Price €110.35^ AB InBev BUY - Jefferies ABI-SAB's footprint, sizing the value uplift from revenue...

USD Prev. 2015A Prev. 2016E Prev. 2017E Prev. 2018E

Rev. (MM) -- 43,604.0 -- 42,778.0 -- 57,509.0 -- 59,936.0

Organic RevGrowth

-- 6.2% -- 3.6% -- 5.9% -- 5.9%

EBIT (MM)Adjusted

-- 13,768.0 -- 13,141.0 -- 19,666.0 -- 21,410.0

EBIT Margin -- 31.6% -- 30.7% -- 34.2% -- 35.7%

EV/EBITDA -- -- -- -- -- 15.6x -- 14.2x

FY P/E 23.9x 35.4x 22.3x 20.1x

FCF Yield -- -- -- -- -- 4.70% -- 5.30%

EPS Adjusted

FY Dec -- 5.20 -- 3.50 -- 5.57 -- 6.18

Price Performance

SEP-15 JAN-16 MAY-16 SEP-16

130

120

110

100

90

^Prior trading day's closing price unlessotherwise noted.

COMPANY NOTE

Initiating Coverage

Global | Consumer | Beverages 13 September 2016

AB InBev (ABI BB)Living the Dream; Initiating at Buy

EQU

ITY R

ESEARC

H G

LOB

AL

BUYPrice target €130.00

Price €110.35^

Financial SummaryNet Debt (MM): $42,185.0

Market Data52 Week Range: €124.20 - €92.73Total Entprs. Value (MM): €218,510.2Market Cap. (MM): €180,974.0Insider Ownership: 52.7%Shares Out. (MM): 1,640.0Float (MM): 722.8Avg. Daily Vol.: 1,355,712

Edward Mundy, ACA *Equity Analyst

+44 (0)20 7029 8476 [email protected] Hathorn, CFA *

Equity Associate+44 (0) 20 7029 8722 [email protected]

* Jefferies International Limited

Key Takeaway

We initiate coverage with a BUY. Our 12 month PT EUR 130 is predicated onthe realisation of USD 3bn cost saves on the SABMiller deal vs guidance 1.4bn.In our long range outlook we think a share price of EUR 180-200 is justified(by 2022) through delivery on the 2020 Dream Incentive Plan. Key steps are 1)over-delivery on SABMiller cost saves 2) driving sustainable med-term revenuegrowth +6% 3) further value accretive M&A (over 10% accretive to EPS)

PT EUR 130 - our 12 month PT is predicated on the realisation of USD 3bn cost synergiesvs company guidance USD 1.4bn.

Dream 2020 justifies a value per share EUR 180-200: We estimate that delivery onthe USD 100bn revenue target per the 2020 Dream Incentive Plan would justify a valueper share EUR 180-200 by 2022. We see the company (1) over-delivering on SABMillercost cutting (USD 3bn vs guidance USD 1.4bn), (2) driving sustainable med-term revenuegrowth (+6%) and (3) carrying out further value accretive M&A (over 10% accretive)

(1) Over-delivery of SABMiller cost cutting: given our more aggressive cost cuttingtargets (USD 3bn vs guidance USD 1.4bn), we are 6% ahead of F17 consensus and 9% aheadof F18. Key analysis within this report includes a deep dive on ABI/SAB cost bases and in-depth analysis of previous transactions.

(2) Driving sustainable med-term revenue growth +6%: top line revenue growthis an increasingly important metric for the group. Key analysis includes a bottom-up reviewof ABI-SAB's footprint, sizing the value uplift from revenue synergies (worth EUR 3-6 pershare), and increasing low alcohol mix (worth an incremental EUR 3-19 per share).

(3) Further value accretive M&A: Although the pace of M&A will naturally slow, weestimate EPS accretion of over 10% from the associate/minority buy-ins. This is reminiscentof the BUD transaction which offered a c.10% earnings kicker through the Modelo deal.

Potential entry point: We acknowledge some 'detail risk' on the SABMiller transaction.However, we believe the long term arguments are sufficiently robust that ABI warrants a Buy.

Valuation/RisksABI trades on cal 2018 p/e 20.1x in line with global staples 19.8x. Our DCF driven PT of EUR130 implies ABI trades at a 15% premium to global staples, a re-rating we believe is warrantedgiven the company's durable competitive advantages, earnings potential & balance sheetoptionality. Key risks: 1) SABMiller transaction, 2) FX & Macro, 3) regulation and tax

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 87 to 92 of this report.

ABISAB pro-forma FY16 EBIT

Source: Company data

N

America

31%

Mexico

9%

LatAm

40%

Africa

8%

Asia 8% Europe

4%

Guidance & Other considerations

At least US$1.4bn cost synergies and

US$0.5bn in-flight savings.

Avg cost of debt on the transaction 3.2%.

We see upside risk to the US$1.4bn cost

savings target and model US$3bn

synergies.

Prospective 12 mths. PER

Source: Factset consensus

15.3x

25.5x

5x

10x

15x

20x

25x

30x

2011 2012 2013 2014 2015 2016

Beverages

Stoxx600

ABI

Anheuser-Busch Inbev (ABI) is the world’s largest brewer, with c.30% global beer market

share post its announced £79bn acquisition of SABMiller, and one of the top five consumer

products companies. AB Inbev global beer brands include Budweiser, Corona, Stella Artois

and a portfolio of over 200 beer brands. The business is geographically diversified with a

balanced exposure to developed and developing markets with 150,000 employees in 26

countries worldwide generating pro-forma $55bn revenue and $21bn EBITDA in 2016F.

ABI is a publically traded company (Euronext: ABI) based in Leuven Belgium with American

Depositary Receipts on the New York Stock Exchange (NYSE: BUD).

Heineken 16Q3 sales, 26 Oct 2016

ABI 16Q3 report, 28 Oct 2016

Carlsberg 16Q3 sales, 9 Nov 2016

Expected SABMiller timeline:

AB Inbev AGM, 28 Sep 2016

UK court to sanction last day dealing in SAB

shares, 5 Oct 2016

Last time for revising elections for cash or

Partial Share Alternative, 7 Oct 2016

Merger combination completes, 10 Oct 2016

New listing of combined group, 11 Oct 2016

Catalysts

Target Investment Thesis

We estimate US$3bn synergies vs currently

announced ‘at least’ US$1.4bn.

FY17-19E organic revenue growth +6% pa,

EBIT +11% pa and EPS +12% pa.

DCF-driven price target: €130.

Company trades 2018 P/E 20x, in line with

consumer ave. More attractive on FCF yield

at 5.3% vs average 4.9%.

Our €130 PT implies P/E 23x and FCF yield

4.6%. Premium justified given visibility on

earnings and durable competitive

advantages.

Upside Scenario

Fx and macro.

Cost savings: every US$200m incremental

cost savings is worth 1% to earnings.

Revenues: successful roll-out of premium

brand strategy and zero/low alcohol beer

is worth €6-25 per share.

Achievement of US$100bn revenue target

by 2022 implies a value per share €180-

200.

Downside Scenario

Fx, macro, commodity and regulatory risk.

Non-completion of SABMiller transaction

would drive share price to €90 – we see

low risk of deal being blocked at

shareholder vote 28 September.

Failure to successfully integrate SABMiller

could result in lower-than-expected

synergy delivery. Every US$200m of

synergies is worth 1% to earnings.

Tax rate – we assume tax rate 23%-24%,

no guidance given.

Long Term Analysis

Scenarios

CY2018 PE ratio

Source: Jefferies estimates

20.1x

17.7x 18.4x

12.1x

16.1x

21.8x

17.8x16.9x

25.6x

19.8x

10x

15x

20x

25x

30x

Earnings Growth vs P/E


ABI

CARL.B

HEIA

BVIC

CCH

CPR

DGERI

RCO

10x

15x

20x

25x

30x

0% 5% 10% 15%

CY

17

PE

EPS CAGR (CY16-18E)

Recommendation / Price Target

T icke r R e com m e n d at io n P T

A B I -B B B u y E U R 1 3 0

C A R L.B -D C H o l d D K K 6 0 0

H E I A -N A H o l d E U R 8 0

B V I C -LN H o l d G B p 6 5 0

C C H -LN B u y G B p 2 0 0 0

C P R - I M H o l d E U R 1 0

D G E -LN B u y G B p 2 5 0 0

R I -F P B u y E U R 1 1 5

R C O -F P H o l d E U R 8 0

Company Description

THE LO

NG

VIE

W

Peer Group

AB Inbev

Buy: €130 Price Target

ABI BB

Initiating Coverage

13 September 2016

page 2 of 92 , Equity Analyst, +44 (0)20 7029 8476, [email protected] Mundy, ACA

Please see important disclosure information on pages 87 - 92 of this report.

Contents EXECUTIVE SUMMARY ................................................................................................................ 4 2020 DREAM INCENTIVE PLAN..................................................................................................... 5 (1) OVER-DELIVERY ON SABMILLER COST CUTTING .................................................................... 10

What has been reported? ........................................................................................................... 13 Drill-down into each cost bucket ................................................................................................ 16 Disposals – quantifying the impact on the synergy opportunity ................................................ 20 ABI synergies – two case studies ................................................................................................ 22

Case study – ABI’s cost cutting in N.America ......................................................................... 22 Case study – ABI’s cost cutting in Mexico .............................................................................. 24

Sense check on margins .............................................................................................................. 25 What about benefits to the legacy ABI business from the transaction....................................... 26 Integration team ......................................................................................................................... 27

(2) DRIVING SUSTAINABLE MED-TERM REVENUE GROWTH (+6%) .............................................. 28 ABI-SAB’s strong footprint – source of long term competitive advantage ................................. 28

Splitting ABI-SAB’s business into four buckets ....................................................................... 30 Building the organic growth profile ............................................................................................ 34

1. Improved geographies ....................................................................................................... 35 2. Incentive structure – emphasis on top line......................................................................... 37

Sizing the value uplift from revenue synergies ........................................................................... 38 Sizing the value uplift from low alcohol ...................................................................................... 41

(3) FURTHER VALUE ACCRETIVE M&A ........................................................................................ 47 Capital allocation objectives ....................................................................................................... 47 M&A has created significant value ............................................................................................. 47 M&A after SABMiller .................................................................................................................. 49

Castel Group .......................................................................................................................... 50 Anadolu Efes .......................................................................................................................... 53

DEAL APPRAISAL ....................................................................................................................... 55 What multiple is ABI paying for SABMiller? ................................................................................ 55 Key transaction metrics .............................................................................................................. 60

CULTURE – THE SECRET SAUCE .................................................................................................. 62 VALUATION & RISKS – EUR 130 PT ............................................................................................. 65 APPENDIX 1 - ABI-SAB TRANSACTION – DETAILS ........................................................................ 68 APPENDIX 2 – MODEL................................................................................................................ 70

ABI: Financial Model ................................................................................................................... 72 Discounted Cash Flow (DCF) ....................................................................................................... 85

ABI BB

Initiating Coverage

13 September 2016



Executive Summary We initiate with a BUY with a 12 month price target of EUR 130. Our 12 month TP is

predicated on the realisation of USD 3bn cost saves on the SABMiller deal vs guidance USD

1.4bn. However, this report is more than just about cost cutting. We also consider the long

range outlook for the business. We believe the company can deliver on its Dream Incentive

Plan of USD 100bn revenues by 2022. If this internal stretch target is achieved, this would

value the shares at EUR 180-200 on our estimates through:

(1) Over-delivery on SABMiller cost cutting (USD 3.0bn vs guidance 1.4bn),

(2) Driving sustainable medium-term revenue growth (+6%)

(3) Further value accretive M&A (worth over 10% earnings).

Key analysis within this report:

Dream 2020 – justifying a EUR 180-200 share price if ABISAB reaches USD 100bn

revenues by 2022.

(1) Over delivery on SABMiller cost cutting – USD 3bn all-in synergy potential -

materially higher than current USD 1.4bn management guidance

Includes deep dive into ABI and SAB’s respective cost bases

Includes in-depth analysis of previous transactions – why the SAB transaction

looks more like Modelo (21.4% of target sales) than BUD (11.8%)

Phasing of synergy realisation – we estimate 50%, 75%, 90%, 100%.

Given our more aggressive cost savings targets we are 6% ahead of F17E

consensus and 9% ahead in FY18E.

(2) Driving sustainable med-term revenue growth (+6%) - top line revenue

growth is increasingly important metric for the group

Strong footprint – attractive market positions in large, scalable profit pools

Building the organic growth profile – an important focus, with 6% organic top

line potential

Sizing the value uplift from revenue synergies – worth an incremental EUR 3-6

per share (not in our numbers or the 2020 Dream Incentive Plan bridge)

Sizing the value uplift from increasing low alcohol mix – worth an incremental

EUR 3-19 per share (not in our numbers or the Dream Incentive Plan bridge)

(3) Further value accretive M&A (worth over 10% to earnings)

EPS accretion from minority buy-ins worth over 10% to earnings

SABMiller deal appraisal – weighing up the dilution from disposals (and capital

gains tax on MillerCoors) on the exit multiple for the SABMiller transaction;

earnings and returns analysis

Culture – the secret sauce

A mixture of Reckitt financial discipline with benefits of long term family

ownership, but where hard-nosed financial logic comes before sentiment

Potential entry point

We would acknowledge some “detail risk” on the SABMiller transaction which could offer

an entry point. However, we believe the longer-term arguments are sufficiently robust

that even as we get further clarity around loose ends such as capital gains tax payable on

MillerCoors and the combined group’s effective tax rate, ABI still warrants a Buy rating.

Valuation and risks

Company trades on a cal 2018 p/e 20.1x vs consumer staples average 19.8x. Given ABI’s

durable competitive advantages, visible returns profile, strong FCF generation we believe

the stock deserves to trade at a premium to the sector. Our EUR 130 price target implies

the stock trades on a 23x 2018 p/e, or a 15% premium to the staples average.

P. 5 to 9 for EUR 180-200 per

share analysis

P.10 to 27 for cost cutting

analysis. We are 6% ahead of

F17E consensus EPS and 9%

ahead of F18E

P. 28 to 46 for revenue analysis

P. 47 to 54 for M&A analysis

P. 62 to 64

ABI BB

Initiating Coverage

13 September 2016



2020 Dream Incentive Plan Under the 2020 Dream Incentive Plan, ABI will pay out a bonus pool of USD 350m to 65 of its

top managers if revenues reach an absolute net revenue target of USD 100bn between 2020-

2022. We would stress that the performance plan is an internal stretch target, not official

company guidance. The scheme excludes the brewer’s executive management board, the top

16 executives in the company. We believe that if the internal stretch target is achieved, this

would value the shares at EUR 180-200 on our estimates.

Further details on the incentive programme

A key way to influence behaviour at ABI is through compensation targets. For full details

of the plan refer to the SEC filing for the 2020 Dream Incentive Plan. What is interesting to

us includes:

Plan is administered by the Board of Directors – we believe this is a direct

reference to the close involvement of the Reference Shareholders in setting very

stretched group targets, with an emphasis on top line growth

Importance of aligning the next generation of leaders – under the

terms of the post-BUD incentive programme, 18m shares were awarded to the

top 40 executives. The exclusion of the existing top 16 executives ensures

alignment with a new generation of leaders who will be able to share in the

upside from the ABI investment case.

Performance test - will be determined as to whether ABI revenues equal at

least USD 100bn.

Observation date – each 31 December 2020, 2021 or 2022

Reconciling the USD 100bn

Per the WSJ 1 April 2016, “to reach its revenue goal AB InBev will have to either make

another big acquisition or crank up growth considerably”. We do not see the need for a

significant external acquisition; rather, the target can be delivered through med-term

organic revenue growth of 6%, tidying up of the existing associate positions with some

form of mean reversion on the currencies.

