Proposal to acquire Carlsberg

SABMiller plc
Team Filthy Rich, IIM Kozhikode
Ankit Kardam
Ankit Kumar
Kritika Gupta
Rahul Mittal
Executive Summary
SABMiller witnessed stagnating volumes for the period 2008-10, owing to global economic crisis. It had been enjoying above
industry average growth rates only until 2008, after which its growth rate declined below the industry average. This indicates
that its portfolio of operations is not resistant to economic shocks. It needs to rebalance its portfolio to retain its above industry
average growth rates. Exposure to developing markets of Asia Pacific & Eastern Europe and value growth markets of Western
Europe would rebalance its portfolio to have a balanced exposure to value and volume growth markets.

Saturation of developed markets and consolidation in the brewing industry has left limited opportunities for acquisitions.
Inorganic expansion seems to be the solution for SABMiller to look for growth opportunities. Carlsberg, based on strategic fit and
stand alone excellent position, seems to be an ideal target for acquisition by SABMiller. This would give SABMiller a balanced
exposure to developed and developing markets. SABMillers low debt levels compared to peers and excellent creditworthiness,
render it in a relatively strong position for this acquisition.

The combined entity is expected to generate tremendous cost and revenue synergies driven by cross-selling opportunities and
sharing of best practices between the two companies. Net sales and operating costs were identified as value drivers for
Carlsberg. Based on DCF valuation methodology, Carlsberg, on a stand alone basis is valued at 150.3 bn DKK. Based on
trading comparables, Carlsberg is valued between 122.5 and 196.3 bn DKK. Based on transaction comparable, Carlsberg has
been valued at 164.1 Bn. to DKK 167.27 Bn.
SABMiller Objectives
Balanced
Portfolio
Develop
Local
Premium
Segment
Raising
Profitability
Expanding
beer
category
Leveraging
skills
globally
1
2
3
4
5

SABMillers wide geographic spread benefits from growth in volumes and value in beer markets

To look for opportunities to strengthen our geographic footprint in both developing and developed markets
through greenfield entries, alliances, mergers and acquisitions

Urbanisation in emerging markets have led to the strong growth of premium brands with higher margins

SABMillers strategy is to provide a full portfolio of brands with products at each point on the price scale

Enhancing its operational performance through top-line growth and continuous improvement in efficiency

Launched business capability programme to simplify processes and reduce costs

Introduced a performance-led framework to maximise profit through the entire value chain

SABMiller is committed to attracting more consumers to beer and to extending the whole beer category

The company targeted new consumers, especially women, with its recent flavoured and light beer versions

It also offers premium products to make beer relevant to more occasions


Gain value from the scale and skills of the group, by standardising our back-office functions around the
world and regionally integrating our front-office systems

Benefit from ongoing collaboration and the transfer of skills between businesses
The acquisition should be able to meet the objectives of the acquirer. SABMiller has 5 key objectives:
Source: SABMiller Annual Report, 2011
SABMiller Portfolio Assessment (1/3) Addressing Why Acquisition?
SABMiller enjoyed above market average growth
rates until 2009, after which its volumes were
affected by economic downturn

In 2010, SABMiller experienced a decline of
0.5% in sales and lagged behind the industry
recovery growth rate

Growth in North America, Eastern Europe and
the Middle East and Africa could not be
countered by good growth in Asia Pacific and
Latin America

Balanced geographic presence is essential to
exploit both the volume growth of emerging
markets and the value growth in mature markets

A stronger SABMiller is required to eliminate any
possibilities of being taken over by rival AB-InBev

SABMiller finds itself in a good position with low
debt levels compared to peers , giving it a distinct
advantage over its rivals for possible acquisitions

Stagnating volumes require SABMiller to look for alternative growth opportunities
Source: Euromonitor
Source: Euromonitor
Region
Forecast CAGR
(2010-15) %
Current Market
Volume Share %
Comments
Middle East &
Africa
6 34
Market leader with leading position in South Africa, accounting
for 77% volume share in the country
Well positioned to exploit growth opportunities
North America < 1 15 (market) High unemployment is a threat to growth in this saturated market
Latin America 3.5 13 Lacks presence in Brazil & Mexico, the two largest markets
Eastern Europe 1 16 (market) Need to focus on Russia &Ukraine (representing 53% market )
Western Europe - 0.2 3 (market) Limited growth potential, possibilities for value growth
Asia Pacific 5.7 1
Urbanisation and middle-class populations are expected to
grow, and stimulate demand especially in premium segment
Leverage and strengthen presence in the region, especially within
the premium segment
Australasia 2.6 2 (market) Strengthen position to capture growth from premium segment
In 2010, Middle East and Africa, North and Latin America, and
Eastern Europe, accounted for 91% of SABMillers total
volumes

