this is good news. This allows InBev to use its Treasury Stock at a slightly higher price to purchase more shares of AB at a slightly lower price.

The following table represents a range of share prices that we would find acceptable for negotiations with AB. The “Low End” column of the table represents the current stock price for Bud plus the proposed 12% premium and the “High End” column represents the 15% walk away premium.

Budweiser - Acceptable Price Ranges/Sharefor Negotiations

Low End High EndDollars $52.96 $54.38Euro 33.43 € 34.33 €

It is important to remember that we calculated a fair market value of $52/share of Bud stock and the current market price (at the time of this writing) is $47.29. Given this $5/share disparity, we feel even more comfortable offering a 12% to 15% premium, even though at 15% we are giving away approx 90% of the estimated synergies because we feel that we are buying AB at a $5/share discount. Of course, we as InBev are not going

39

to clue in AB of this fact. We are simply going to hold onto this as a form of insurance in case some of our synergies or implementation plans don’t work out.

We next gathered relative multiple information from FactSet (Appendix 7). We narrowed down the list of comparable firms based on market value, sales, and earnings in order to be sure we were analyzing comparable firms.

Based on the P/E and P/Sales multiples, we feel that the market is pricing these firms mainly based on these criteria.

Synergies

We next looked at where we felt the synergies would come from in the form of revenue enhancements and cost savings.

As Appendices 8 and 9 illustrate, we would expect to generate 300€ million within one year after completion of the deal and grow that revenue at a rate of 20% in years 1, 2, and 3, 10% in year 4 and 3% in year five and maintain that level of growth into the future.

By far the largest amount of synergies comes from the cost saving/operational improvement methods we would expect InBev to employ. We applied a slightly higher growth percentage into perpetuity given that it is one of InBev’s core strengths to improve operating efficiencies.

We felt the funds required to invest to achieve the synergies could come from, in part, the $250 million in cash that AB has on its balance sheet as well as the 1.5€ billion that InBev has on its balance sheet.

Combined Firm Financials

Appendix 10 outlines our estimation of firm value and accretion to the value of InBev’s share price based on a 12% premium offer for Bud’s share.

Appendix 15 demonstrates that a 12% premium for Bud’s shares is in line with other premiums paid for similar firms.

In addition, we wanted to leave ourselves room to come up in price should Bud initially balk at our offer. Appendix 12 shows that our walk-away price is actually based on a 15% premium. We chose this threshold because once we exceed a 15% premium; we exceed 95% of the synergies that we estimate generating. We feel that any price that

40

exceeds a 15% premium would be too risky to take on should we not realize 100% of the estimated synergies.

Deal Structure

Appendices 11 and 12 outline our deal structure and Appendices 13 and 14 illustrate the impact of the +/- 2% collar we placed on the deal due to possible fluctuations in exchange rates.

Given that InBev went through such an aggressive share repurchase program in 2007, we decided to use approx. 400 million shares currently held in Treasury Stock to purchase 100% of Bud’s stock at an initial 12% premium offer in a stock-for-stock transaction.

We wanted to use a stock-for-stock transaction for a number of reasons:

1) We felt that InBev’s stock was slightly over-valued

2) We felt that Bud’s stock was slightly under-valued

3) The Euro is strong against the Dollar which works in our favor

4) The transaction is tax deferred for InBev

5) Is relatively simple

6) InBev repurchased a large amount of its stock in 2007. This is currently being held as Treasury Stock and was done, in our opinion, for use in a transaction exactly such as this.

ConclusionBased on the fact that this is a mature industry and consolidation is going to happen whether the major players, we feel that Bud will have little choice but to approve the deal.

We feel that the 12-15% premium is what is most likely to be settled upon and would endorse it at that level based on InBev’s expertise at operations management and cost cutting.