Bridge to USD 100bn

Starting point: we start with ABI 2017 revenues USD 44.5bn and SABMiller

USD 13bn.

Organic growth: based on c6% organic growth (or 5% reported after FX

devaluation), this adds a further USD 14.6bn to 2022E.

M&A: we calculate that the buyout of associate positions in Castel and Anadolu

(note neither will be proportionately consolidated under existing ABI reporting),

will provide a boost to revenues of a further USD 14.3bn.

FX tailwind: assuming some form of mean reversion (+10%) on emerging

market currencies – note, many of ABI and SAB currencies are trading at c.50%

of their 10-year peaks vs USD – could add a further USD 14.8bn.

For a detailed breakdown of the bridge, refer to Table 1.

USD 100bn revenue target is a

stretch but does not necessarily

require material acquisitions

outside of Castel and Anadolu

Mapping out the journey to

USD 100bn revenues

ABI BB

Initiating Coverage

13 September 2016



https://www.sec.gov/Archives/edgar/data/1140467/000119312515407864/d40141dex46.htm

Chart 1: Dream 2020: USD 100bn revenue bridge by 2022


EUR 100bn revenues – means a share price EUR 180 to 200

In Table 2, we create a synthetic income statement to 2022 which would point to EBITDA

of USD 46.4bn by 2022 and EPS USD 11.98. On our estimates, using both target EV to

EBITDA and P/E metrics, this would imply a share price of EUR 180 assuming sector

average multiples and approximately EUR 200 applying a 10% premium to consumer

staples, which we believe would be warranted.

Chart 2: Implied valuation in 2022E - €180 to €200 per share


ABI BB

Initiating Coverage

13 September 2016



Table 1: Bridge to USD 100bn revenues

(USD m) 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E

ABI revenues (2015) 43,603 42,778 44,533 46,419 48,457 50,823 53,377 56,136

SAB subsidiary

revenues (ex-disposals)

11,909 12,271 12,976 13,517 14,085 14,682 15,310 15,969

Combined pro-

forma revenues

55,512 55,049 57,509 59,936 62,542 65,505 68,687 72,106

Organic growth 5.9% 5.9% 6.0% 6.4% 6.5% 6.6%

FX -1.5% -1.7% -1.7% -1.7% -1.6% -1.6%

Reported growth -0.8% 4.5% 4.2% 4.3% 4.7% 4.9% 5.0%

TARGET 100,000

GAP 27,894

Tidying up of

associate positions

Africa associate

EBIT 1,815

Less Delta - 40% stake -182

Less Distell - 27% stake -343

TOTAL - Castel (25%

stake)

1,291 1,381 1,478 1,581 1,692 1,810 1,937 2,073

Reported Growth 7% 7% 7% 7% 7% 7% 7%

100% Castel 5,163 5,525 5,912 6,325 6,768 7,242 7,749 8,291

Anadolu Efes stake

(24%)

1,017 1,068 1,121 1,177 1,236 1,298 1,363 1,431

Reported Growth 5% 5% 5% 5% 5% 5% 5%

100pc Anadolu Efes 4,238 4,449 4,672 4,905 5,151 5,408 5,679 5,963

Sub-total of associate

tidy-up

9,401 9,974 10,583 11,231 11,919 12,650 13,427 14,254

ABI - subtotal - core

+ associate buyout

64,913 65,023 68,092 71,167 74,461 78,156 82,114 86,360

Reported Growth 0.2% 4.7% 4.5% 4.6% 5.0% 5.1% 5.2%

TARGET 100,000

GAP 13,640

FX sensitivities

Assume no FX deval 5,311

Assume mean

strengthening +10%

9,469

Sub-total 101,140

Source: Jefferies estimates, Company data

ABI BB

Initiating Coverage

13 September 2016



Deriving a synthetic income statement to 2022

In the below table, we show a synthetic income statement for ABI-SAB based on the

achievement of USD 100bn revenues as laid out above. To derive a synthetic EBITDA and

EPS and valuation of between 180 and 200 per share, see workings below:

1. Group EBIT and EBITDA. For illustrative purposes, we apply the group EBIT and

EBITDA margin to the widened group. Given the lack of integration of SAB’s

associate positions, we believe that this is not unreasonable whilst recognising

the different business mix (some soft drinks exposure) for both Castel and

Anadolu.

2. Financial items – assume incremental interest at 4.0% coupon on c.USD 37b

capital outlay. Assume tax rate in line with ABI-SAB group (23-24%). Associate

income and minority charge adjusted for buyout of Castel and Anadolu Efes.

Table 2: Synthetic income statement – ABISAB to 2022 on delivery of USD 100bn revenues

(USDm unless otherwise

given)

2017E 2018E 2019E 2020E 2021E 2022E

Existing ABI-SAB estimates 57,509 59,936 62,542 65,505 68,687 72,106

Acquisitions 10,583 11,231 11,919 12,650 13,427 14,254

Revenues 68,092 71,167 74,461 78,156 82,114 86,360

FX - tailwind (cumulative) 2.9% 5.7% 8.6% 11.4% 14.3% 17.1%

70,034 75,227 80,833 87,073 93,825 101,140

Existing group EBITDA

margin

41.4% 43.0% 44.1% 45.0% 45.4% 45.9%

Implied pro-forma

EBITDA

28,967 32,362 35,641 39,177 42,638 46,448

Depreciation and Amort 5,018 5,489 6,007 6,599 7,257 7,988

%age of sales 7.2% 7.3% 7.4% 7.6% 7.7% 7.9%

Implied pro-forma EBIT 23,949 26,872 29,634 32,577 35,381 38,461

EBIT margin 34.2% 35.7% 36.7% 37.4% 37.7% 38.0%

Existing Interest (3,556) (3,530) (3,334) (3,148) (2,945) (2,726)

Incremental Interest (4% on

USD 37bn acquisitions)

(1,480) (1,406) (1,336) (1,269) (1,205) (1,145)

Pro-forma interest (5,036) (4,936) (4,670) (4,416) (4,151) (3,872)

Pro-forma PBT 18,913 21,936 24,964 28,161 31,230 34,589

Tax (4,350) (5,045) (5,742) (6,759) (7,495) (8,301)

Tax rate 23.0% 23.0% 23.0% 24.0% 24.0% 24.0%

Pro-forma PAT 14,563 16,891 19,222 21,402 23,735 26,288

Associates 427 458 491 527 564 605

Adjusted for Castel and

Anadolu

(400) (428) (458) (490) (524) (561)

Associates (adjusted) 27 30 33 37 40 44

Minorities (1,882) (2,066) (2,270) (2,497) (2,748) (3,027)

Adjust for Castel minority 150 165 181 199 219 241

Minorities (adjusted) (1,732) (1,901) (2,089) (2,298) (2,529) (2,786)

Net income 12,859 15,019 17,166 19,141 21,246 23,546

NOSH (m) 1,966 1,966 1,966 1,966 1,966 1,966

EPS (USD) 6.54 7.64 8.73 9.74 10.81 11.98


If the company could achieve

revenues of USD 100bn by

2022, along with successful

margin expansion, we estimate

a share price of USD 180-200

ABI BB

Initiating Coverage

13 September 2016



Target valuation – 10% premium to staples

To derive a target p/e and EV to EBITDA multiple for 2022, we take the average large cap

consumer staples multiples per Factset and roll them out to 2022E. This provides a target

p/e of 16.6x and EV to EBITDA 10.6x by 2022. Assuming that ABI could trade at a 10%

premium to the staples average would imply 2022 multiples of 18.3x p/e and 11.7x

EBITDA.

Table 3: Implied consumer staples multiples – sector average and 10% premium for ABI

2017E 2018E 2019E 2020E 2021E 2022E

EV to EBITDA 14.0 13.3 12.6 11.9 11.2 10.6

P/E 22.0 20.8 19.7 18.6 17.6 16.6

10% premium

EV to EBITDA 15.4 14.6 13.8 13.1 12.4 11.7

P/E 24.2 22.9 21.6 20.5 19.3 18.3

Source: Jefferies estimates, Factset (31 Aug-16)

Would imply a share price of USD 180-200, our Upside Scenario

On achievement of the USD 100bn revenue target, we believe the company could

generate EBITDA of USD 46.5bn and EPS of USD 11.98. Applying the implied consumer

staples average EBITDA multiple of 10.6x and 16.6x would generated a share price of EUR

180. Applying a 10% premium of ABI relative to the staples average, would imply a share

price closer to USD 200.

Table 4: Implied valuation in 2022E

(USDm unless otherwise given) Sector

average

10%

premium

2022 EBITDA 46,448 46,448

Implied enterprise value - 10.6x multiple 493,706 543,076

Implied debt (107,589) (107,589)

Implied equity value 386,116 435,487

NOSH 1,966 1,966

Value per share – USD 196 222

Value per share - EUR 179 201

EPS valuation

2022 EPS 11.98 11.98

Implied p/e - 16.6x 16.6 18.3

Value per share USD 199 219

Value per share - EUR 181 199


ABI BB

Initiating Coverage

13 September 2016



(1) Over-delivery on SABMiller cost

cutting We estimate an all-in cost synergy target of USD 3.0bn vs the current target USD 1.4bn. Key

analysis includes a deep-dive into ABI and SABMiller’s respective cost bases and an in-depth

analysis of the Modelo and Anheuser transactions.

We see a strong integration team with significant experience. Whilst we believe that there has

been some sharing of data between the ABI and SABMiller in a clean room, there are some

functions within the combined group where we think it has not been possible to advance

integration planning given regulatory restrictions. Therefore, whilst we expect a strong start to

synergy capture, the timing of an upgrade to cost savings could be delayed until there is

better visibility on SABMiller’s full financials.

The SABMiller transaction provides strong earnings visibility…

Given the mixed outlook for global growth, we believe that top-line recovery across

consumer staples, to pre-crisis levels, is unlikely to occur in the near term. However, ABI’s

strong track record on integration and synergy realisation provides confidence on delivery

on the SABMiller transaction. This provides an earnings bridge to navigate through the

current period of macro volatility.

...with earnings momentum from over-delivery

ABI has typically guided conservatively on cost savings, having under promised and over-

delivered historically. We believe that there is upside risk to the current USD 1.4bn cost

cutting synergy target, which offers scope for earnings momentum. We estimate that an

all-in synergy figure of over USD 3bn is achievable. We estimate that every USD 200m of

over-deliver is worth approximately 1% to earnings.

Timing on potential synergy upgrade – at the earliest March 2017…

We would highlight that the cost cutting guidance on the Anheuser transaction was

upgraded with F09 results in March 2009, following deal completion 18 November 2008

– i.e. four months into the transaction. Based on this precedent, this would suggest that

the very earliest that an announcement upgrading the synergy target would be F16

results on 2 March 2017.

….but different circumstances, therefore upgrade to cost savings may take

time to become visible

Whilst there are some similarities between the ABI and SABMiller transactions, we believe

that timing on synergy upgrades could come through later. This reflects:

Time to study ABI – in 2005, InBev agreed to Anheuser becoming its US

distributor for import beers (e.g., Stella Artois, Becks); this allowed InBev to

'get inside' Anheuser to do initial due diligence, and we believe this was an

important stepping stone towards the bid in 2008 that InBev made for

Anheuser. Unlike the BUD deal, ABI has not had the luxury of three years of

studying SABMiller’s largest markets.

Clean room – the USD 1.4bn cost savings target was initially set without

significant access to SABMiller’s books. With the benefits of a clean room, we

believe the ABI deal team, led by David Almeida, has managed to further

develop its plans for integrating the combined business following completion.

However, there are some functions within the combined group that have not

been made available to the ABI integration team.

Size of the “inflight cost cutting programmes”. Anheuser’s Blue Ocean

cost savings represented approximately USD 1.1bn of the initial USD 1.5bn

target. Here, the residual business capability programme has c.USD 0.5bn to run

We estimate that every USD

200m of synergies is worth

c.1% to earnings

ABI BB

Initiating Coverage

13 September 2016



relative to the initial cost cutting target of at least USD 1.4bn (combined total

USD 1.9bn).

Stronger balance sheet – the AB transaction pushed net debt to EBITDA well

over 5x at the peak of the financial crisis, which resulted in management highly

incentivised to delever. The SABMiller transaction pushes ABI net debt to EBITDA

to c.4x given both the smaller relative size of the SABMiller transaction and also

the issue of equity. Therefore, we expect a more balanced approach to growth

and value creation, as opposed to just deleveraging.

Cost savings of USD 1.4bn – looks conservative

Brewers have tended to generate cost savings of 6-8% as a percentage of sales. ABI’s

range has been 12-21%. After adjusting for disposals of the European assets to Asahi and

private equity (to be completed), the cost savings target of USD 1.4bn would imply

generating 10.4% of target subsidiary revenues, which is below previous deals 12-21%.

Table 5: Cost savings as a percentage of target revenue – recent beer deals

Year Currency Acquirer Target Target

Revenue

Initial cost

synergies

announced

Achieved cost

synergies

/updated

target

Synergies % of

target revenue

2004 EUR Interbrew Ambev 2,400 280 11.7%

2005 USD SABMiller Bavaria 1,900 120 6.3%

2008 USD InBev Anheuser Busch 18,988 1,500 2,250 11.8%

2009 EUR Heineken FEMSA 2,465 150 198 8.0%

2011 USD SABMIller Fosters 2,369 150 162 6.8%

2013 USD ABI Modelo 4,669 600 1,000 21.4%

Average 11.0%

2015 USD ABI SABMiller 16,534 1,400 8.5%

2015 USD ABI SAB post

disposal

13,359 1,400 10.4%


All in target of USD 3bn

We estimate an all-in cost cutting opportunity at SABMiller of USD 3bn. This incorporates

an upgrade to the synergy target from USD 1.4bn to USD 2.5bn, with an additional USD

0.5bn from the legacy, “in-flight” cost savings programme announced by SABMiller on 9

October as part of the bid defence. This is incorporated into our modelling.

Synergy realisation could come through quickly

The company has not guided on phasing of the cost synergies associated with the

SABMiller transaction. Based on the phasing for the Anheuser-Busch (2008) and Grupo

Modelo transactions (2012), we would expect phasing of 50%, 75%, 90%, 100% over the

four years (2017-2020) after completion of the transaction.

Table 6: Phasing of synergies – AB, Modelo and SAB

Initial

target

Yr 1 Yr 2 Yr 3 Yr 4

Anheuser-Busch (2008-11) 1,500 250 1,360 1,980 2,250

% of updated target 11% 60% 88% 100%

Modelo (2012-15) 600 460 730 940 1,000

% of updated target 46% 73% 94% 100%

SABMiller 1,400 1,500 2,250 2,700 3,000

50% 75% 90% 100%

Source: Jefferies estimates, company data. Note the first full year for the BUD deal (2009) is shown as year 2 in above table

We have USD 3bn of cost

savings in our model

P.22 to 26 of this report

considers the USD 3bn target in

light of the previous BUD and

Modelo transaction

ABI BB

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13 September 2016



Reconciliation of a USD 3bn all-in synergy target A summary guide to our USD 3bn cost savings estimate

Initial target USD 1.4bn – management have guided to a figure of “at least”

USD 1.4bn for SABMiller’s subsidiary business by year four following completion of

the transaction. This is incremental to SABMiller’s existing cost savings programmes.

Based on the cost savings description, we think that approximately half of the cost

savings relate to COGS items and half to OPEX items

Opex benchmarking USD 1.4bn – working on the assumption that half of the

initial target is attributable to COGS and half to OPEX, a USD 700m reduction in

SABMiller opex pushes opex as a %age of sales from 36.5% to 32.2%.