SABMiller needs to strengthen its position in high growth
markets of Asia and Australasia

Focus on emerging high growth markets would ensure a more
balanced portfolio in terms of both volume and value growth

SABMiller Portfolio Assessment (2/3) Addressing Why Acquisition?
Source: Euromonitor, Datamonitor
Region Comments
Volume
Growth
Value
Growth
Middle East &
Africa
Premium lager represented 15% of total beer volumes in 2010, showing
more than 9% growth compared to previous year
63% of premium volumes are sold in Nigeria and South Africa
Acquisition of Pabod Breweries in Nigeria & expansion plans in South Africa
High Moderate
North America
Joint venture with Molson Coors strengthens distribution network
Standard lager segment was much more worse than premium segment
(SABMiller holds only 2% share in premium segment)
Low Low
Latin America
Companys volumes are concentrated mainly in the standard lager category
(81%), which represents about 91% of total market
Under-represented in key markets of Brazil and Mexico
Premium segment is expected to outperform overall beer market
Moderate Moderate
Eastern Europe Premium lager, accounts for 27% of total beer volumes Low Moderate
Western Europe Possibilities for value growth in Turkey and Netherlands Low Low
Asia Pacific
Premium lager offers value growth opportunities with rising disposable
incomes of China & India
Vietnam, South Korea & Japan promise premium segment growth
High Moderate
Australasia
Premium lager accounts for 22% market with a forecast of 9% for 2010-15
Strong trend towards premiumisation, though it is a small market
Low Moderate
Price/mix is a powerful driver of gross profits. SABMillers portfolio should adequately account for premium segment to
capture value growth and standard segment to capture volume growth. The following table* presents level of potential
opportunities for value and volume growths for SABMiller:

* Based on SABMillers position in the above markets as of June, 2011
SABMiller Portfolio Assessment (3/3) Addressing Why Acquisition?
Carlsberg Acquisition Target Assessment Addressing Why Carlsberg?

Carlsbergs 2008 acquisition of Scottish & Newcastle made
it the leading player in Eastern Europe, as well as
significantly bolstering its standing in Western Europe and
Asia Pacific

Its global share rose from 3% to 6%, and the company
climbed five places in the global rankings

Carlsberg is the leader in 17 (59%) of its total markets

It stands 2
nd
in 8 of its market, further indicating its ability
to enjoy leadership position in key regions

Carlsberg successfully implemented phased implementation of
price increase despite excise duty increase of 200% in Russia

Efficiency initiatives at Carlsberg have been successful in
increasing operating profits despite stagnating volumes growth
in 2008-10

Source: Carlsberg Annual Reports, 2006-10
A good fit with strategic priorities of the acquirer is critical for the success of any acquisition.
Carlsbergs acquisition by SABMiller has been evaluated on 3 fronts:

Market Impact
A greater impact on a global basis is likely to positively affect both parties

Strategic Fit
The objectives of Carlsberg should be in alignment with that of SABMiller

Synergies
The combined entity is likely to generate both revenue and cost synergies
Transaction Rationale Market Impact (1/2) Why Carlsberg?
Strategic
Fit
Synergies
Market
Impact
SABMiller - Carlsberg
The combined entity would be the
strongest in Eastern Europe (41%),
giving SABMiller greater access to
key markets of Russia & Ukraine
Market Share Impact of SABMillers Acquisition of Carlsberg*
*Based on 2010 market shares
Heineken
AB InBev
Others
SABMiller would gain by
extending its market share
in the value driven Western
European market
The entity would be in a much
stronger position (enhanced
distribution capabilities) to
capitalize vast opportunities in
key market of China, India &
Vietnam
SABMillers position would be
further strengthened in this
region which is expected to
drive major chunk of global
value & volume growth
Transaction Rationale Market Impact (2/2) Why Carlsberg?