41

Appendix 1 - InBev

Extraordinary Period: Stable Period:5.00% 3.00%5.00% 3.00%

Assumed to remain at 9.0% of SalesGrowth Rate: (Cash Dividend) Assumed to remain at 7.0% of Sales

0.67 0.670.33 0.330.96 0.96

Data Range: 12/1/07-12/1/08Frequency: DailyRegression Index: BEL20

2.30% 3.30%8.00% 5.00%9.94% 8.08%10.59% 10.59%10.15% 8.90%

Currency: Euro

Extraordinary Period Stable Period0 1 2 3 4 5

2007 2008 2009 2010 2011 2012Sales 14,430.00 € 15,151.50 € 15,909.08 € 16,704.53 € 17,539.76 € 18,065.95 €

Cash Flow from Ops 4,064.00 4,267.20 4,480.56 4,704.59 4,939.82 5,088.01Capital Expenditures 1,481.00 1,363.64 1,431.82 1,503.41 1,578.58 1,625.94

Cash Dividend 769.00 822.83 880.43 942.06 1,008.00 1,078.56FCF 1,814.00 2,080.74 2,168.32 2,259.12 2,353.24 2,383.51

Terminal Value 33,314.90Total FCF 2,080.74 2,168.32 2,259.12 2,353.24 35,698.41PV of FCF 1,888.92 1,786.97 1,690.18 1,598.29

Sum of PV of FCF 6,964.37PV of Terminal Value 24,245.99

Firm Value 31,210.36605.80

Fair Value Per Share 51.52 €

DCF Valuation as of January 1, 2008

# of Shares Outstanding

Cost of Equity:Cost of Debt:WACC:

Beta: Assumptions:

Risk Free Rate: (5 yr. T-Note)Risk Premimum:

Growth Rate: (Capex)

Equity Weight:Debt Weight:

Aussumptions: DCF, Medium Growth

Growth Rate: (Sales)Growth Rate: (CF from Ops.)

42

Appendix 2 - InBev



0.67 0.670.33 0.330.96 0.96


2.30% 3.30%8.00% 5.00%9.94% 8.08%

10.59% 10.59%10.15% 8.90%

Currency: Euro


2007 2008 2009 2010 2011 2012Sales 14,430.00 € 15,440.10 € 16,520.91 € 17,677.37 € 18,914.79 € 19,576.80 €





Firm Value 36,527.55605.80


Aussumptions: DCF, High Growth

Growth Rate: (Sales)Growth Rate: (CF from Ops.)Growth Rate: (Capex)

Equity Weight:Debt Weight:Beta: Assumptions:




Cost of Equity:Cost of Debt:WACC:

43

Appendix 3 - InBev



0.67 0.670.33 0.330.96 0.96


2.30% 3.30%8.00% 5.00%9.94% 8.08%

10.59% 10.59%10.15% 8.90%

Currency: Euro


2007 2008 2009 2010 2011 2012Sales 14,430.00 € 15,007.20 € 15,607.49 € 16,231.79 € 16,881.06 € 17,218.68 €





Firm Value 27,174.96605.80



Risk Free Rate: (5 yr. T-Note)

Aussumptions: DCF, Low Growth




Risk Premimum:Cost of Equity:Cost of Debt:WACC:

44

Appendix 4 – BUD



0.26 0.260.74 0.740.50 0.50

Data Range: 12/1/07-12/1/08Frequency: DailyRegression Index: S&P 500

2.30% 3.30%8.00% 5.00%6.29% 5.79%5.30% 5.30%6.03% 5.43%

Currency: US DollarSpot Exchange Rate Dollars per Euro: 1.5842


2007 2008 2009 2010 2011 2012Sales $16,926.50 $17,772.83 $18,661.47 $19,594.54 $20,574.27 $21,088.62

Cash Flow from Ops 3,234.30 3,396.02 3,565.82 3,744.11 3,931.31 4,029.59Capital Expenditures 865.90 1,155.23 1,213.00 1,273.65 1,337.33 1,370.76

Cash Dividend 943.20 996.02 1,051.80 1,110.70 1,172.90 1,238.58FCF 1,425.20 1,244.76 1,301.02 1,359.76 1,421.09 1,420.26



Firm Value 37,508.63721.3

Fair Value Per Share $52.00Firm Value: Euro 23,676.70 €

Debt Weight:

Aussumptions: DCF, Medium Growth


Equity Weight:

WACC:

Beta: Assumptions:


DCF Valuation as of April 1, 2008


Cost of Equity:Cost of Debt:

45

Appendix 5 – BUD



0.26 0.260.74 0.740.50 0.50


2.30% 3.30%8.00% 5.00%6.29% 5.79%5.30% 5.30%6.03% 5.43%



2007 2008 2009 2010 2011 2012Sales $16,926.50 $17,942.09 $19,018.62 $20,159.73 $21,369.32 $22,010.40





Firm Value 45,519.62721.3


Debt Weight:

Aussumptions: DCF, High Growth


Equity Weight:

WACC:

Beta: Assumptions:




Cost of Equity:Cost of Debt:

46

Appendix 6 – BUD



0.26 0.260.74 0.740.50 0.50


2.30% 3.30%8.00% 5.00%6.29% 5.79%5.30% 5.30%6.03% 5.43%



2007 2008 2009 2010 2011 2012Sales $16,926.50 $17,603.56 $18,307.70 $19,040.01 $19,801.61 $20,197.64





Firm Value 31,467.57721.3



Risk Free Rate: (5 yr. T-Note)

Aussumptions: DCF, Low Growth




Risk Premimum:Cost of Equity:Cost of Debt:WACC:

47

Appendix 7 – Multiple Valuation

Report as of: 14-Apr-08Reuters Global Fundamentals / I/B/E/S

Currency: U.S. Dollar

InBev Anheuser-Busch Cos.

Inc.

SABMiller PLC

Scottish & Newcastle

PLC

Heineken N.V.

Kirin Holdings Co. Ltd.

Diageo PLC

Averages for 21 competitors INB-BE BUD SAB-GB SCTN-GB HEIA-NL 2503-JP DGE-GB

Summary Statistics 12/2007 12/2007 09/2007 06/2007 12/2007 12/2007 12/2007

Avg Median

Current Price 25.90 19.39 93.31 48.36 20.94 15.63 59.37 19.39 20.68

52 Week High 29.80 21.21 99.00 55.19 31.46 16.40 70.93 19.70 23.46

52 Week Low 19.39 13.79 67.27 45.55 19.91 11.14 49.77 12.17 17.88

Beta 0.80 0.72 1.31 0.55 1.23 0.40 0.67 0.53 0.72

Market Value 15,773.2 9,818.3 56,427.4 34,544.2 33,148.2 14,854.7 29,043.5 18,508.2 52,995.4

Enterprise Value 16,822.3 12,000.9 - 43,401.3 40,684.2 18,863.8 32,549.5 23,872.6 64,646.4

Sales 8,483.3 5,718.7 21,097.4 16,685.7 20,057.0 6,635.0 18,369.2 16,122.9 15,419.2

Assets 10,980.0 9,665.3 - 17,155.0 30,700.0 14,112.7 18,959.9 22,106.8 30,231.2

LTM Price to Earnings 24.8 20.9 16.5 17.3 17.4 26.3 22.8 28.1 19.2

NTM Price to Earnings 17.7 16.3 16.6 15.5 13.8 19.6 14.0 17.7 15.7

Price to Book 3.0 2.4 - 11.1 2.1 2.3 3.4 1.8 7.0

Book Value per Share 8.46 5.57 - 4.37 9.85 6.78 16.15 9.89 2.97

Price to Sales 1.6 1.6 2.5 2.1 1.6 2.5 1.5 1.0 3.5

Price to Cash Flow 18.4 12.4 - 12.0 12.0 23.9 10.6 16.3 18.8

Enterprise to Sales 2.0 1.9 - 2.6 2.0 3.2 1.7 1.4 4.2

Dividend Yield 1.6 1.2 4.1 2.6 2.5 0.9 1.9 1.1 3.2

Sales Growth + 11.3 + 13.7 - + 6.2 + 14.0 + 8.7 + 14.1 + 15.3 + 7.6

Gross Profit Growth + 10.6 + 7.8 - + 5.4 - - 8.9 + 0.6 + 14.1 + 6.9

EPS Growth + 32.6 + 18.4 - + 10.4 + 14.4 + 8.3 - 26.1 + 33.1 - 6.2

Assets Growth + 11.8 + 9.7 - + 4.7 + 12.6 + 7.2 + 10.6 + 34.1 + 7.2

48

Appendix 8 - Synergies

Revenue Enhancement Synergy Valuation, Fair Estimate

Assumptions:Revenue Enhancement Growth Rate; yrs. 1,2 and 3 20.00%Revenue Enhancement Growth Rate; yr. 4 10.00%Revenue Enhancement Growth Rate; yr. 5 on 3.00%