Benchmarking to ABI’s opex as a percentage of sales drives an incremental USD

700m. Benchmarking to those regions where ABI’s opex is lowest (Latam 22.6%,

N.America 22.6%, Latam South 23.8%) drives an incremental opportunity of USD

1.5bn. We then reduce this total by 0.1bn given that retrenchments will not be

possible in South Africa for five years as part of the regulatory approval process.

Inflight USD 0.5 – the residual in-flight SABMiller savings is a separate bucket

from the initial USD 1.4bn target. Per SABMiller’s description, 70% of the additional

savings arise from procurement and 30% from manufacturing and distribution. We

assume that these are COGS not OPEX items. Therefore, we believe this is NOT

double counting with either the initial USD 1.4bn target or our identified USD 1.4bn

from opex benchmarking.

Less: USD 0.3bn – our estimate of the “lost” synergies given Europe subsidiary

disposal. Note the sale of China and the US were treated as associates and JVs

therefore did not form part of the initial USD 1.4bn cost savings programme.

Chart 3: ABI synergy - upside to USD 1.4bn target

1,400

1,400

500 (300)

3,000

Initial Target Opex Inflight Europe disposal Upgraded Target


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13 September 2016



What has been reported? ABI has guided for incremental pre-tax cost synergies of at least USD 1.4bn by year four

following completion of the transaction. We would highlight that on the deal

announcement conference call 11 November 2015, CEO Brito indicated that the

opportunity is “at least” USD 1.4bn. This equates to c8.5% of F15A subsidiary revenues.

Note that this is incremental to the USD 1.05bn identified by SABMiller on 9 October 2015

as part of the company’s bid defence, (with USD 547m delivered by F16).

Where are the existing USD 1.4bn cost savings going to fall?

The company has indicated that cost synergies will be split as follows:

Chart 4: USD 1.4bn synergy programme - split by bucket

Source: Jefferies estimates.

The company has not specifically split out where in the income statement each bucket

will fall, however based on the descriptions of each bucket, we believe that the

procurement & engineering and brewery & distribution buckets would fall within COGS,

whilst best practice and corporate overheads would fall within OPEX. There is some

chance that some of the procurement savings fall outside of COGS, however equally there

is some chance that best practices fall within COGS. See a further description in the table

below.

Table 7: Breakdown of USD 1.4bn synergies

Cost bucket Value (USDm) Proportion of

synergy target

Description Jefferies comment

procurement &

engineering

350 25% Combined sourcing of raw

materials and packaging.

Some re-engineering of

associated processes

We assume that these cost savings would largely

fall within the COGS line. Impact on SABMiller

subsidiary gross margin = 210bps.

brewery & distribution

efficiencies

350 25% Alignment of brewery,

bottling, and shipping

productivity initiatives

Optimising other brewery

processes across the

combined geographies.

We assume that this would largely fall within the

COGS line. Impact on SABMiller subsidiary gross

margin 210bps.

best practice sharing 280 20% Cost management

efficiencies and productivity

enhancements across the

group's administrative

operations.

We assume that this would largely fall within

operating expenses. Impact on SABMiller EBIT

margins = 170bps.

corporate and overlapping

regional headquarters

420 30% Corporate overheads include

two offices in the UK and

hub offices across the group

We assume that this would largely fall within

operating expenses. Impact on SABMiller EBIT

margins = 250bps

TOTAL 1400 100%

Source: Company Data, Jefferies research. Note, on a company conference call 30 August 2016 the company increased the weighting to procurement and engineering (from 20-25%) and decreased the weighting to corporate and overlapping regional headquarters (from 35-30%)

Initial target “at least” USD

1.4bn

We assume 50% of the savings

fall in COGS and 50% in OPEX

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13 September 2016



But, isn’t SABMiller already quite efficient?

It is true that SABMiller’s starting EBIT margin is relatively high compared to other brewing

peers Carlsberg and Heineken. We show below the EBIT margin for SABMiller’s subsidiary

business, on which the USD 1.4bn is based on.

Chart 5: SABMiller EBIT margins - vs peer group (2015)

Source: Company Data, Jefferies research (SABMiller 31 March FY16 year end)

Why is SABMiller more profitable than Heineken/Carlsberg?

The key drivers of higher profitability vs peers include:

a. Geographic mix – SABMiller has strong exposure to geographies with strong market

shares (94% of lager volumes from markets with #1 or #2 positions). Whereas Heineken

and Carlsberg have high exposures to Europe, where profitability is lower and also pulled

down by a low margin wholesaling business.

b. “Chasing pennies down the hall” – at the core of SABMiller’s DNA is a

management team that grew up running emerging markets businesses in Africa and

“chasing pennies down the hall”; therefore, operationally SABMiller is a lean, well-oiled

machine, albeit one that has a decentralised structure.

c. Decentralised business model – following a rapid period of industry consolidation

during the 1990s and 2000s, SABMiller traditionally was run as a highly decentralised

business, with fragmented IT and back-office systems. Whilst we would not disagree that

a decentralised business argues against a huge head office cost, in reality the decentralised

nature placed significant local autonomy over business functions – i.e. each operating

company had infrastructure including finance, HR, IT, legal etc. This structure suited

SABMiller, with local operators empowered to pursue the growth opportunity and make

quick decisions at a local level.

However, centralisation programme only just getting started at SABMiller…

With its interim results in November 2009, SABMiller announced the launch of “a major

business capability programme to simplify processes, reduce costs and allow local

management teams to enhance focus on their markets”. By F14, the company has achieved

cumulated savings of USD 496m per annum.

…and bid defence tried to capture some of the saving

As part of SABMiller’s bid defence 9 October, SABMiller upgraded its existing cost-cutting

programme from USD 0.5bn to at least USD 1.05bn with incremental savings of at least

USD 550m, extending the programme from F18 to F20. However, we would see this

journey towards centralisation as just getting started in earnest. Further, it is possible that

whilst the investment in systems infrastructure at SABMiller has been made (and the costs

associated with this investment are embedded in SABMiller’s i/s) the benefits have yet to

be realised.

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13 September 2016



ABI and the ZBB culture

ABI operates a very different model to SABMiller and many other CPG companies. The

company is fixated on measuring, benchmarking, “opening gaps” and performance

management and applies very strict financial discipline on costs. An integral part of the

success of ZBB is the ownership mindset at ABI - senior management at ABI are heavily

incentivised to deliver. We believe that for ZBB to be effective it needs to be embraced by

top executives and, critically, a firm’s variable compensation structure needs to reflect it.

Key tenets of ABI’s approach to costs include:

a. Transparency:

The ability to identify what the company is spending. Data transparency enables ABI to

dig into a line item and challenge it regularly, both on price (cost per unit) and

consumption (how many units are consumed). This is particularly relevant when focusing

on the non-working money side (i.e., what the consumer does not see). SABMiller’s IT

systems have been standardised through the implementation of global information

systems as part of the original BCP programme in F10-14; however, we believe ABI has

best-in-class data transparency.

b. Specialists in local/global levels

ABI has specialists for certain line items (e.g., lease and rental) to drive benchmarking

across the business. This then enables the line-item specialists to challenge other regions,

and everything is ‘up for grabs’. Certain functions, such as procurement, have been

centralised, and although a process of rigorous benchmarking between regions has been

established at SABMiller, there is still a reasonable degree of autonomy at the regional

level.

c. Working money vs non-working money

With strong data transparency and specialists at local and global levels on each expense

line item, ABI is able to categorise expenses between working money and non-working

money. Working money is defined as having a “direct impact on sales volumes or

revenues”, with non-working money incurred “independently from sales volumes or

revenues and without immediate benefit to customers and consumers”

In the analysis below, we show ABI’s N.American income statement on acquisition (2008)

and after the realisation of synergies (2011) and the conversion of non-working money

into working money.

p. 22 to 23 considers the

Anheuser cost cutting case-

study and the conversion of

non-working money into

working money

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13 September 2016



Drill-down into each cost bucket As shown in chart 3 above, we believe that a USD 3bn cost cutting programme is feasible.

This is comprised of:

USD 1.4bn existing cost savings target

USD 1.4bn from benchmarking of opex

USD 0.5 in-flight SABMiller savings

Less: USD 0.3bn associated with the Europe disposals

USD 1.4bn – from benchmarking opex

Analysis of SABMiller’s income statement – points to upside

The level of disclosure at SABMiller, historically, had been poor relative to ABI. ABI

provides detailed disclosure by division through to normalised operating profit; SABMiller

provides margins by division which includes both the subsidiary and associate/JV

business, however at a consolidated level disclosure is based on the subsidiary business

only.

ABI’s debt filing on 22 December 2015 offered better disclosure of SABMiller’s key

expense line items, for the subsidiary business, on the same basis as ABI. This included

splitting operating costs by function rather than nature. Given that the company has not

published disclosures for F16, on the same basis as ABI’s income statement, our analysis is

restricted to 2014 / F15.

ABI’s debt filing in December

2015 offered insights into

SABMiller’s P&L with the costs

split by function rather than

nature

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13 September 2016



Table 8: Income statement drill-down – ABI vs SAB

USDm ABI (FY14) SAB (FY15)

USDm USDm

Volume (m hl) 459 175

Revenue 47,063 16,534

Cost of sales (18,756) (6,051)

Gross profit 28,307 10,483

Gross profit margin 60.1% 63.4%

Distribution expenses (4,558) (1,623)

Sales & marketing expenses (7,036) (2,495)

Admin expenses (2,791) (2,104)

Other operating income/expense 1,386 193

Total Opex (12,999) (6,029)

Noramlised EBIT 15,308 4,454

Normalised EBIT margin 32.5% 26.9%

Exceptional items (197) (75)

Reported EBIT 15,111 4,379

Reported EBIT margin 32.1% 26.5%

Key metrics as % sales

COGS 39.9% 36.6%

Gross profit 60.1% 63.4%

Distribution expenses 9.7% 9.8%

Sales & marketing 15.0% 15.1%

Admin expenses 5.9% 12.7%

Opex 27.6% 36.5%

Normalised EBIT 32.5% 26.9%

Source: Jefferies, company data

Note:

1. Gross profit: SABMiller’s subsidiary has a GM 63.4% vs ABI 60.1%. ABI expects 25%

of the USD 1.4bn cost savings to come from procurement and engineering and another

25% from brewery and distribution efficiencies. With these costs largely falling within

COGS, it is worth c4.2% to SAB gross margins (1% to pro-forma group gross margins).

2. Opex as %age: operating expenses as a %age of sales for SABMiller is 36.5% vs ABI’s

27.6%. Note that Distribution (c10%) and S&M expenses (c15%) as a percentage of sales

are broadly equal for ABI and SAB. Admin expenses, however, at SABMiller are

significantly higher at 12.7% vs ABI's 5.9%. Although SABMiller has undergone a process

of centralisation since 2009, the company’s historical decentralised operating model has

led to high levels of admin expenses with each operating unit having a high degree of

autonomy (with costs to match this) and a network of regional hub offices.

OPEX benchmarking

We show three scenarios in Table 9 below

Scenario 1 – if we apply half of the initial USD 1.4bn cost savings programme (i.e. 25%

for best practice sharing, 25% for corporate and overlapping regional headquarters) then

SABMiller OPEX as a percentage of sales falls from 36.5% to 32.2%

Scenario 2 – if we benchmark SABMiller OPEX as a %age of sales to ABI’s group OPEX as

a %age of sales, then OPEX falls to 27.6% of sales. This is worth in aggregate USD 1.4bn

or an incremental USD 700m to the initial target.

Scenario 3 – if we benchmark SABMiller OPEX as a %age of sales to ABI’s best in class

regions (Latam and USA at 23%), then this is worth in aggregate USD 2.2bn or an

ABI BB

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incremental USD 1.5bn. This is reduced by USD 0.1bn given that retrenchments will not

be possible in South Africa for five years as part of the regulatory approval process.

Details on Scenario 3: benchmarking to Latam North levels of opex

An analysis of ABI’s opex as a %age of sales shows some wide differences between

regions.

Chart 6: ABI - opex as a % of sales (2014)

27.6%

22.6%

31.5%

22.6%23.8%

38.6% 39.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Group N.America Mexico Latam North Latam South Europe Asia Pac

Source: Company Data, Jefferies research

ABI’s group opex as a percentage of sales is comprised of a number of markets that are

arguably not an appropriate benchmark for SABMiller’s subsidiary business given

disposals of Europe and the non-inclusion of the disposals of associate businesses in the

US and China.

More appropriate to benchmark vs Latam North and South

If one was to benchmark ABI’s African and Latam businesses – businesses that arguably

have more in common with Latam North and Latam South, ie very strong market shares –

this would imply that opex as a %age of sales could fall to as low as 23% vs the ABI group

average 27.6%. This could imply in total a 1350bps reduction in opex as a percentage of

sales (total USD 2.2bn) or an incremental USD 1.5bn over and above the existing USD

1.4bn cost cutting target, per our allocation.

Table 9: Opex benchmarking analysis

USD m ABI (F14) SAB (F15) Scenario 1 Scenario 2 Scenario 3

Revenue 47,063 16,534 16,534 16,534 16,534

Cost of sales (18,756) (6,051) (5,351) (5,351) (5,351)

Gross profit 28,307 10,483 11,183 11,183 11,183

Total opex (12,999) (6,029) (5,329) (4,567) (3,803)

Normalised EBIT 15,308 4,454 5,854 6,616 7,380

Opex as a %age of sales 27.6% 36.5% 32.2% 27.6% 23.0%

Opex reduction 423bps 884bps 1346bps

Cost savings at COGS line 700 700 700

Cost savings at OPEX line 700 1,462 2,226

Total cost savings 1,400 2,162 2,926

Incremental cost saving vs USD 1.4bn 762 1,526


Adjustment for Africa – USD 0.1bn

As part of the conditions set out by the South African Competition Tribunal in its approval

of the Transaction, we would highlight:

The company is prohibited from undertaking involuntary retrenchments related

to the transaction in South Africa.

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The company has committed to maintaining its total permanent employment

levels in the beer and cider business in South Africa as at the date of Completion,

for a period of five years.

The company may seek to implement changes to the reporting lines and roles

of, and work undertaken by, certain employees in South Africa following

Completion.

Given some of the protections to the cost structure in South Africa, we estimate that the

company will not be able to cut as deeply as initially expected in South Africa.

Therefore, we adjust our total incremental cost savings estimate from Opex

benchmarking by USD 0.1bn from USD 1.5bn to USD 1.4bn. This is broadly in lie

with the reduction in corporate HQ / overlapping regional HQs bucket as per the

presentation 30 August, 2016 (35% to 30% or worth USD 70m)

USD 0.5bn – in-flight cost savings On 9 October, as part of SABMiller’s bid defence, SABMiller upgraded its internal cost-

cutting programme from USD 0.5bn to at least USD 1.05bn. With F16 results the

company delivered US 547m which would imply an incremental cost cutting opportunity

of USD 503m beyond F16 attributable to SAB’s in-flight cost savings opportunity.

We would assume that SABMiller is on-track to harvest these savings and that they are

included as part of the total cost savings number. We address below the two key

questions relating to this bucket of cost savings.

1. To what extent is the initial cost cutting target of USD 1.4bn incremental to

the in-flight savings programme?

ABI has indicated that its USD 1.4bn cost synergy target is incremental to the SABMiller in-

flight cost-savings target. On the transaction conference call November 2015, ABI

indicated that it “estimate(s) incremental recurring run rate pre-tax cost synergies of at

least USD 1.4bn pa, in addition to the USD 1.05bn cost savings identified by SABMiller

in their presentation on 9 October 2015”. Therefore, we do not believe that there is a risk

of double-counting relative to the initial USD 1.4bn cost savings bucket.

2. What is the risk of double counting the cost cutting programme with our

flexed opex cost savings number of USD 1.4bn?