The combined entity is expected to have
geographical complementarities and
balanced exposure to High-Growth and
Mature Markets
Developed Markets
Developing Markets
+ 53%
+ 43.7%
+ 45%
The combined entity would lead to significant value creation for all shareholders through combined competencies
of the two companies, making the entity the highest revenue generator of the industry, surpassing leader AB InBev

There would be increased bargaining power over both sides of the value chain (e.g. a stronger entity would be better
able to tackle the cost pressure of raw materials, the entity is also expected to benefit from reduced price competition)

Balanced and
attractive
global spread of
businesses
Strong, relevant
brand portfolios
that win in the
local market
Improving
profitability
of local
businesses,
sustainably
Benefit from
skills and
global scale

Carlsberg has balanced exposure to developed and developing markets, deriving 55% of its
operating profit margins from developing markets and 45% from developed markets

SABMiller gains access to key emerging markets (China, India & Ukraine), developed markets of
Europe (value growth) and strengthens its leadership in MENA

Carlsberg is the leader in 17 markets and ranks 2
nd
in 8 of its markets, with a global 4
th
position

International premium brands (Carlsberg, Tuborg, etc) constitute 2.6 % of global market



Business capability program at SABMiller has been instrumental in economies of scale

Trinity Procurement (SABMillers global procurement organisation) is expected to provide huge
costs reduction in procurement of raw materials
Transaction Rationale Strategic Fit (1/2) Why Carlsberg?
There needs to be high alignment between the goals of SABMiller and Carlsberg for the combined entity to generate
positive gains. Carlsberg is a good fit with SABMiller's strategic priorities :


Its initiatives such as network optimisation ,divestitures, standardization, portfolio optimisation &
simplification have resulted in increasing operating profits, despite stagnating volumes

Carlsberg's R&D aims at continuous development of new environment friendly solutions, with
integration of corporate social responsibility (CSR) throughout the value chain


Transaction Rationale Strategic Fit (2/2) Why Carlsberg?


MENA
Western
Europe
Asia Pacific

Eastern
Europe
A
d
d
i
n
g

N
e
w

P
r
o
d
u
c
t
s

Serving New Customers
Strategic Fit Matrix between SABMiller & Carlsberg

Type of strategic fit for SABMiller in different regions can be
described on the basis of new products or new customers added

New products includes wine, cider and other beverages

New customers refers to new markets:
- Where SABMiller does not have a significant presence
- New type of customers (e.g. women) in existing markets

Eve, a malt based beverage has been developed by Carlsberg to
target women customers in MENA & Western Europe

Cider has been developed for Western European market by Carlsberg
1st 2nd
3rd 4th
Synergies are expected to be greater for existing products in new markets as SABMiller already has expertise
in selling these products in other markets (4
th
quadrant)

New products for new type of customers require additional skills to be transferred from Carlsberg (1
st
quadrant)
Other Considerations

Global premium brands of both companies can be expanded internationally, further increasing brand strength

Carlsbergs GloCal approach (finding the right balance between working closely together at a Global level while
allowing local brands and initiatives to flourish) is consistent with approach preferred by SABMiller

Opportunity for Carlsberg to capitalize SABMillers distribution capabilities in MENA & benefit from Trinity Procurement


Source: Annual Reports, 2010
Transaction Rationale Synergies Why Carlsberg?


Revenue Synergies

Cross selling opportunities for both brands in their respective new markets

Significant advantage over other competitors in relatively new and emerging markets such as China & India

Top line synergies would depend on exchange of sales and marketing best practices between the two firms

Collusive synergies (market power) of the combined entity would enable to better compete and also pass on
price increases in shock scenarios such as sudden increase in excise duties

The combined entity would also enable it to dictate terms on existing/new channels of distribution

Cost Synergies
Trinity Procurement (SABMillers new global procurement organisation) is expected to provide costs reduction

Elimination of corporate overlapping functions will lower the companys costs relative to same revenue stream

Optimisation in distribution, sales service and trade marketing, would improve efficiency and reduce costs

Increasing trend of EBIT/Volumes of the
companies indicate efficiencies achieved
due to following:

- Ability to achieve cost reductions
- Ability to pass price increases
- Combination of above factors
Cultural issues for Carlsberg employees are very critical for synergies to be realized
Managing layoffs resulting from acquisition by giving proper compensation
Ensuring management does not leave the company resulting in decrease in synergy
Implementation time to financial closure is critical, may impact operating activities of Carlsberg
Consolidating accounts, goodwill impact, provisioning in the balance sheet, purchase
consideration break-up between assets would be critical due to different currencies

Cost of capital, tax benefit for interest, cross-border jurisdictions impacts need to be assessed
Capital gains impact for Carlsberg to be assessed

Potential implication of stamp duty & sales tax when acquiring Carlsbergs assets

Impact of restrictive import taxes , especially in emerging markets like Russia & China
Open Offer Requirements, capitalization norms should be in compliance with applicable laws

Obtaining Carlsberg shareholders approval for the proposed transaction
- Key would be to convince Carlsberg Foundation which owns 30% shares & 74% vote rights

Obtaining approval from SABMiller shareholders by convincing of the synergies to be realized

Antitrust law terms to be met, especially in regions of moderate to high consolidation
Acquisition Issues
Regulatory
Issues
Tax
Considerations
Financial &
Accounting
Considerations
Other
Considerations
SABMiller - Creditworthiness
Creditworthiness of SABMiller has been assessed on 2 broad parameters: (these also determine management effectiveness)

1) Corporate Governance 2) Financial Strength
Parameter SABMiller
Industry
Average
Quick Ratio 0.463 0.593
Inventory Turnover 7.47 8.147
Receivables Turnover 10.855 7.512
WC Turnover 0.678 0.679
Total Debt Ratio 0.268 0.356
Interest Coverage 5.055 6.975
Long Term Debt Ratio 0.202 0.270
D/E Ratio 0.507 0.767
Debt Capacity = EBIT/(r interest coverage ratio),
where r = interest rate for SABMiller
Debt Capacity = 3563/(.059*5.055)
= $ 11958 million
Liquidity
Measures
Solvency
Measures

SABMiller practices healthy corporate governance. Some of
the key features include:
Senior independent director has been provided
sufficient authority to interfere in management decision
Formal and rigorous evaluation of the board is carried
out each year, led by the Chairman, with input from the
Senior Independent Director
Contribute in value creation for shareholders
Every new director is subject to election at 1
st
AGM,
directors are subjected to retirement and re-election by
shareholders every three years
Less chances of directors biasing towards management
Transparency & Ethics in reporting, employees are given
training in ethics
Remote chances of insider advantage
Efficient Remunerations committee will further ensures
transparent and actual performance reporting
Corporate Governance
Cash Flow Parameters
FCF/Debt 0.3048
FFO/Debt 0.644
Debt/EBIDTA 1.81
All three parameters have been
deemed at least very good by all
Credit Rating agencies
Liquidity ratios of SABMiller are above industry while Solvency ratios and Cash flow ratios are excellent in compare to
industry peers. SABMiller can easily get debt for acquisition as per its strong current creditworthiness
Carlsberg Value Drivers

Value for any organization is driven by endogenous
(internal) and exogenous (external) factors*. For
endogenous factors, 6 factors result in significant
contribution towards value. These factors include:

1. Sales Growth Rate (NSL)
2. Operating Costs (OC)
3. Income Tax Expenses (ITX)
4. Cost of Financing (IEX)
5. Incremental Investment in Fixed Capital (FCL)
6. Incremental Investment in Working Capital (WCI)


Operating Cost has most influence on the Share price

OC was further analyzed to recognize micro level factors

Trend Analysis of the micro-level factors revealed a highly
favorable trend with respect to Days Payable and Days
Receivable hinting at effective Cash Management Process

Improvement in EBITDA% and Inventory Turnover over
the years has contributed to the shareholder Value
Value
3. IEX: .013
4. ITX: .008
5. FCI: -.05
6. WCI: -.0005
1. OPC: -1.02
2. NSL: 0.43
Significant Factors
Insignificant Factors
ROA
Days Payable
Inventory Turnover
Days Receivable
EBITDA %
Regression with the share prices with the above factors revealed sensitivities of share price with each of the above
factors (indicated in flow chart above)
0
20
40
60
80
100
120
1 2 3 4 5 6 7 8 9 10
ROA
Days payable
Inventory
turnover
Days Receivable
EBITDA %
Operational Efficiency Parameters Trend Analysis
* Exogenous Factors have been discussed previously
Valuation Transactions Multiples