8.00%Operating Costs (as % of Revenue) 50.00%Discount Rate: 15.00%

Year0 1 2 3 4

2008 2009 2010 2011 Terminal

Additional Distribution 300.00 € 360.00 € 432.00 € 475.20 € 489.46 €

300.00 360.00 432.00 475.20 489.46Operating Costs 150.00 180.00 216.00 237.60 244.73

EBITDA 150.00 180.00 216.00 237.60 244.73

9.00 10.80 12.96 14.26 14.68EBIT 141.00 169.20 203.04 223.34 230.04

Taxes (@ 40%) 56.40 67.68 81.22 89.34 92.02Net Income 84.60 101.52 121.82 134.01 138.03

Reqd. Reinvestment 24.00 28.80 34.56 38.02 39.16FCF 60.60 72.72 87.26 95.99 98.87

PV of FCF 52.70 54.99 57.38 54.88Terminal Value 823.92

Total FCF's 60.60 72.72 87.26 95.99 922.79Sum of PV of FCF 219.94

PV of Terminal Value 527.61

747.55

300.00

447.55 €Net Present Value of Enhanced

Revenue

Reqd. Reinvestment to Sustain Enhanced Growth (as % of Revenue)

Revenue Enhancement Due to Improved:

Total Revenue Due to Enhanced Synergies:

Dep. and Amort. (3% of Sales)

Total Value of Revenue Enhancement Synergies

Investment Required to realize Enhanced Revenue

49

Appendix 9 – Cost Synergies

Cost Savings Synergy Valuation, Fair Estimate

Assumptions:Estimated Cost Savings; yr. 1 15.00%Estimated Cost Savings; yr. 2 8.00%Estimated Growth in Cost Savings; yrs. 3 and On 4.00%

5.00%Discount Rate: 15.00%Conversion Rate: Dollars Per Euro 1.5842

Year0 1 2 3 4

2008 2009 2010 2011 TerminalEstimated Cost Savings Due To:

Reduction of COGS: $10,991.50Direct Labor 2198.30 329.75 356.12 370.37 385.18 400.59

Optimizing Production 1099.15 164.87 178.06 185.18 192.59 200.30Economies of Scale 1648.73 247.31 267.09 277.78 288.89 300.44

Reduction of SG&A: $3,022.70Shipping Costs 151.14 22.67 24.48 25.46 26.48 27.54

Marketing Costs 453.41 68.01 73.45 76.39 79.45 82.62Corporate Overhead 604.54 90.68 97.94 101.85 105.93 110.16Reduction of WC: $217.80 32.67 35.28 36.69 38.16 39.69

Total Cost Savings 955.96 1,032.43 1,073.73 1,116.68 1,161.35Taxes (@ 40%) 382.38 412.97 429.49 446.67 464.54

After Tax Cost Savings 573.57 619.46 644.24 670.01 696.81

25.81 32.21 55.83 58.07FCF 573.57 593.65 612.03 614.17 638.74

Terminal Value 5,806.74Total FCF's 573.57 593.65 612.03 614.17 6,445.49PV of FCF 498.76 448.88 402.42 351.16


5,386.45

500.00

$4,886.45

3,084.49 €

Net Present Value of Cost Saving Synergies

NPV of Cost Synergies: Euro

Reqd. Reinvestment to Sustain Enhanced Cost Savings (as % of Revenue)

Reqd. Reinvestment to Maintain Cost Savings

Total Value of Cost Saving Synergies

Investment Required to realize Enhanced Revenue

50

Appendix 10 – Fair Value Merged Companies

"Fair" Value Merged Co. = Market Value InBev + Market Value AB + Synergies - Cash