SABMiller has indicated that c70% of the additional savings from the USD 0.5bn in flight

programme will arise from procurement and 30% from manufacturing and distribution.

The key drivers of the higher cost savings include increased spend under central

management and further efficiencies in manufacturing. This would suggest that whilst

this cost cutting programme does not exclusively relate to cost of goods, we believe that a

large proportion does not relate to operating expenses, an ABI core competency and the

source of our upside. Therefore, we believe that the USD 1.4bn identified in our flexed

opex benchmarking and the incremental inflight savings (USD 0.5bn) are distinct

opportunities.

Adjusting for protections in

South Africa, we see an

incremental Opex benefit of

USD 1.4bn not USD 1.5bn

In-flight savings of USD 500m

are a separate bucket from the

initial 1.4bn savings target

In-flight savings of USD 500m

fall within the COGS bucket, we

believe, therefore separate

from our USD 1.4bn OPEX

opportunity

ABI BB

Initiating Coverage

13 September 2016



Disposals – quantifying the impact on the synergy opportunity The cost cutting analysis above is based on F15 SABMiller subsidiary financials and

therefore does not take into consideration the disposal programme of SABMiller

subsidiaries that ABI has carried out / continues to carry out as part of the transaction. We

believe that the dilution to the synergy opportunity is worth approximately USD 300m,

based on the inability to fully tap savings on the European division.

1. Disposals of USA and China – not part of the original synergy programme

On 11 November 2015, the company announced the disposal of SABMiller’s 58%

economic interest in the MillerCoors JV for USD 12bn. On 2 March 2016, ABI entered into

an agreement to sell SABMiller’s 49% interest in China Resources Snow Breweries to

China Resources Beer (Holdings) Co. Ltd for USD 1.6bn. Note that the USD 1.4bn cost

cutting target, and the analysis above on the USD 3bn cost savings opportunity, has been

carried out based on SABMiller’s subsidiary business, not the associate/JV parts of the

business.

2. Disposals of European subsidiaries – need to account for this

Given regulatory considerations, ABI will dispose of the European subsidiary business, ex-

the Canary Islands, as part of the acquisition of SABMiller. There are two tranches in the

disposals process:

On 10 February 2016, ABI received a binding offer from Asahi to acquire the

Peroni, Grolsch and Meantime brands (and associated businesses in Italy, the

Netherlands, the UK and internationally), subject to successful closing of the

acquisition of SABMiller by ABI. The total consideration is EUR 2.55bn or USD

2.9bn.

ABI, per press release 24 May 2016, has also proposed the sale of SABMiller’s

businesses in Central and Eastern Europe (Hungary, Romania, Czech Republic,

Slovakia and Poland). This encompasses the remainder of SAB’s subsidiary

business, with the exception of the Canary Islands. The Central and Eastern

European businesses can be sold to one or two purchasers and can be

completed after closing of AB InBev’s proposed combination with SABMiller.

Quantifying the “lost” synergy opportunity

The synergy calculations in our above analysis (total USD 3.3bn) are based on the

inclusion of the European subsidiary.

SABMiller’s European subsidiary: not strategic for ABI

We believe that the ability to drive very high margins in Europe is limited given the market

structure, absence of scale and tough retail landscape. We would highlight that ABI sold

its CE European business in 2009 to CVC, including Bosnia-Herzegovina, Bulgaria, Croatia,

Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia therefore the region

is of less strategic importance to ABI compared to Africa or the Americas.

Europe: has been at the forefront of SABMiller cost cutting

Europe has borne the brunt of the cost cutting at SABMiller over the past few years and

arguably it is furthest down the path of centralisation. Therefore, we would argue that an

appropriate way to benchmark these markets is relative to ABI’s existing European

business, which are lean.

ABI reported an F15 EBIT margin in Europe of 18.6% vs SABMiller’s 15.4%. However, it is

necessary to sanitise both numbers:

ABI margin is brought down by the consolidation of CE Europe (Russia and

Ukraine). In 2012, the former CE European business (post the sale of operations

We estimate the sale of the

European subsidiaries leads to

“lost” synergy opportunity of

USD 300m potential cost

savings

ABI BB

Initiating Coverage

13 September 2016



to Starbev) generated a margin of 4% with revenues 1.7bn and EBIT 62m. Since

then, revenues have been negatively impacted by weak currencies, adverse

macro/political/regulatory factors and we estimate that revenues have fallen to

USD 1bn, with margins protected through cost cutting such as brewery closures

(four closed between 2012-14).

SABMiller’s Russian and Ukrainian business is captured within the 24% stake in

Anadolu Efes. Therefore, ABI’s Western European business carries a margin

closer to 24%, we believe.

Therefore, whilst there is a margin gap on paper of 320bps, this gap could extend to close

to 550bps we believe.

Table 10: Europe margin gap analysis – ABI vs SABMiller

USD m ABI W.Eur

- estimated

ABI E.Eur

- estimated

ABI Europe

- total

SABMiller

- subsidiary

SABMiller

- associate

SABMiller

- total

Revenue 3,009 1,003 4,012 2,815 1,017 3,832

EBIT 711 37 748 511 78 589

EBIT margin 23.6% 3.7% 18.6% 18.2% 7.7% 15.4%

Margin gap 5.5%

Synergy opportunity 154

Source: Company Data, Jefferies estimates

Assume USD 300m synergies that are not captured

Table 10 above would indicate that approximately USD 150m of synergies are not

accessible given the sale of the European subsidiary, based on benchmarking SABMiller’s

subsidiary business to ABI. In reality, we believe that ABI would cut deeper and therefore

we believe that the total amount that ABI is not able to capture, given the disposal of the

European subsidiary, is closer to 10% of sales or USD 300m.

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13 September 2016



ABI synergies – two case studies We analyse below in detail two case studies – the US and Mexico – to ascertain which is the

better benchmark for SABMiller when considering cost savings as a proportion of sales. In

summary, we believe that Mexico (cost savings 21.4% of sales) is a better proxy than

N.America (13.1% of sales) given the absence of negative operating leverage. In our analysis

of non-working money and working money for Anheuser, we believe that the opportunity in

the US was likely closer to 20% of sales, rather than 13%, however negative operating

leverage held back stronger margin expansion. This provides a sense-check against our USD

3bn cost cutting programme which represents 18% of subsidiary sales.

Case study – ABI’s cost cutting in N.America Between 2008-2011, ABI drove considerable cost savings out of the US business of

Anheuser Busch. Cost savings as a percentage of revenues was 13%. EBIT per hl in the

division increased by 70%. Note, that 90% of the N.America division is the US, therefore

the overall divisional movement largely reflects the changes to the US business (Canada is

10%).

Table 11: ABI N.America cost structure (2008-11)

USD m 2008 2011 Change %age movement

Volumes (m hl) 140.6 124.9 -11.1%

Revenues 15,571 15,304 -1.7%

COGS (7,948) (6,726) -15.4%

Gross profit 7,623 8,578 12.5%

Gross margin 49.0% 56.1% 7.1%

OPEX (3,854) (2,868) -25.6%

EBIT 3,769 5,710 51.5%

EBIT margin 24.2% 37.3% 13.1%

COGS as %age of sales -51.0% -43.9% 7.1%

OPEX as %age of sales -24.8% -18.7% 6.0%

TOTAL costs -75.8% -62.7% 13.1%

Revenue per hl 110.8 122.5 10.6%

COGS per hl 56.5 53.9 -4.8%

OPEX per hl 27.4 23.0 -16.3%

EBIT per hl 26.8 45.7 70.5%

Source: Company data, Jefferies research

Key observations

1. Growth in profitability despite the negative operating leverage

Volumes declined 11% during the period whereas EBIT grew by over 50%. Given the high

fixed cost base of beer (typically one percent movement in volumes can equal a 3%

movement in EBIT), it is remarkable that ABI still managed to achieve such a high increase

in profits. We would acknowledge some help from strong pricing, with revenue per hl

growth of 10.6% between 2008-11.

2. Identifying the addressable cost base

At SABMiller, while local management is known for being very cost conscious, we believe

that there is scope for a more aggressive approach to prioritising working vs non-working

money, a core ABI competency.

We assume in the analysis below of ABI’s N.America division total cost base (75.8% of

sales) on acquisition, approximately a 40% of COGS is fixed and 60% remainder variable.

This is in line with Carlsberg’s disclosure below splitting out COGS between raw

materials, personnel expenses and other COGS.

Here we compare our USD 3bn

cost savings target (or 18% of

SABMiller sales) to the Mexican

transaction (21% of sales) and

N.America (13%)

US example

Our conclusion is that in the

absence of negative operating

leverage, the cost savings

opportunity in the US would

have amounted to c.18% of

sales with the shift from

working to non-working money

Mexican example

Given the absence of a three

tier system in Mexico, ABI

cranked up gross margins by

1300bps which was the key

contributor to the 2000bps

margin expansion in Mexico.

Latam and Africa have more in

common with Mexico in terms

of route to market given the

absence of a three tier system

EBIT per hl increased 70% but

EBIT increased by ‘only’ 50%

The total AB N.America cost

base was 76% of sales. We

estimate an addressable cost

base of 55%, once fixed costs in

COGS have been stripped out

ABI BB

Initiating Coverage

13 September 2016



Table 12: Carlsberg split of COGS

DKK m F14 F15

Raw materials 18,100 17,558

Personnel expenses included in COGS 1,412 1,469

Other – fixed 13,213 14,402

TOTAL 32,725 33,429

COGS breakdown

Raw materials 55.3% 52.5%

Personnel expenses included in COGS 4.3% 4.4%

Other – fixed 40.4% 43.1%

TOTAL 100.0% 100.0%


As ABI did not close any breweries in N.America post the acquisition of Anheuser Busch,

we believe that it is fair to assume that approximately 60% of COGS is addressable and

40% fixed. Therefore, the addressable cost base in ABI’s N.America business is

approximately 55% of sales (i.e. total cost base 75.8% less 40% of COGS, which is 51%).

3. Shift in non-working money to working money

We estimate that when InBev acquired AB in 2008 approximately 60% of the addressable

cost base was in non-working money and 40% in working money. By moving this to 40%

non-working money and 60% working money, this resulted in significant savings worth

as much as 18.5% of sales. This is a larger number than the 13.1% of sales that was

generated in N.America.

Sense check: As a sense check to this maths, N.America EBIT increased by 50% from USD

3.7bn to 5.7bn between 2008-11. Had N.America EBIT increased in-line with EBIT per hl

(+70%), then EBIT would have increased from by USD 2.6bn or 17% of sales. This is

broadly in line with the 18.5% as per the calculation above.

Note that this analysis includes both Canada (c.10% of N.America division profits) and

stronger savings were likely held back by negative operating leverage – volumes declined

11% between 2008-2011.

Table 13: ABI N.America- - shift from non-working to working money worth

18.5% of sales

Total cost base 75.8%

Assume 40% COGS are fixed 20.4%

Addressable cost base 55.4%

Pre-synergies 2008

60% non-working 33.2%

40% working 22.2%

TOTAL 55.4%

Post synergies: 2011

40% non-working 14.8%

60% working 22.2%

TOTAL 36.9%

Difference 18.5%


Therefore, we would conclude that the cost cutting opportunity in N.America was greater

than the 13% that was ultimately achieved, given the impact from negative operating

leverage. It is promising that volumes in the SABMiller subsidiary business – in particular

Latam and Africa – showed strong momentum into F16 with Latam lager volumes +6%

and Africa subsidiary +8%.

We estimate that the cost

savings opportunity in the US

would have been around 18%

of sales, in the absence of

negative operating leverage

ABI BB

Initiating Coverage

13 September 2016



Case study – ABI’s cost cutting in Mexico With the acquisition of Grupo Modelo in 2013, the company committed to cost savings of

USD 1bn. As at the end of 2015, it has delivered most of these benefits (USD 940m). We

would argue that SABMiller’s cost cutting programme (our estimate of USD 3bn or 18%

of sales) has more in common with the Mexican cost cutting programme (over 20% of

sales) given (a) a more similar route to market (which offers higher COGS savings) vs the

US, and (b) volume growth in the underlying markets vs negative operating leverage in

the US.

Mexican example: significant margin expansion from squeezing COGS

The table below shows that, of the 2,000bp increase in EBIT margins in Mexico

between 2012-15, squeezing of COGS accounts for 1,300bp (gross margin

improvement from 61% to 74%). The key buckets include combined purchasing

opportunities, sharing of best practices, efficiencies in overheads and system

platform costs.

Table 14: Mexico – income statement analysis (2012-15)

Source: Jefferies estimates, company data

Table 15: N.America– income statement analysis (2008-11)


High proportion of own-distribution in Mexico

Gross margin expansion in Mexico has been impressive, in particular around costs of sales

and overheads. ABI has a high proportion of owned distribution in Mexico (c85%) and the

proportion of owned distribution in SABMiller’s Latam business (c.70%) is also high.

Cost savings not eroded away by negative operating leverage

Organic beer volumes grew +1.6% in 2014 and +7.3% in 2015. Within this context, cost

savings were not eroded away by negative operating leverage.

3-tier system

Unlike the US, there is no 3-tier system in Mexico. This partly explains why the cost

savings opportunity in Mexico at COGS was significantly greater than that in the US,

where there are greater restrictions on recalibrating gross margins.

Mexico 2012 2013 2014 2015

Volume (m hl) 20,038 22,366 38,800 41,629

Revenue 2,616 2,769 4,619 3,951

Cost of sales (1,014) (869) (1,374) (1,034)

Gross profit 1,603 1,900 3,245 2,917

Gross profit margin 61.3% 68.6% 70.3% 73.8%

Distribution expenses (270) (232) (453) (403)

Sales & marketing expenses (515) (484) (808) (720)

Admin expenses (338) (234) (430) (347)

Other operating income/expense 102 104 237 222

EBIT 582 1,054 1,791 1,669

EBIT margin 22.2% 38.1% 38.8% 42.2%

Cost as % sales

Cost of sales -39% -31% -30% -26%

Distribution expenses -10% -8% -10% -10%

Sales & marketing expenses -20% -17% -17% -18%

Admin expenses -13% -8% -9% -9%

Other operating income/expense 4% 4% 5% 6%

Per hl metrics

Revenue 131 124 119 95

Cost of sales (51) (39) (35) (25)

Gross profit 80 85 84 70



Admin expenses (17) (10) (11) (8)

Other operating income/expense 5 5 6 5

EBIT 29 47 46 40

N.America 2008 2009 2010 2011

Volume (m hl) 140,558 134,644 129,476 124,899

Revenue 15,571 15,486 15,296 15,304

Cost of sales (7,948) (7,525) (6,946) (6,726)

Gross profit 7,623 7,961 8,350 8,578

Gross profit margin 49.0% 51.4% 54.6% 56.1%

Distribution expenses (1,128) (792) (774) (807)

Sales & marketing expenses (1,794) (1,694) (1,565) (1,640)

Admin expenses (869) (636) (526) (475)

Other operating income/expense (62) 54 61 54

EBIT 3,770 4,893 5,546 5,710

EBIT margin 24.2% 31.6% 36.3% 37.3%

Cost as % sales

Cost of sales -51% -49% -45% -44%

Distribution expenses -7% -5% -5% -5%

Sales & marketing expenses -12% -11% -10% -11%

Admin expenses -6% -4% -3% -3%

Other operating income/expense 0% 0% 0% 0%

Per hl metrics

Revenue 111 115 118 123

Cost of sales (57) (56) (54) (54)

Gross profit 54 59 64 69



Admin expenses (6) (5) (4) (4)

Other operating income/expense (0) 0 0 0

EBIT 27 36 43 46

Cost savings of 2000bps were

achieved in Mexico. Mexico is

similar to SAB’s Latam and

Africa businesses in that have

volume growth and both have

strong routes to market

ABI BB

Initiating Coverage

13 September 2016



Sense check on margins We show below a reasonableness check around our estimated USD 3bn of cost savings

and what it implies for SABMiller’s divisions and total. We assume that the cost savings

from the eradication of overheads from central/hub head offices are apportioned to each

division. Overall, it would imply an EBIT margin of 51% for the SABMiller business.