0
2
4
6
8
10
12
14
16
FV/Revenue
FV/EBITDA
NOTE: Respective Multiples for Kirin Holdings-Lion Nathan have been reduced a bit to compensate
for the extra premium Kirin holdings paid compared to the industry average at that time
Carlsberg (Figures in million DKK)
EV (using Average of Revenue Multiples)
164100.3
EV(using Average of EBITDA Multiples)
167273
Thus, the valuation of Carlsberg (as per Transaction Comparables Methodology)
should be in the range of DKK 164.1 Bn. to DKK 167.27 Bn.
Criteria Comments
Size of
Acquisition
Acquisition value close to Carlsbergs Enterprise value of $20.8 Bn
Majority Stake
Acquired
Control premium should be a part of acquisition value
Strategic Intent
SABMiller's acquisition of Carlsberg will be an effort by SABMiller to gain considerable market share
in emerging markets since its own markets are either saturating or already saturated
Timing
Data from last 3 years only has been selected to maintain the relevance of control premium paid
Criteria for selecting Comparable Acquisition Transactions
Following are the four transactions selected :
1. Jan-10: Heineken-FEMSA 3. Jul-08: InBev - Anheuser-Busch
2. Apr-09: Kirin Holdings Lion Nathan 4. Jan-08: Heineken/Carlsberg - Scottish & Newcastle
FV or EV imply Firm/Enterprise Value
Valuation Trading Multiples


Criteria for selecting Peers for Trading Comparable Valuation
Identification of breweries with dedicated operations in brewing (major revenues) & similar geographic reach

Key ratios including margin ratios, ROE, ROA, D/E, ATO and Interest Coverage calculated for the above

Peer group for benchmarking selected by excluding outliers, based on above ratios
Comparable Multiples Calculation
P/B P/S EV/EBITDA EV/Net Revenue
Ab In Bev 2.5 2.4 9.42 3.60
SABMiller 2.5 2.7 11.79 2.85
Heineken 4.8 0.7 8.59 1.91
Molson Coors 1 2.4 8.22 2.70
Fosters 3.3 2 8.86 2.52
Carlsberg 1.1 1.2 7.67 1.82
Average 2.82 2.04 9.38 2.71
Calculation of Carlsberg's Price
Implied Price of Carlsberg (in mil DKK) 196353.78 122510.16 133496.53 163037.20
Peer group companies for benchmarking and valuing Carlsberg
Source: Annual Reports, 2006-10
Discounted Cash Flow(DCF) Valuation - Carlsberg (1/3)


Northern & Western Europe

Growth for next 2 years expected to be negative due to aftershocks of recession, mature markets, &
increased competition

Outlook: Growth slowly increasing over 2 yrs and then recovers and stabilises to 1% for future

Eastern Europe

Strong volume growth in other regions with positive price/mix across all countries in 1st quarter of 2011

Russian market recovered in 2010 end and high growth to be driven due to large market share

Extremely high growth in Russia in 2011 and 2012 especially due to destocking

Per capita consumption in Russia, Ukraine and Romania expected to be back at pre-recession level

Outlook: Growth expected to be 15% in 2011 which slowly declines to perpetuity growth rate of 2% in
Eastern Europe during the next 10 years

Asia
Asian market characterized by high density population in cities and a growing economy, low per capita
consumption, expanding population and rising disposable incomes

Expected to grow faster than the rest of the world; Proved to be Resilient during recession

China to drive growth due to large population & per capita consumption steadily increasing for past 5 yrs

Outlook: High growth period till 2015 driven by M&A activities across Asia. Eventually converging to
4% perpetuity which is higher than global average

Revenue Forecast Assumptions
Discounted Cash Flow(DCF) Valuation - Carlsberg (2/3)


Other Assumptions
Cost of Sales

Production costs to fall due to economies of scale, standardisation of operations, closing down of old breweries

Implementation of Excellence programs since 2003 to improve margins, optimize costs and increase efficiency

Taking 2010 Cost of Sales as base (which is 43.47%)