Market Value InBev 36,277 €Market Value AB 21,531 €Synergies (Fair) 3,532 €

Value InBev/AB Merged 61,340.41 €

51

Appendix 11 – Preimum Offers

Initial Premium Offer

Premimum=Price Pd. for Target - Mkt. Value Target

Offer Price $52.96Market Value of AB $47.29

Premium/Share $5.67Firm Value Premium $4,093.23Firm Value Premium 2,583.79 €

Premium Percentage 12.00%

Deal Structure

Offer: Purchase 100% of AB in a Stock-for-Stock TransactionCurrent Mkt. Value: AB 21,531 €Prem/Share * # of Shares $4,093.23Prem/Share in Euro 2,583.79 €Prem % of Tot. Synergies 73.15%Offer Price/Share $52.96Total Offer in Dollars @ 100% $38,203.51Total Offer in Euro @ 100% 24,115.33 €# of InBev Treas. Shares Req. @ 59.88€/Share 402.7

EPS Analysis

EPS Combined Firm = Net Income Combined / # of Shares Combined Firm

Net Income, InBev 2,198.00 €Net Income, AB 1,331.08 €

Net Income Combined 3,529.08 €# of Shares Combined 830.66

EPS Combined Firm 4.25 €

Accretion/Dilution of InBevStock = EPS Combined Firm - EPS InBev Pre-Merger

EPS Combined Firm 4.25 €EPS InBev Pre-Merger 3.42 €

Accretion of InBev Stock 0.83 €

52

Appendix 12 – “Walk Away” Premium Offer

“Walk Away” Premium Offer

Premimum=Price Pd. for Target - Mkt. Value Target

Walk Away Price $54.38Market Value of AB $47.29

Premium/Share $7.09Firm Value Premium $5,116.54Firm Value Premium 3,229.73 €

Premium Percentage 15.00%

Deal Structure – “Walk Away”


EPS Analysis – “Walk Away”








53

Appendix 13 – Impact of Collar, At a increase of 2% in the exchange rate

Assumes Dollars Per Euro of: 1.6159









54

Appendix 14 - At a decrease of 2% in the exchange rate

Assumes Dollars Per Euro of: 1.5525









55

Appendix 15 – Premium Justification

Scottish & Newcastle PLC Date Created: 28-Apr-2008

SCTN-GB 0783969 London Common stock

Target Price/ Premium Premium Premium

Buyer Name Seller Name Unit Name Ownership Share 1 Day 5 Day 30 Day

Sunrise Acquisitions Ltd. Scottish & Newcastle PLC - Public 15.87 4% 5% 8%

FactSet Mergerstat - Premium Report

Molson Coors Brewing Co. (Cl B) TAP 60871R209 B067BM3 NYSE Common stock



Adolph Coors Co. Molson, Inc. - Public 25.76 -2% 3% 6%

FactSet Mergerstat - Premium Report

Anheuser-Busch Cos. Inc. BUD 035229103 2033004 NYSE Common stock



Cia Cervecerias Unidas SA /Private Group/ Anheuser-Busch Cos., Inc. United Breweries Co., Inc. Public 4.73 -5% -1% -3%

Anheuser-Busch Cos., Inc. Harbin Brewery Group Ltd. - Public 0.72 10% 12% 63%

Anheuser-Busch Cos., Inc. Harbin Brewery Group Ltd. - Public 0.72 9% 12% 63%

56

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December 2007,16

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7. Anheuser Busch 2007 Annual Report

8. Datamonitor, US Beer Market, December 2007

9. Datamonitor, Anheuser-Busch Companies, Inc., May 24, 2007.

10. Datamonitor, Beer in China, December 2007

11. Molson Coors 2007 Annual Report

12. Datamonitor, Beer in Canada, December 2007.

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Inbev and ABv10

Documents

integrated inbev

inbevs brands

inbevs ebitda margin

anheuserbusch company

inbevs core business

largest brewing company

market capitalization

market update