Table 15: Illustrative SABMiller margin progression – sense check

Latam F15R F16E F17E F18E F19E F20E

NPR 5,211 5,480 5,864 6,111 6,367 6,635

EBIT 1,873 1,970 2,108 2,196 2,289 2,385

EBIT margin 35.9% 35.9% 35.9% 35.9% 35.9% 35.9%

Cost savings 0 0 750 1,125 1,350 1,500

Pro-forma EBIT 1,873 1,970 2,858 3,321 3,639 3,885

Pro-forma EBIT margin 35.9% 35.9% 48.7% 54.4% 57.1% 58.6%

Asia

NPR 1,732 1,718 1,760 1,751 1,742 1,733

EBIT 434 430 441 439 437 434

EBIT margin 25.1% 25.1% 25.1% 25.1% 25.1% 25.1%

Cost savings 0 0 150 225 270 300

Pro-forma EBIT 434 430 591 664 707 734


Africa

NPR 4,966 5,162 5,562 5,874 6,203 6,550

EBIT 1,312 1,364 1,469 1,552 1,639 1,731

EBIT margin 26.4% 26.4% 26.4% 26.4% 26.4% 26.4%

Cost savings 0 0 600 900 1,080 1,200

Pro-forma EBIT 1,312 1,364 2,069 2,452 2,719 2,931


Total

NPR 11,909 12,359 13,186 13,735 14,312 14,918

EBIT 3,619 3,764 4,018 4,187 4,364 4,550

EBIT margin 30.4% 30.5% 30.5% 30.5% 30.5% 30.5%

Cost savings 0 0 1,500 2,250 2,700 3,000

Pro-forma EBIT 3,619 3,764 5,518 6,437 7,064 7,550



Note that for the purposes of the above reasonableness check, we only show the impact

of the cost-cutting programme falling through to the bottom line, and do not take into

consideration either positive effects (such as benefits from positive operating leverage or

premiumisation), or negative effects (e.g., down-trading, affordability strategy, negative

transactional risk, risk of new entrants into existing markets).

Latam – margin of 58.6%

Without a full breakdown of SABMiller’s cost base in Latam by line item, it is hard to

benchmark it against ABI’s Latam North division (2015: 44.2% margin) and Mexican

business (2015: 42.3% margin). There is some commonality between the two businesses

in terms of customer base (low proportion of organised retail / high proportion of mom-

and-pop stores) and route to market (both have a higher proportion of direct sales

distribution), however we believe that SABMiller has potential for higher margins given:

Higher market shares in SABMiller’s markets - Colombia (99%) and Peru (92%)

vs Brazil (68%) and Mexico (58%). Given greater competition in Brazil, we

believe that it is not unreasonable for monopoly markets to

command EBIT margins 1,000bp above that of Brazil – Ambev’s

Brazil Beer division has an EBIT margin of 46.6% in 2015.

We believe that monopoly

markets could command

margins 1000bps above the

Brazil Beer division margin

ABI BB

Initiating Coverage

13 September 2016



Low penetration of premium in SABMiller’s markets relative to Brazil and

Mexico.

Asia: squeeze Australia cost base and benefits from premium brand portfolio

SABMiller’s Asian subsidiary largely consists of Australia. ABI is paying a termination fee of

USD 223m to Lion Nathan for the transfer of the premium Corona, Stella and Hoegaarden

brands - we estimate that this is worth USD 75m to EBIT and carries a high margin – it

could be worth 200bps alone to Asian division margins.

Africa: strong market positions. Similar to Brazil 30 years ago

SABMiller has attractive market positions in Africa. Although we see a strong focus on

growth, Africa represents, in some respects, a similar opportunity to Brazil from the late

1980s – i.e. a significant volume growth proposition, an underdeveloped premium beer

segment and opportunities over the medium term to drive margins as scale benefits

become more visible.

What about benefits to the legacy ABI business from the transaction Broadly similar strategic rationale nine months post the initial

announcement…

On the company conference call 30 August 2016, management highlighted a broadly

similar strategic rationale for the transaction as per their presentation 11 November 2015,

announcing the boards of ABI and SABMiller have reached agreement on the terms of a

recommendation acquisition.

…however benefits from further product and service innovations

On the 30 August 2016 conference call, management added to the strategic rationale

slide the following bullet point - “Benefits from the capabilities of both companies to deliver

further product and service innovations to our consumers and customers around the world”.

We believe this is a reference to SABMiller’s telesales centre in Bogota as well as

SABMiller’s affordability skill-set.

What is Colombia’s telesales business?

In 2006, post the Bavaria transaction, the Colombian route-to-market was inefficient and

expensive. The company moved from a relatively informal van-sales/pre-sales model to a

telesales model, with the rollout of Automated Order Processing (through a smartphone

app) to be fully rolled out by 2018. On physical distribution, the company moved from

use of third parties to a direct sales distribution model (Colombia now 69% DSD, Peru

73%).

Advantages of the telesales model…

The telesales model offers increased contact for the salesman at the point of sale, both in

terms of time spent selling beer and frequency of call. E.g. for top accounts, total contact

per week has risen from 2x to 3x, with time spent calling each outlet from 7 minutes to 13

minutes. Further, the administrative task of order taking has reduced from 80% to 40% of

time spent, with development (e.g. trading the vendor up) from 20% to 60%.

…and could this learning be applied to ABI’s Latam business

For ABI, a company that feeds off measurement and benchmarking, this opens up

significant new opportunities both in terms of top line and costs in the existing Latam

business, which is over three times the size of ABI’s Latam business (c.USD 6.5bn for ABI’s

Latam business in F16 vs USD 2bn for SABMiller’s). We would acknowledge that the

Colombia telesales model cannot be replicated overnight, however we believe that ABI

would look to learn and copy from it. This provides further comfort that the upside

margin opportunity from the combined group is likely to be material.

We see potential learnings from

SABMiller which could add to

ABI’s underlying margin. This is

not in our existing modelling

ABI’s existing Latam business is

far larger than SAB’s.

Therefore, the impact of

potential learnings could be

material

ABI BB

Initiating Coverage

13 September 2016



Integration team On 4 August 2016, ABI disclosed details of the leadership team of the new entity. In

addition to the CEO and CFO and functional heads, we highlight some of the key

individuals on the executive committee who will be responsible for delivering the cost

savings on the transaction. Almeida, Tadeu and Moreira have significant experience of

integration and have worked across ABI’s most profitable business units. Craps’

experience of working in mature markets and driving revenue per hl through

premiumisation and innovation will suit Asia Pac South given key market Australia.

We believe that ABI’s reference Brazilian shareholders are closely involved in this process.

1. Chief Integration Officer: David Almeida (age 40).

Joined Inbev in 1998 (aged 22) from Salomon Brothers IBD in NYC. Appointed Chief

Integration Officer in March 2016. David was VP US sales (2011-16) and Inbev head of

M&A where he led the combination with AB and the US integration.

2. Zone President Africa: Ricardo Tadeu (age 40)

Joined Ambev (age 19) in 1995. Zone President Mexico (2012 to present), Business Unit

President Brazil (2008-12) and Business Unit President HILA (2005-08). Six Sigma Black

Belt. Yohesh Maharaj, currently Sales and Distribution Director for SAB’s South African

division will be Business Unit President South Africa, reporting to Tadeu.

3. Zone President Latin America COPEC: Ricardo Moreira (age 45)

Joined Ambev (age 24) in 1995. Marketing VP Mexico and led the commercial integration

of Grupo Modelo. 21 years of working in Latam. COPEC will include SABMiller markets

Colombia, Peru, Ecuador.

4. Zone President Asia Pacific South: Jan Craps (Belgian citizen, age 39)

President of Canada operation November 2014. Joined Inbev in Belgium in 2002 from

McKinsey. Worked across sales and marketing in France, Belgium and Canada.

ABI BB

Initiating Coverage

13 September 2016



(2) Driving sustainable med-term

revenue growth (+6%) Top line revenue growth is an increasingly important metric for the group. To achieve +6%

sustainable organic revenue growth to 2022, we consider the following:

ABI-SAB’s strong footprint – attractive market positions in large, scalable profit

pools. This provides long term competitive advantages

Building the organic growth profile – an important focus, with 6% organic top line

potential

Sizing the value uplift from revenue synergies – worth an incremental EUR 3-6 per

share (not in our numbers or the 2020 Dream Incentive Plan bridge)

Sizing the value uplift from increasing low alcohol mix – worth an incremental EUR

3-19 per share (not in our numbers or the 2020 Dream Incentive Plan bridge)

ABI-SAB’s strong footprint – source of long term competitive advantage ABI will be the largest CPG company in the world by EBITDA and nearly four times the size of

its nearest competitor. Scale matters in beer – it drives operating leverage and provides

resources to invest in commercial opportunities that can be spread over a larger business

base. However scale, per se, is not the most important characteristic in global beer, in our

view. What matters more is possessing strong market positions in key markets with

geographical diversification.

In the section below, we split ABISAB’s markets into four buckets. The analysis shows that that

35% of ABISAB’s profits are generated is in relatively protected mature profit pools, which are

an important source of hard currency cash flow. The majority of ABISAB’s business (57%)

consists of markets where leading market shares provide pricing power, strong route to

market provides high barriers to entry, significant medium term growth opportunities exist

given favourable demographics and growing middle classes and a low level of premium beer

offers opportunities to drive revenue per hl. Other growth markets and Europe each account

for c.4% of profits.

This distinction is important as it points to the durable competitive advantages of ABISAB’s

business given the attractive geographic portfolio. Whilst we recognise that ABI has limited

experience of operating in Africa, ABI can plug-and-play its success from markets such as

Brazil and Mexico into SABMiller, most of which consists of Latam/Africa where the company

has both growth and attractive market shares.

New entity - EBITDA of over USD 21bn

We estimate that the combined business will generate revenues of USD 55.5bn and

EBITDA USD 21bn. This is after the disposal of the European subsidiary business and does

not include the results of SABMiller’s JVs and associates. This is before synergies.

ABI has the benefits of both a

significant global scale

advantage vs peers…

…and also an enviable portfolio

where over 90% of profits are

generated in markets where the

company has #1 or #2 positions

ABI BB

Initiating Coverage

13 September 2016



Chart 7: ABISAB – pro-forma revenues (2015/F16)

Source: Jefferies estimates, company data,

Chart 8: ABISAB – pro-forma EBITDA (2015/F16)


One of the world’s largest CPG companies

We estimate that ABISAB, pre-synergies, will be the largest amongst its CPG peer group.

Chart 9: ABISAB revenues – in FMCG context

Source: Jefferies estimates, company data, Factset

Chart 10: ABISAB EBITDA (pre-synergies) – in FMCG context

Source: Jefferies estimates, company data, Factset

With a significant scale advantage within beer

ABI will be the leader in global beer by a significant margin, at 4x the size of the nearest

competitor Heineken. Scale drives operating leverage and provides more resources to

invest in commercial opportunities, which may not be available to smaller brewers. The

cost of prize marketing assets, such as the FIFA World Cup, can be spread over a larger

business base.

Scale provides a larger base on

which the company can spread

commercial investments

ABI BB

Initiating Coverage

13 September 2016



Chart 11: FY15 volumes (m hl)


Chart 12: FY15 EBITDA (pre-synergies) and margin (%)


But big does not always mean best Scale undoubtedly is important within global beer. However, it is not a means to an end.

We would argue that local market structure and growth are more important determinants

when considering a company’s geographic footprint.

Splitting ABI-SAB’s business into four buckets

Below we split ABI-SAB’s markets into four buckets:

1. Mature but duopoly – these are mature markets with growth challenges. However, a

favourable duopolistic market structure exists.

2. Growth >50% share. Growth markets where the company has a number one market

share.

3. Growth <50% market share. Growth markets where the company does not have a

number one market share.

4. Europe. We include both CE Europe and W Europe.

Chart 13: ABISAB volumes by markets


Chart 14: ABISAB EBIT by markets


Note – we only include the subsidiary business in the above analysis.

Growth and local market

structures are arguably more

important than global scale

ABI BB

Initiating Coverage

13 September 2016



The below chart provides market share, volume and EBIT contribution by market for

ABISAB. For the purposes of the analysis we assume the sale of SABMiller’s CE European

subsidiary business, which is on-going.

Chart 15: Splitting ABI-SAB's markets into four buckets (Pro-forma 2015)


SAB ABI Comment Volume Contribution EBIT contribution

Mature markets

US 27% 46% Sold to TAP 19.4% 27.6%

Austrailia 40% 6% 1.3% 2.1%

Canada 1% 42% 1.7% 3.5%

South Korea no production 57% 2.4% 1.3%

Total 24.7% 34.5%

Growth markets >50% share

Brazil 68% 20.4% 21.5%

Mexico 58% 7.4% 9.6%

Colombia 99% <1% 4.0% 5.9%

South Africa 90% 5.1% 5.2%

Argentina 5% 77% 4.3% 6.6%

Dominican Republic export 88% 0.7% 0.7%

Ecuador 93% 5% 1.1% 1.2%

El Salvador 91% 0.2% 0.2%

Honduras 93% 0.2% 0.3%

Panama 53% 0.3% 0.3%

Paraguay export 90% 0.5% 0.6%

Peru 97% 2% 2.5% 2.7%

Uruguay 97% 0.2% 0.2%

Botsw ana 91% 0.1% 0.2%

Ghana 51% 0.0% 0.2%

Lesotho 99% 0.1% 0.1%

Mozambique 92% 0.5% 0.5%

Sw aziland 89% 0.0% 0.1%

Tanzania 77% 0.5% 0.4%

Uganda 60% 0.3% 0.3%

Zambia 92% 0.3% 0.2%

Total 49.1% 57.3%

Growth markets <50% share

Chile export 14% 0.2% 0.2%

Guatemala 10% 0.0% 0.0%

Kenya 1% 0.0% 0.0%

Malaw i 1% 0.0% 0.0%

Namibia 15% 0.0% 0.0%

Nigeria 15% 0.5% 0.5%

China 25% 19% Sold to CRE 13.3% 3.0%

India 21% 2% 0.9% 0.4%

Singapore 6% 0.0% 0.0%

Vietnam 0% 0.0% 0.0%

Other LatAm 1.9% -0.3%

Other Africa 0.2% 0.0%

Other Asia 1.3% 0.0%

Total 18.5% 3.9%

Europe

W Europe Disposal of SAB business 5.2% 4.1%

E Europe Disposal of SAB business 2.5% 0.2%

Total 7.7% 4.3%

Total 100.0% 100.0%

ABI BB

Initiating Coverage

13 September 2016



1. Mature but duopoly

These markets account for just over a third of company EBIT, with the US the largest part

at 28% of this bucket. We see structural headwinds in most of these markets given loss of

share of throat to wine and spirits as well as the threat to mainstream beer from craft and

imports.

However, these markets are not unattractive

Cash: They are an important source of stable cash flow given that they are

highly cash generative, with low capex requirements and in hard currency.

Consolidated market structure: This argues for a rational pricing

environment.

Favourable regulatory environment: Both Canada and the US are highly

regulated markets. This provides some protection against strong retailer power,

such as in Europe.

Premiumisation: Whilst there is not a natural growth opportunity for beer in

these markets given the absence of demographic and per capita consumption

tailwinds, consumers are trading up to more premium brands which is healthy

for the overall beer category.