Outlook: With new acquisitions and expectations of increase in input prices, the production cost is first
expected to rise, but shortly after expected to decrease and stabilise at 42% of Net Revenue

Other Items

Most of the other expenses including S&D, Administrative, Financial expenses as well as items like Financial
Income, Special items etc. have been taken as constant percentage of net sales based on historical trends
Tax Rate, Fixed Assets, Depreciation, Working Capital

Tax rate was observed to be constant during past years; Same value (~25%) projected for the future

Fixed Assets predicted assuming a constant fixed asset turnover ratio obtained from historical data

Depreciation is taken as a constant percentage of fixed assets with a minor increase due to new acquisitions

Working Capital projected as a constant percentage of sales based on historical data

Discounted Cash Flow(DCF) Valuation - Carlsberg (3/3)


NPV (Million DKK) 150303.7
Valuation Range (Million DKK) 126119.89 (8.75%) - 183714.17 (6.75%)
WACC 7.74%
Perpetuity Growth Rate 1.87%
138000
140000
142000
144000
146000
148000
150000
152000
154000
156000
158000
1.40% 1.60% 1.87% 2% 2.20%
N
P
V

i
n

M
i
l
l
i
o
n

D
K
K

Perpetuity Growth Rate%
NPV@WACC of 7.74%
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
6.75% 7.25% 7.74% 8.25% 8.75%
N
P
V

i
n

M
i
l
l
i
o
n

D
K
K

WACC
NPV@Perpetuity Growth of 1.87%
Sensitivity Analysis
Refer Appendix I for detailed cash flow statements
Valuation Methodologies Benefits & Limitations




Benefits
Current developments and expectations regarding growth in emerging markets and Russia can be easily
incorporated into the cash flows
Takes into account the underlying characteristics of the firm while projecting cash flows
Easier to perform Sensitivity analysis for changes in various parameters
Limitations
Carlsberg has significant amount of intangible assets which are not taken into account for describing future
cash flows and thus can lead to undervaluation

DCF Valuation


Benefits
In brewery industry, most of the companies operate with similar operational ratios and processes. Thus, while
valuing Carlsberg it gives us a fairly reliable estimate of valuation of company
Limitations
Primarily takes into account the current performance of Carlsberg which is not a true reflection of the growth
potential that it has in emerging markets
More likely reflects the current market perceptions instead of the fundamentals governing the business
Trading Comparables


Benefits
Control premium paid for the acquisitions is already taken into account giving a fair idea of the market expectations
Limitations
Geographic overlap of SABMiller and Carlsberg cannot be taken into account which leads to inaccurate estimation of
control premium due to operational synergies
Multiples used might not be relevant under current market conditions; We have tried to avoid this by taking
transactions from last 3 years only
Transaction Comparables
Alternatives for SABMiller


The target should be such that it serves the following objectives:
Give the combined entity a more balanced exposure to volume and value markets
Strengthens SABMiller so as to ward off possibilities of being taken over by AB-InBev
China has top position by volume (24%) & 3
rd
position (8%) by value
Registered global share of 3.4% in 2010, making it the 2
nd
largest brewery in China
It is expected to have wide Chinese footprint through its successful local acquisitions
Strengthen SABMillers position as 90% of future growth (5 years) expected from China
SABMiller gains Heinekens 37.5% equity stake in United Breweries in India
Combined entity to become the leader in Eastern & Western Europe and MENA regions
Access to Brazil & Mexico through Heinekens equity stake in FEMSA
Combined entity to surpass AB-InBevs volumes in the coming years, with current market
shares (2010) within 0.6% reach of AB-InBev
Would give access to Australian market with tremendous growth in the premium segment
Opportunity to explore wine business of Fosters
Increase stake in Castel, China Resources and Modelo
Acquire Anadolu to strengthen Eastern Europe, particularly Turkey
Molson Coors represents an opportunity to increase stake in NA and UK
Acquire smaaler players like Schinariol or Petrolopolis to gain foothold in Latin America
Others
Source: Annual Reports, Datamonitor, Euromintor
Synergies Valuation (1/2)


Post acquisition value if combined entity (V
SC
) = $ 109,529
Standalone value of SABMiller (V
S
) = $ 70,881
Standalone value of Carlsberg (V
C
) = $ 28,758
Synergies = V
SC
- (V
S
+ V
C
) = $ 10,089