USA: There are still a number of ‘gaps’ to address in the US however we see

market share losses starting to slow given moderation in the rate of decline of

Budweiser, strong growth in Michelob Ultra and greater participation in craft

and near beer, which are in growth. Bud Light remains the key brand to turn

around.

Australia: The termination of the distribution license with Lion Nathan (Kirin)

should argue for better performance in Australia given strong momentum in

Corona.

2. Growth >50% market share

These markets account for 49% of volume and 57% of group EBIT. Most of SABMiller’s

subsidiary business, that are not being disposed, fit within this bucket. Although these

emerging markets can be volatile, in our view these are the most attractive bucket within

the context of global beer. They share the following:

Strong market shares: The company has price leadership

Barriers to entry: barriers to entry are high given a high proportion of owned

distribution in many markets and strong local brand portfolios. Whilst the risk of

new entrants exists (e.g. Poland and Nigeria having moved from duopolies to

three brewer markets), we believe that this is tougher to achieve where there is

one brewer that has such a strong local market position.

Low level of premium beer: Premium beer accounts for under 3% in many of

these markets. This offers a significant longer term structural opportunity for

attractive revenue per hl realisation

Retailer structure: Organised retail is generally low. Mom and pop stores

account for the largest part of the customer base

Attractive fundamentals: Favourable demographics, per capita consumption

growth opportunities and attractive medium term income dynamics.

We would highlight that the majority of the subsidiary business that ABI has bought fits

into this bucket. Whilst ABI has limited experience of Africa today, these are markets that

ABI feels comfortable operating in given their attractive market structures and growth

characteristics.

ABI’s mature markets don’t

offer a natural top line growth

opportunity…

…however, the duopolistic

structure of these markets

offers better pricing power vs

mature Europe where there is a

mismatch between a

fragmented supplier base and

consolidated retailer base

We like markets with growth

and strong market shares…

….which represent the majority

of the business that ABI is

keeping

ABI BB

Initiating Coverage

13 September 2016



3. Growth <50% market share

These markets account for 18% of volumes and 4% of profits. China is the majority of this

business representing 13% of group volumes and 3% of profits. Although ABI has <20%

market share in China, averages are misleading and we believe that local market share is

higher. Therefore, one could argue that ABI’s China business could sit within the second

bucket.

Given that distribution push does not exist in some of the other markets, the model is

based more on consumer pull. Levels of investment in these markets are generally high –

sales and marketing spend in ABI’s Asia Pac division is 25% of sales (2015) vs 16% for the

group. Vietnam, Chile, India are all markets where there is potential for ABI’s premium

portfolio to do well.

4. Europe – not singularly unattractive, but tough

Europe offers reasonable cash flow and pockets of growth do exist through successful

premiumisation and innovation. Further, it is wrong to assume that all ABISAB’s market

shares in Europe are unfavourable – in Belgium, ABI has a >50% market share. Whilst we

would not go so far as to share former SABMiller CFO Malcolm Wyman’s pronouncement

of Europe as “singularly unattractive” (April 2007), we would view this bucket less

favourably than the other groupings.

In general, Europe has non-scalable, mature, highly competitive markets with an

unfavourable regulatory environment (inability to consolidate both within and beyond

national borders). A consolidated retailer base leads to a tough pricing environment.

Value creation is often driven by cost cutting, innovation and premiumisation. The

company has seen some success with premiumisation (e.g. into France) and innovation

(e.g. alcohol free and Radlers). Europe is important in the context of the ensuring

provenance of global brands such as Stella Artois however we do not believe that the

region holds significant strategic interest for the company.

Growth markets with <50%

market share represents 4% of

ABISAB profits

Europe 4% of ABISAB

ABI BB

Initiating Coverage

13 September 2016



Building the organic growth profile An important focus – we think 6% organic revenue growth is achievable

Although ABI will continue to evaluate opportunities to drive external growth, we believe

that organic growth will likely be a focus for ABI’s management. This reflects the

following:

1. Deleveraging – At 4x net debt to EBITDA, we would expect the company to focus on

deleveraging in the near term, in addition to paying a healthy dividend.

2. SABMiller likely represents the last game-changing deals for ABI within the

beer universe. Outside of buying out SABMiller’s associate businesses, the company’s

ability to create value through future deals in beer has diminished given:

ABI’s scale – with combined pro forma EBIT of USD 20bn the company is 5x the

size of the nearest competitor, Heineken. Therefore, it will become increasingly

difficult to move the needle through deals. Indeed, we would view the SABMiller

transaction as a significant bolt-on rather than an industry transformational deal.

Scarcity of assets – many of the remaining sizeable assets have protected

shareholder structures, with family control or controlled by a foundation.

Regulatory issues – with a few exceptions as discussed below, it will become

increasingly difficult for ABI, we believe, to create value through M&A without

running into regulatory complications.

ABI – known for cost-cutting…

There is not much debate around ABI’s core competencies of cost cutting, focus on cash

generation and excellence in integrating businesses. Where there is perhaps greater

debate is around the company’s brand building track record, and to what extent ABI can

be viewed as a reliable compounder, capable of achieving growth in excess of >5% per

annum.

… but a strong top line should become increasingly visible

We see two key reasons as to why organic growth at ABI-SAB should accelerate:

1. Improved geographies - Following the acquisition of SABMiller, ABI’s exposure to

markets with significant structural growth increases

2. Changing incentive structure – Compensation metrics shifted in 2014 to sharpen

the focus on market share and revenue growth

…with further value creation opportunities from revenue synergies and near

beer

In our bridge to USD 100bn revenues, we consider 6% organic revenue growth as

reasonable. In this report, we also look at other levers to create value which could be part

of the revenue growth opportunity at ABI but have not been included within our existing

assumptions.

Sizing the value uplift from revenue synergies – We estimate that the roll-

out of ABI’s brands onto SABMiller’s platform could be worth EUR 3-6 per share.

This is not included in our existing forecasts or as part of the 2020 Dream

Incentive Plan bridge

Innovation as a driver of growth: We also see the business increasingly

focused on innovation

Sizing the value uplift from low alcohol: The company has set a target that

low alcohol should make up at least 20% of volumes by 2025. We estimate that

a successful roll-out of no/low alcohol beer, in line with ABI’s 2025

commitments, could be worth between EUR 3 to 19 per share, depending on

the level of cannibalisation. This is not including in our existing forecasts or part

of our 2020 Dream Incentive Plan bridge.

Top line will be an increasingly

important metric for the

business

Improved exposure to growth

markets and greater emphasis

on top line for bonus

ABI BB

Initiating Coverage

13 September 2016



1. Improved geographies Following the acquisition of SABMiller, ABI’s exposure to attractive, growth markets

increases. With the disposal of SABMiller’s European business, ABI is acquiring a business

that has half of subsidiary profits generated in Latam, a third in Africa and the remainder in

Asia (largely Australia).

Chart 16: ABISAB pro-forma EBITDA by region


Africa and Latam – structural growth opportunity

Africa and Latam, in our view, offer significant opportunities for growth given a medium

term favourable macro outlook, demographic tailwinds and opportunities for per capita

consumption to increase.

Informal alcohol accounts for an estimated 75% of Africa total alcohol, 19% of S. Africa

and 25% of SABMiller’s LatAm business. As GDP per capita increases in these markets, we

would expect beer to capture a higher percentage of total alcohol consumption. We

believe that consumers will switch from informal alcohol towards beer which offers a

higher-quality, safer alternative in more attractive packaging than subsistence alcohol.

Along with favourable demographics, this provides a significant tailwind for medium-term

volume growth.

Chart 17: Estimated share of informal alcohol:

Beer has penetration upside in Africa(75% informal alcohol)

Source: SABMiller Mar-15 Africa presentation, WHO, Canadean, Euromonitor, Hughes & Munday

25%

8%19%

75%

0%

20%

40%

60%

80%

100%

North America LatAm C&E Europe China South Africa Africa

Beer Wine Spirits Estimated Informal Alcohol

ABI BB

Initiating Coverage

13 September 2016



Given low per capita consumption, favourable demographics and potential for

wealth effects we expect growth three times that of the global rate.

Chart 18: Beer per capita consumption (litres)

Africa has the lowest per capita beer consumption globally

Source: Jefferies, Euromonitor

Chart 19: Beer volume growth 2014-2025E

African beer growth expected to grow faster


Given this improving footprint, we believe that the company on a medium term view can

increase organic volumes +2% and organic revenues over +6%.

Table 16: ABISAB Revenue forecasts (2017E – 2023E)

F17E F18E F19E F20E F21E F22E F23E

Volume

ABI 0.9% 1.0% 1.0% 1.3% 1.3% 1.3% 1.3%

SABMiller 4.9% 4.4% 4.4% 4.4% 4.4% 4.5% 4.5%

Combined 1.9% 1.9% 1.9% 2.1% 2.2% 2.2% 2.2%

Price/mix

ABI 4.4% 4.5% 4.6% 4.7% 4.8% 4.9% 4.6%

SABMiller 3.3% 3.2% 3.2% 3.3% 3.3% 3.3% 3.4%

Combined 4.0% 4.1% 4.1% 4.3% 4.3% 4.4% 4.1%

Revenue

ABI 5.3% 5.4% 5.5% 6.0% 6.1% 6.2% 5.9%

SABMiller 8.2% 7.6% 7.7% 7.7% 7.8% 7.8% 7.8%

Combined 5.9% 5.9% 6.0% 6.4% 6.5% 6.6% 6.3%


We estimate that N.America (37% of ABI revenues) will fall to 29% of the pro-forma group

revenues (2015), 24% in year 5 after the transaction 20% in year 10 and 13% in year 20.

16%

44%

World Africa

ABI BB

Initiating Coverage

13 September 2016



Chart 20: 20 year development of ABISAB footprint – revenues

N.America

37%N.America

29%

N.America

28%N.America

24%N.America

20%N.America

13%

Mexico 9%

Mexico 7% Mexico 7%Mexico 6%

Mexico 6%

Mexico 6%

Latam

30%

Latam

44%

Latam

33%Latam

35%Latam

40%Latam

41% Latam

41%

Africa 42%

Africa 9% Africa 10% Africa 10% Africa 12%Africa 17%

Asia 13%

Asia 15%

Asia 14% Asia 14% Asia 14% Asia 15% Asia 20%

Europe 10% Europe 7% Europe 7% Europe 6% Europe 5% Europe 3%

ABI FY15 SAB FY16 Pro-forma YR 1 YR 5 YR 10 YR 20


We estimate that N.America (36% of ABI EBITDA) will fall to 29% of the pro-forma group

EBITDA (2015), 21% in year 5 after the transaction, 17% in year 10 and 11% in year 20.

Chart 21: 20 year development of ABISAB footprint - EBITDA

N.America

36% N.America

29%

N.America

25%N.America

21%N.America

17%N.America

11%

Mexico 12%

Mexico 9%Mexico 8%

Mexico 7%Mexico 7%

Mexico 7%

Latam

37%

Latam

50%

Latam

40%Latam

42%Latam

47%Latam

49% Latam

47%

Africa 35%

Africa 7% Africa 10% Africa 11% Africa 13%Africa 19%

Asia 8%Asia 15%

Asia 9% Asia 10% Asia 11% Asia 12% Asia 15%

Europe 6% Europe 5% Europe 5% Europe 4% Europe 3% Europe 2%

ABI FY15 SAB FY16 Pro-forma YR 1 YR 5 YR 10 YR 20


2. Incentive structure – emphasis on top line

A key way to influence behaviour at ABI is to change compensation. EBITDA and cash flow

received the most focus from management following the BUD transaction, given specific

incentives to delever below 3.5x net debt to EBITDA over five years (worth 18m share

options to top 40 executives).

We would highlight that in 2014, the company changed the group’s compensation

structure with market share and total revenue growth elevated to be more important than

EBITDA and cashflow.

Chart 22: Evolving management incentives (2008-15)

Source: Company Data

2008 2009 2010 2011 2012 2013 2014 & 2015

Variable

compensation targets

EBITDA target

not met: CEO

no bonus

EBITDA

Cash flow

Market share

EBITDA

Cash flow

Operating costs

Market share

EBITDA

Cash flow

Operating costs

Market share

EBITDA

Cash flow

Operating costs

Market share

EBITDA

Cash flow

Operating costs

Market share

Market share

Total revenue growth

EBITDA

Cash flow

ABI BB

Initiating Coverage

13 September 2016



2020 Dream Incentive Plan

Under the 2020 Dream Incentive Plan, ABI will pay out a bonus pool of USD 350m to 65

of its top managers if revenues reach USD 100bn by 2022. We would highlight that the

performance plan is an internal stretch target, not official company guidance. The scheme

excludes the brewer’s executive management board, the top 16 executives in the

company. Refer to section on the 2020 Dream Incentive Plan for further details.

Sizing the value uplift from revenue synergies Revenue synergies – worth between EUR 3-6 per share

We believe there are opportunities for ABI to learn from SABMiller’s best practices on local

portfolio management and beer category development through driving affordability. ABI

brings a global brand portfolio that, over the medium to longer term, can be rolled out

across SABMiller’s markets. We would estimate that a successful roll-out could be worth

between EUR 3-6 per share.

The growth of craft

Craft accounts for c11% of US industry beer volumes but c1-2% of global beer volumes.

In most mature markets, we are seeing an emergence of craft. This reflects new entrants,

as well as a desire for something different in beer markets where core lager appears

homogenous.

Potential for craft in emerging markets…

We do not dispute that there is potential for craft to grow in emerging markets. For

instance, Ambev has bought Sao Paolo-based craft brewer Colorado in Brazil and also

bought Colombia’s largest craft brewer, Bogota Beer Company. In 2015, Heineken

acquired a 50% stake in Laguinitas, where the aim is to drive higher sales of the brand

internationally.

…but premium beer works better than craft in EMs

Although craft beer works well in mature markets, in emerging markets we see a natural

consumer move towards higher-value premium brands. We believe that premium brands

resonate more strongly with consumers in EMs, relative to craft. The challenging taste

profile of many craft beers does naturally suit warm climates, and we would argue that it

is easier for consumers who seek a more aspirational premium product to “badge”

themselves through a well-recognised international premium beer than a niche craft beer.

SABMiller - premium beer opportunity under-exploited

One of SABMiller’s strengths had been portfolio management of local brands, trading

consumers up from mainstream to local premium. However, given the absence of a

strong global brand portfolio, we believe this represents an opportunity for ABI’s global

brands Budweiser, Stella Artois and Corona.

We would highlight that each of these brands can be deployed differently by market:

Budweiser is for “Relaxation and Bonding”

Stella Artois for “Savor the Moment”

Corona for “Changing the Mood and Night Out”.

As a result, the price index of each brand also differs (eg, Corona in Brazil carries a WAMP

of 200 vs Argentina 300).

Revenue synergies – would be a slow build

We think that a successful roll-out of ABI’s premium portfolio into SABMiller’s markets

would be a slow process. Not only is detailed market research required, but, premium

brands need to be seeded into the right on-trade outlets to ensure that its premium

credentials are established before wider roll-out.

There is potential for craft in

emerging markets….

…. International Premium

Brands resonate better in EMs…

….and arguably suit warm

climates better than hoppy

craft

We estimate that the successful

exploitation of SABMiller’s

distribution network to sell

Bud, Stella and Corona is worth

c.EUR 3-6 per share

- this is not included in our

current forecasts

ABI BB

Initiating Coverage

13 September 2016



Quantifying the opportunity

Analysis below suggests that EBIT per hl for the premium brand portfolio (USD 64) could

be more than double that of mainstream beer (USD 30), despite the higher costs

associated with COGS and SG&A.

We show two scenarios below:

1. Premiumisation of 10% of SABMiller’s subsidiary business, after the sale of Europe.

Cannibalisation of 10%. No volume uplift. Under this scenario, we estimate a value per

share of EUR 3.

2. Premiumisation of 10% of SABMiller’s subsidiary business. No cannibalisation; 10%

volume uplift. Under this scenario, we estimate a value per share of EUR 6.

Table 17: Scenario 1 – assumes 10% premium but 10% cannibalisation

SABMiller 10% of portfolio Cannibalisation Pro-forma

Volumes (m hl) 142 14 (14) 142

Revenues 11,909 1,786 (1,191) 12,504

COGS (4,358) (567) 436 (4,489)

Gross profit 7,551 1,220 (755) 8,015

Gross margin 63.4% 68.3% 63.4% 64.1%

SG&A (3,932) (452) 393 (3,991)

EBIT 3,619 768 (362) 4,025

EBIT margin 30.4% 43.0% 30.4% 32.2%

P&L structure

Revenue per hl 84 +50% 126 84 88

COGS per hl (31) +30% (40) (31) (32)

Gross profit per hl 53 86 53 57

SG&A per hl (28) +15% (32) (28) (28)

EBIT per hl 26 54 26 28

Incremental EBIT 406

Post tax impact (22%) 316

Capitalised (20x) 6,329

NOSH 1,966

Value per share (USD) 3.2

Value per share (EUR) 2.9


ABI BB

Initiating Coverage

13 September 2016



Table 18: Scenario 2 – assumes 10% premium, no cannibalisation

SABMiller 10% of portfolio Cannibalisation Pro-forma

Volumes (m hl) 142 14 - 156

Revenues 11,909 1,786 - 13,695

COGS (4,358) (567) - (4,925)

Gross profit 7,551 1,220 - 8,770

Gross margin 63.4% 68.3% - 64.0%

SG&A (3,932) (452) - (4,384)

EBIT 3,619 768 - 4,387

EBIT margin 30.4% 43.0% - 32.0%

P&L structure

Revenue per hl 84 +50% 126 - 88

COGS per hl (31) +30% (40) - (32)

Gross profit per hl 53 0 86 - 56

SG&A per hl (28) +15% (32) - (28)

EBIT per hl 26 0 54 - 28




NOSH 1,966




Key assumptions

1. Revenue per hl on Global Brands – We estimate a 50% premium to SAB’s existing

revenue per hl (subsidiary business). This implies revenue per hl of USD 126 for the Global

Brands.

By way of a sense check, the average revenue per hl in N.America is USD 132. We believe

the average price per case for Stella Artois is USD 158 per hl. We estimate that Corona

carries a price point of USD 200 (USD 180 per hl in Brazil, USD 240 per hl in Argentina).

Therefore, revenue per hl of USD 126 for the Global Brands is a reasonable proxy and

would reflect a mix of the global brands as well as adjusting for affordability by market

2. COGS per hl on Global Brands – We estimate a 30% uplift to SAB’s existing COGS

per hl. Note that for brands that can be locally produced (e.g., Budweiser), the

incremental COGS per hl is only 10% however given that Stella and Corona are likely to

be imported, we apply a higher COGS per hl.

3. SG&A per hl – we estimate a 15% uplift to SABMiller’s existing SG&A per hl. This

reflects higher sales and marketing expenses associated with the premium branding.

ABI BB

Initiating Coverage

13 September 2016



Innovation as a driver of growth Beer – historically not focused on innovation

It should not be surprising that the major beer companies have not focused on innovation

historically. Value growth in the beer industry has been driven by emerging market

growth, in particular pre-2008, with significant margin benefits from consolidation and

internal cost cutting programmes.

Innovation in beer – takes many forms

Innovation in beer takes many forms, including new liquids (e.g. Mixx Tail and Skol Beats

Senses), line extensions (Shock Top Expansion), creative approaches to brand identity (eg

Project 12: The New Batch) and packaging (e.g. Aluminum Bottles), and new marketing

(eg Bud and Burgers) and trade concepts (innovation around cooler penetration). The

benefits of innovation are to refresh the interest of existing consumers and extend the

reach of existing brands to new consumers and consumption occasions. Innovation

should also be gross margin enhancing.

ABI - innovation portal

On the ABI Open Innovation Submission Portal, employers can submit details of technical

innovations (eg new case designs, materials, construction/adhesives, new ergonomics or

even just a better handle design) and innovations around digital marketing, retail sales

and other digital technology.

For instance, in 2013 AB InBev used digital technologies to run a weather-dependent

advertising campaign for Stella Artois Cidre. By using weather data, the company was

able to ensure that the ads displayed as soon as there was a two degree rise in

temperature – an innovative use of technology that allowed the company to target

customers just at the point at which they were susceptible to buy.

Chief Disruptive Growth Officer

In February 2015, Pedro Earp (age 39) was appointed to the Executive Board of

Management as Chief Disruptive Growth Officer. Given ABI’s centralised management

style, we believe that new ideas can be rolled out quickly across the organisation.

Sizing the value uplift from low alcohol ABI likes targets. The company has set a target that no (ABV 0-0.5%) or lower alcohol beer

(ABV 0.51-3.5%) products should make up at least 20% of ABI’s global beer volume by

the end of 2025, with no-alcohol beer to be available in all of the company’s markets by

the end of the period. The company has indicated that no or lower alcohol beer accounts

for c.6% of its beer volumes today, with a higher proportion of volumes in Europe than

other regions.

Small segment…

Non-alcoholic beers account for c.0.6% of global beer consumption however the

category’s share is higher in some regions, such as the Middle East and North Africa (6.6%

in 2015). Low alcohol beers account for c.2,2% of global consumption.

…but fast growing segment…

Low / zero alcohol beer is one of the fastest growing segments. Over the past five years,

zero alcohol beer grew 2.5% (CAGR) with low alcohol growing 4.9% (CAGR). This

compares to the total beer market 1.6%. Innovation with low alcohol has seen some

success in Germany with Becks Blue, whilst Radlers have seen strong momentum across

much of Europe. In Canada the company has recently launched Budweiser Prohibition

Brew, using the latest de-alcoholisation technology. For SABMiller, Aguila Cero has seen

good momentum in Colombia.

ABI – starting to become more

innovative

ABI has a 39 year old Chief

Disruptive Officer on the

Executive Committee

The low alcohol opportunity is

interesting. We think it could

yield upside of between EUR 3-

19 per share.

This is not included in our

existing forecasts

ABI BB

Initiating Coverage

13 September 2016



…with potential to widen the consumption occasion

We believe that with zero / low alcohol there is potential to widen the consumption

occasion beyond beer’s traditional drinking occasions: ABI has historically targeted four

drinking occasions including relaxation and bonding, food and savour, changing the

mood, serving on a great night out. By way of reference, the Coca-Cola Company has

identified over thirty drinking occasions. We believe that zero alcohol beer could

specifically target the lunch occasion as well.

…with distribution in the non-beer universe

We see potential for alcohol free beer to be distributed into non-beer outlets such as fast-

food chains, the on-the-go channel or even vending machines.

….and bring in new consumers

We see potential to attract new consumers, in particular female consumer or those who

do not drink for religious reasons. Per Heineken (12 November, 2014), Radlers are taking

70% of its volume beyond the core category, in particular through bringing female

consumers into beer. There is also an opportunity to attract consumers who do not drink

given religious reasons.

Per WHO, 61.7% of the global population (+15) has not drunk alcohol in the past 12

months (2010) and 13.7% have ceased alcohol consumption, i.e. they have consumed

alcohol earlier in life but not in the past 12 months). Almost half of the global adult

population (48.0%) has never consumed alcohol.

Chart 23: Split of current, former drinkers & lifetime abstainers (+15 years)

Source: WHO (World Health Organisation)

In certain emerging markets, such as in Latam, consumption tends to be heavily skewed

towards the weekend. Therefore, increasing sales of no/low alcohol beer could drive

incremental volumes for the category. We would also see opportunities for no/low

alcohol beer in those markets, such as in Western Europe, at the lunch time consumption

occasion.

….with attractive margins

Zero alcohol or low alcohol beers are value accretive given the saving on excise duty. We

Per Heineken (12 Novemeber, 2014), Radlers carry a gross margin that is 22% ahead of its

mother brand.

Implications for ABI’s p&l

Whilst we recognise that the 2025 target is in large part driven by the ABI’s social

responsibility agenda, its Global Smart Drinking Goals, the margins for low alcohol are

more attractive than mainstream beer.

ABI targets four key

consumption occasions. Coke

targets over 30.

Non-alcohol beer could be

distributed into new points of

sale such as vending machines,

fast food, cinemas or on-the-go

70% of radler volumes have

come from outside of beer

48% of the global adult

population haver never

consumed alcohol

Gross margins for Radlers are

22% more profitable than the

mother brand

ABI BB

Initiating Coverage

13 September 2016



We show two scenarios below:

1. 20% of ABISAB’s global beer volumes are zero/low alcohol beer. No volume uplift.

Under this scenario, we estimate that this is worth 2% to EBIT or EUR 3 per share.

2. 20% of ABISAB’s global beer volumes are zero/low alcohol beer. No cannibalisation;

14% volume uplift. Under this scenario, we estimate this is worth c.17% to EBIT or EUR 19

per share.

Workings and assumptions

Excise paid at ABI

1. Splitting out excise tax: ABI does not separately split out excise duty. In the

commercial section of the 2015 annual report, ABI indicates that excise and income taxes

totalled USD 13.7bn in 2015. Corporation tax was USD 2.6bn which would imply excise

tax of 11.1bn.

2. Split out beer from soft drinks: For volumes, ABI splits out non-beer as 44.1mhl.

ABI discloses that net revenues from beer amounted to USD 40,594m and non-beer USD

3,010m.

Excise paid at SAB subsidiary (ex-Europe)

1. Splitting out excise tax: SABMiller separately splits out excise duty paid by region.

2. Split beer from soft drinks: SABMiller discloses beer volumes 248.8m hl (F16).

Stripping out China (58m hl) and USA (38m hl) and estimated other associate volumes in

Europe and Africa (14m hl) leaves 138m hl of subsidiary volumes. The disposal of Europe

(est 36m hl) reduces this to 102mhl. We estimate subsidiary soft drinks volumes of 40m

hl, split broadly equally between Africa and Latam.

Table 19: : ABI-SAB beer excise workings

ABI SAB Pro-forma

Volumes (m hl) 457 142 599

Non-beer (est mhl) 44 40 84

Beer (m hl) 413 102 515

Net revenues 43,604 11,909 55,513

Non-beer (est) 3,010 2,521 5,531

Beer revenues 40,594 9,388 49,982

Excise 11,106 4,028 15,134

Gross revenues 51,700 13,416 65,116


What proportion of volumes will be impacted?

With approximately 5% of ABISAB volumes already at no/low alcohol, the volumes

impacted to reach 20% of the combined portfolio are 15%:

For scenario 1 – cannibalisation – we assume no volume uplift.

For scenario 2 – no cannibalisation – we assume a volume uplift.

Calculating the excise saving

We assume an average saving on excise of 60% on excise per hl. We would assume that

half of the portfolio of zero/low beer is 0.5%, half is 3.5% - ie an average of 2.0%. This

compares to an estimated average ABV of 5.0% for the ABISAB beer portfolio. Therefore,

excise per hl on the zero/low alcohol volumes (20% of the portfolio) drops from USD 29

to USD 12 per hl and revenue per hl increases from USD 98 to 116.

Note, this is broadly in line with the company’s target to reduce the average ABV of at

least 10% by end 2025.

ABI BB

Initiating Coverage

13 September 2016



Table 20: Evolution of average ABV at ABISAB by 2025

Share of portfolio ABV Weighted ave

ABV

Current portfolio assumption 100% 5.0% 5.0%

2025 plan 10% 3.5% 0.4%

2025 plan 10% 0.5% 0.1%

2025 plan 80% 5.0% 4.0%

TOTAL - 2025 plan 100% 4.4%

Aggregate reduction in alcohol content -12.0%


Other impacts

COGS – we do not assume any change to COGS. On the one hand, the brewing

process for low/zero alcohol beer could be more expensive (either through

removal of alcohol post brewing or by limited ethanol formation), however it is

likely that the raw materials are less expensive (fewer hops required). Therefore,

this is a wash.

Gross margin – due to saving on excise that the gross margin per hl is

approximately 30% higher on the zero/low alcohol volumes at USD 78 vs 60 for

the remainder of the portfolio.

Marketing – ABI has highlighted a USD 1bn investment as part of the

programme. Therefore, we assume that SG&A increases from USD 2.3bn to USD

3.3bn on the zero/low alcohol portfolio.

SG&A - in scenario 2, in which we do not assume any cannibalisation, we do not

take into consideration the potential benefits from positive operating leverage,

but neither do we take into consideration the higher costs associated with

expanded production / higher R&D costs.

ABI BB

Initiating Coverage

13 September 2016



Table 21: Scenario 1 – assumes 20% portfolio becomes zero/low alcohol. 20% cannibalisation

USD m ABISAB 20% of portfolio (Cannibalisation) Pro-forma

Volumes (m hl) 515 77 (77) 515

Gross revenues 65,116 9,767 (9,767) 65,116

Excise (15,134) (908) 2,270 (13,772)

Net revenues 49,982 8,859 (7,497) 51,344

COGS (19,299) (2,895) 2,895 (19,299)

Gross profit 30,682 5,964 (4,602) 32,044

Gross margin 61.4% 67.3% 61.4% 62.4%

SG&A (15,494) (3,324) 2,324 (16,494)

EBIT 15,189 2,640 (2,278) 15,551

EBIT margin 30.4% 29.8% 30.4% 30.3%




NOSH 1,964



P&L structure

Gross revenue per hl 126 126 126 126

Excise per hl (29) (12) (29) (27)

Net revenue per hl 97 115 97 100

COGS per hl 37 37 (37) (37)

Gross profit per hl 60 77 60 62

SG&A per hl 30 43 (30) (32)

EBIT per hl 29 34 29 30


ABI BB

Initiating Coverage

13 September 2016



Table 22: Scenario 2 – assumes 20% portfolio is zero/low alcohol, no cannibalisation

USD m ABISAB 20% of portfolio (Cannibalisation) Pro-forma

Volumes (m hl) 515 77 592

Gross revenues 65,116 9,767 74,883

Excise (15,134) (908) (16,042)

Net revenues 49,982 8,859 58,841

COGS (19,299) (2,895) (22,194)

Gross profit 30,682 5,964 36,647

Gross margin 61.4% 67.3% 62.3%

SG&A (15,494) (3,324) (18,818)

EBIT 15,189 2,640 17,829

EBIT margin 30.4% 29.8% 30.3%

Incremental EBIT 2,640

Post tax impact (22%) 2,059


NOSH 1,964



P&L structure

Gross revenue per hl 126 126 126

Excise per hl (29) (12) (27)

Net revenue per hl 97 138 99

COGS per hl 37 37 (37)

Gross profit per hl 60 77 62

SG&A per hl 30 43 (32)

EBIT per hl 29 34 30

Source: Jefferies estimate. Note that mathematically under this scenario of no cannibalisation, the existing zero/low alcohol volumes (26m h or 5% of the existing business) and incremental volumes (77m h) come to 17% of the pro-forma business not 20%.

ABI BB

Initiating Coverage

13 September 2016



(3) Further value accretive M&A

Although there will likely be a pause for breath in the near term as the company focuses on

deleveraging, M&A remains a core competency for ABI and we would identify a number of

opportunities beyond the SABMiller transaction which could lead to value creation.

We see some parallels with the acquisition of Anheuser in 2008 where there was a follow-up

‘boomberg’ transaction in the form of Grupo Modelo in 2012, which was earnings accretive

by over double digits. With SABMiller, we see potential for full ownership of Castel which we

believe would also be accretive to earnings by double digits.