Synergies
Cost of Sales will decrease further due to economies
of scale and will be less by 1% in 5-6 years and will
remain same till terminal
Elimination of overlapping functions will lead to synergies
in marketing and distribution to reduce costs up to 0.5%
in next few years, after which it is expected to stabilize
Cost Synergy Assumptions
Synergies Valuation (2/2)


Carlsbergs dominant positions in both Eastern &
Western Europe would provide growth synergies up
to 0.3% higher than normal growth which will
converge to 0.05% at terminal
Cross selling opportunity effects will percolate to net
revenues to the tune of 0.5% in next few years,
stabilizing to about 0.05% for long term
Revenue Synergy Assumptions
Heads Synergies (US $ million)
Cross Selling 7987
Efficiency in Cost of Sales 11375
Premium & Market Dominance 13802
Efficency in Sales & Distribution 14484
Incresed WACC (negative) -4395
Total 10089
Deal Structure (1/2)


Excess Debt Capacities
Debt Capacity = EBIT/(r interest coverage ratio),
where r = interest rate for SABMiller
Total Excess Debt Capacities = US $ 5, 145 m
Entity Debt Capacity Existing Net Debt Excess Debt Capacity
SABMiller 11,958 7, 091 4, 867
Carlsberg 6, 491 6, 231 278
(all values in US $ million)
Hence, SABMiller can fund the transaction with debt worth US $ 5,145 (utilizing debt capacities of the target as well)
without increase in interest rates ( ~ 5.6 %). SABMillers excellent credit worthiness and diversification in cash flows
achieved from the combined entity would enable SABMiller to take on additional debt.

Carlsberg Debt Capacity = EBIT/(r interest coverage ratio),
where r = interest rate for Carlsberg
Debt Capacity = 7385.2/(.056*3.86)
= $ 6491 million
Impact on Credit Rating :
Considering Current credit rating of SABMiller Baa1 by
Moodys It will remain same if it takes an additional debt of $12
billion while for more than that credit rating will decrease which
will effect its future borrowing power which in turn block its
future acquisition opportunities
Rationale for Deal Structure :
There is no excess cash available with both companies-SABMiller and Carlsberg
Rest of options of Acquisition are Cash payment by taking all debt or share exchange or combination of both
Since credit rating will be affected if SABMiller will go for more than $12 billion debt it can not go for total debt financing
of deal
If it will go for complete share exchange then there will be more dilution in shareholding and EPS for existing
shareholders
Only better option is to go for combination of share exchange and Debt financing up to $12 billion

Source: Global Alcoholic beverage rating methodology by Moodys
Deal Structure (2/2)


Range of Carlsberg Share price for acquisition will be 671 DKK to 935 DKK
Accounting for synergies brought in by both companies deal can be finalized at 820 DKK=$ 155.94
Out of which $ 78.66 is paid through debt taken by SABMiller while rest $77.28 is paid by share exchange of 2.17
No of new shares need to be issued = 330.9 million
82.75% of final ownership will remain with SABMiller while 17.25% will go to Carlsberg
This type of Deal structure will prevent high dilution of EPS for existing SABMiller shareholders and also will save in tax
for the transaction

Appendix I DCF Valuation


Appendix II Assumptions for Projecting Cash Flows


Appendix III Sensitivity Matrix


Appendix IV DCF Valuation of SABMiller


Appendix V Creditworthiness impact on SABMiller using
Moody's Metrics
Overall rating will be unaffected by loan of $12 Billion taken by SabMiller for acquisition of Carlsberg. It will
be same as of now Baa1. However more than that loan will downgrade it's credit rating because Financial ratings
will be too down that it will not be offset by enhancement in ratings of Scale and profitability
Excess Cash with Carlsberg or SABMiller
Carlsberg does not have excess cash (as of 31
st
Dec. 2010)
Excess Cash = Total Cash - Max(0; (Current Liabilities - Current Assets + Total Cash))
= 2,735 Max (0; (27,047 15,523 + 2,735)) DKK million
= 2,735 Max (0; (27,047 15,523 + 2,735)) DKK million
= (11,524) DKK million
Similarly SABMiller = (1,769 $ million)
Both SABMiller and Carlsberg do not have excess cash available with them