Full ownership of associate businesses Castel and Anadolu Efes would move group revenues

to c.USD 86bn by 2022, we estimate, which represents a gap of USD 14bn vs the USD 100bn

Dream Incentive Plan target. We believe that a fair wind on currency would help to close the

gap. Whilst there is potential for deals outside of ABISAB, we see fewer targets that would

have a meaningful impact on ABISAB given its size.

On acquisitions outside of beer, CEO Brito has reiterated a commitment to beer saying "we've

always done it within beer. We don't believe in going too much outside beer. That makes the

likelihood of success in integration higher." For now, we abstain from the debate around the

future direction, beyond beer, with ABI having enough levers for value creation over the next

five years.

Capital allocation objectives

ABI has consistently communicated that its capital allocation objectives consist of:

1. Investment in organic growth of the business

The company’s first priority is to focus on organic growth in its existing footprint and

business. Strong market shares and strong brands provide a healthy backdrop for

continued profit growth over the medium term.

2. Selective M&A, strict financial discipline

The company adopts a cautious and disciplined approach to M&A. Price, timing and

cultural fit are all important factors, and any deal must create value and provide

opportunities for existing employees to further develop their careers. The company’s track

record on integration and deal synergies is strong.

3. Capital allocation beyond M&A

The company’s objective is to have a dividend yield comparable with other consumer

goods companies (3-4%), with an optimal capital structure of c2x net debt/EBITDA. Note

that the target of 2x is not a straight-jacket, ie, if net debt/EBITDA falls below 2x, it will not

automatically trigger a share buy-back. As the company delevers below 2x, we would

expect the business to maintain a net debt / EBITDA ratio through a combination of high

dividends and share buybacks.

Pause for breath as delever but

not the end of the M&A story

Castel transaction provides an

attractive ‘boomerang’

transaction

USD 100bn revenue target does

not necessarily require

significant M&A outside of SAB

associate businesses

Beer vs non-beer?

ABI BB

Initiating Coverage

13 September 2016



M&A has created significant value M&A boom – the past 20 years

The past 20 years has witnessed an M&A boom within the beer industry. The table below

shows that EBITDA from Interbrew (USD 198m) and Brahma (USD 231m) has grown 60x

from 1990 to 2015.

Chart 24: Top 10 global brewers 1990

Volume (mhl), EBITDA (USDm)


Chart 25: Top 10 global brewers 2015

Volume (mhl), EBITDA (USDm)

Source: Jefferies estimates (Asahi includes alcoholic beverages &

overseas divisions)

With significant value creation

Deal synergies have been a key driver beer company profit growth following the crisis.

ABI’s margins have increased from 26.1% in 2004 to 38.6% in 2015.

Chart 26: EBITDA margin trend 2004-15


ABI BB

Initiating Coverage

13 September 2016



M&A after SABMiller M&A likely to be less meaningful than the past…

Following the SABMiller transaction, ABI’s ability to create value through future beer M&A

is reduced. This largely reflects regulatory issues and a lack of further material targets that

could move the dial.

Chart 27: Beer volume market shares pre ABISAB transaction

Source: Jefferies estimates, Euromonitor

Chart 28: Beer volume market shares post ABISAB transaction

Source: Jefferies estimates, Euromonitor

….however, M&A remains a core competency for the group…

Although there are fewer obvious targets within the beer space for ABI, we believe that

M&A will remain a core competency for ABI. Indeed, reaching a goal of USD 100bn by

2022 per the Dream Incentive Plan would imply some impact from M&A. We show below

the impact of tidying up SABMiller’s associate positions in Castel and Anadolu and how

these moves help to bridge the gap towards the USD 100bn target.

…and a preference for beer assets

Per CEO Carlos Brito, "we've always done it within beer. We don't believe in going too

much outside beer. That makes the likelihood of success in integration higher." Source

Reuters. Link to Reuters article: AB InBev plays down talk of move beyond beer

ABI BB

Initiating Coverage

13 September 2016



http://www.reuters.com/article/us-abinbev-m-a-idUSKCN0XO1Q7

Castel Group Company description – top four brewer in Africa

Castel Group is one of the top-four brewers in Africa with a particularly strong footprint in

northern Africa. It has exposure to 21 countries in Africa, with 15 of these markets also

producing Coca-Cola products.

Complex cross-holding agreement with SABMiller

In 2001, Castel and SABMiller undertook an equity swap: SAB acquired 20% of Castel,

while the remaining 80% is owned by the Castel family; in return Castel received 39% of

SABMiller’s African subsidiary (ex-South Africa and Namibia). Since 2001, a number of

other businesses have been acquired including Algeria (40% effective interest) and

Morocco (40%). Therefore, SABMiller’s effective interest in Castel is greater than 20% - we

estimate closer to 25%.

Pre-emptive rights over the business

In January 2012, SABMiller announced that it had implemented a number of

organisational changes in its African operations, as part of a review of its strategic alliance

with the Castel Group. This included a change in management control over Nigeria (to

SABMiller) and Angola (to Castel) as well as a change to the terms of the strategic alliance

agreement to encourage sharing of best practice and technical expertise. Further, a more

precise methodology was put in place for the existing mutual pre-emptive rights over the

groups' respective beverage operations in Africa (excluding South Africa and Namibia).

We believe that SABMiller has right of first refusal on the Castel business in the event

Castel wants to sell, and we understand that the 2012 agreement locks in the heirs to the

business to this first right of refusal.

Structure of transaction - tranches rather than piecemeal assets

Note there is a scenario whereby the heirs to the business would look to sell equity stakes

in Castel through tranches rather than an outright transaction to transfer their full stake in

the business to ABI-SAB. However, we do not think that discrete assets or geographies

would be sold off individually given the existing cross-shareholding agreement between

SABMiller and Castel.

Relationship with ABI-SAB

On the analyst conference call 30 August 2016, ABI management indicated that the

relationship with Castel is a “very important” one. Although Mark Bowman, SABMiller

head of Africa since 2007, will not be part of the management team post the acquisition,

we wonder whether a relationship has been developed at the reference shareholder level

with the Belgian and Brazilian families courting Pierre Castel.

Timing of Castel acquisition?

Trying to second guess the timing of a Castel deal is not straightforward. We wonder

whether there is a scenario whereby ABI-SAB looks to capitalise on the continued low

interest rate environment, which argues for a buyout of the Castel business sooner than

later, for instance before 2020.

By 2020, the synergy programme will be nearing the end of its completion with

SABMiller fully integrated

We estimate 2020 net debt to EBITDA will be 2.9x. Gearing back up to 4x

represents acquisition firepower of over USD 35bn. From a cashflow

perspective, the buy-out of Castel represents approximately two years FCF for

ABI.

Relationship with Pierre Castel

likely fostered at the Reference

Shareholder level

ABI BB

Initiating Coverage

13 September 2016



Estimating Castel profits

It is not straightforward trying to derive a clean profit number for Castel given the cross

holding agreements between SABMiller and Castel. In addition to the Castel associate,

the associate line includes SABMiller’s 40% stake in Zimbabwean associate Delta and also

SABMiller’s 27% stake in Distell.

We estimate that Castel’s share of SABMiller’s subsidiary business in 2016E (F17E) is USD

257m and Castel’s share of the Africa associate business is USD 1.4bn.

Table 23: Castel – estimated profits

F15 F16 F17E F18E F19E

(USDm unless otherwise given) 2014 2015 2016E 2017E 2018E

SUBSIDIARY:

South Africa 939 837

Legacy Africa 532 475 522 575 632

Africa subsidiary division EBIT 1,471 1,312

Amortisation

South Africa - -

Legacy Africa 9 15 17 18 20

Africa subsidiary division Amortisation 9 15

Depreciation

South Africa 156 141

Legacy Africa 119 108 119 131 144

Africa subsidiary division Depreciation 275 249

Subsidiary

EBIT - 100% 522 575 632

D&A - 100% 135 149 164

EBITDA - 100% 658 724 796

Castel's share 39% 39% 39%

Castel's share of Africa subsidiary EBITDA 257 282 310

ASSOCIATE:

Africa associate division EBIT 427 381 419 461 507

Less Delta - 40% interest 44 38 42 46 51

Less Distell - 27% stake 40 40 42 44 46

Castel associate EBIT 343 303 335 371 410

Share of Castel - amortisation 0 0 0 0 0

Share of Castel - depreciation 121 120 132 145 160

Share of Castel - EBITDA 464 423 467 516 570

Castel EBITDA - gross up to 100% 1,856 1,692 1,869 2,064 2,279

Castel's share of Africa associate EBITDA 1,392 1,269 1,402 1,548 1,709


ABI BB

Initiating Coverage

13 September 2016



Valuation range – between USD 29-33bn

We estimate a valuation range of between USD 25-28bn for 75% of the Castel associate

business that is not owned and approximately USD 4.5-5bn to buy out Castel’s 39%

subsidiary in SABMiller’s Africa division subsidiary (ex-South Africa and Namibia). We use a

range of 16-18x one year forward EBITDA.

This would imply a total valuation of between USD 29-33bn to buy-out Castel.

Table 24: Valuation range – buy-out of Castel’s subsidiary and associate businesses

F15 F16 F17E F18E F19E

(USDm unless otherwise given) 2014 2015 2016E 2017E 2018E

Castel subsidiary - valuation range

EBITDA Multiple

16 4,105 4,516 4,967

17 4,362 4,798 5,278

18 4,618 5,080 5,588

Castel associate - valuation range

EBITDA Multiple

16 22,427 24,770 27,351

17 23,829 26,318 29,061

18 25,230 27,866 30,770

TOTAL - valuation range

EBITDA Multiple

16 26,532 29,285 32,319

17 28,190 31,116 34,339

18 29,849 32,946 36,359


Access to growth…

The full acquisition of the business would give SAB a strong position across fast-growing

African nations. It would increase ABISAB’s pro-forma profit exposure to Africa from 7% to

14%.

…and opportunity to drive margins

With its existing stake (c25%) in the Castel associate business, SAB already has some

operational ties however we believe that there is limited integration of business practices

between SABMiller and Castel. The F16 Africa associate EBIT margin is 20.9% vs

SABMiller’s subsidiary margin 26.1%. Therefore there is an opportunity for the business

to be made more profitable. We believe that over the medium-term, the margin here

could be doubled. For the associate business, we estimate that this could add as much as

11% to ABI earnings.

Table 25: : Buy-out of Castel associate – illustrative accretion analysis

2017E

Castel associate business - not owned (EBIT) 371

Gross up to 100% 1,483

Assume doubling of profitability 2,967

Consideration - 18x EBITDA 27,866

Interest c.4% 1,115

EBIT - 100% Castel 2,967

less interest - c.4% (1,115)

Pre-tax profit 1,852

Tax - c.25% (463)

Strip out existing post tax equity income from Castel associate (222)

Pro-forma incremental net income 1,167

ABISAB net income 10,950

Accretion 11%


ABI BB

Initiating Coverage

13 September 2016



We would view the buyout of the subsidiary Africa business (39% that is not owned) as a

wash from an earnings perspective. We expect the deconsolidation of the minority

interest charge associated with Castel 39% share of SABMiller’s on-SA based Africa

subsidiary being offset by interest. Given that ABISAB will already have control of this

business, we do not see a synergy opportunity from 100% ownership.

Anadolu Efes Company description

Turkish brewer Anadolu Efes is controlled by the Anadolu Group (43% stake); the Yazivci

families have 23.6% and Ozilhan families 13.5%. SABMiller has a 24% stake in the

business following the transfer of its Russian and Ukrainian beer businesses to Anadolu

Efes in 2012 (approximate value at transaction value USD 1.9bn).

Beer and soft drinks – largely Turkey and CIS

The business is comprised of a soft drinks business (Turkey, C Asia, Iraq, Pakistan), a

Turkey beer business and International beer business (predominately Russia and Ukraine).

Anadolu is the number-one brewer in Turkey, with a 69% share and a 15% share in

Russian beer. The company also owns a controlling stake in the Coke bottler Coca-Cola

Icecek, the Coke bottler in Turkey, Iraq, Pakistan and other territories in the CIS and

Middle East. After adjusting for the CCI minority interest (Anadolu owns 50% in soft drinks

associate CCI) group EBITDA is split approximately 41% soft drinks, Turkey beer 33%,

International beer 25%.

Pre-emptive rights

We believe that both parties have the right of first refusal at fair market value in the event

of either party seeking to sell any shares in Anadolu Efes.

Rationale for ABI

Although regulation remains a risk in Turkey, consumption per capita is low and should

offer scope for expansion over the medium term as the country westernises. There has

been some exchange of best practices between SABMiller and Efes, in particular in

restoring profitability in Russia, however we believe that ownership under ABI would drive

further cost savings in particular around procurement. In Russia, the combination of ABI’s

business (11% per Euromonitor) and Efes (15%) would also drive cost savings.

Consolidation of Russian beer could also lead to a more rational pricing environment.

The soft drinks business offers significant medium term growth given low per capita

consumption of soft drinks in key territories, favourable demographics and an attractive

medium term macro outlook.

Total consideration

Purchase of the outstanding 76% stake in Anadolu Efes, assuming a 25% premium to the

current share price, would imply an equity value of USD 4.6bn (for 100% of the business)

and enterprise value 6.0bn including debt. Note, that this assumes no change in the

ownership structure of CCI (current 50.3% stake). We estimate that this transaction would

be low single digit accretive.

The buyout of Efes would

provide greater access to longer

term growth however the

impact on earnings is unlikely

to be material

ABI BB

Initiating Coverage

13 September 2016



Disposals As part of the ABISAB transaction, outstanding disposals include the sale of CE European

beer business (value GBP 5bn per cityam 5 June) and Distel (value USD 0.7bn), amongst

others.

African soft drinks: On 2 July 2016, the Coca-Cola Beverages Africa transaction

received regulatory approval. CCBA will produce and distribute 40% of Coca-Cola

volumes in Africa with operations in 14 countries. SABMiller has a 54% stake in CCBA

(longer term 57%).

Per SABMiller’s F16 annual report, “a change of control of the company would give The Coca-Cola Company certain rights under its bottling agreements with various subsidiaries

of the company” which would be triggered by the acquisition of SABMiller by ABI.

We believe that KO has the right to take back the bottling license from CCBA (in practice,

this is not feasible given that the license agreement serves the entire CCBA business)

however it is not clear whether KO could force a sale of ABI’s stake in CCBA.

Valuing the CCBA stake: In 2013, CCBA had EBITA of USD 505m. We estimate F16E

EBITDA USD 700m. Applying a multiple of between 12-15x EBITDA would imply a

valuation for 100% of EV of USD 8-11bn, with SABMiller’s 53.7% stake (rising to 57%)

worth USD 4.5-6.7bn.

There is still some tidying up of

assets as part of the disposals

process. We would not view

these as material

ABI BB

Initiating Coverage

13 September 2016



Deal appraisal The acquisition of SABMiller represented an opportunistic move, we would argue, at a time

when emerging market volatility was high and SABMiller on the cusp of embarking on a

value-creative, multi-year efficiency programme with the support of a new Chairman & CFO.

Given the scale and complexity of the SABMiller transaction, it should not be surprising that

certain parts of the acquisition are less favourable than initially anticipated, in particular the

end multiple paid for the business post disposals as well as the returns analysis. In

comparison to the headline multiple of 17.3x pre-synergies, we calculate a multiple of 20.9x

for the business post disposals and other items. Note, this 20.9x multiple drops to 16.3x after

USD 1.4b synergies and 13.0x post Jefferies estimated synergies USD 3.0bn.

We estimate that the deal becomes EVA positive in year 5 however after taking into account

the other costs associated with the transaction such as capital gains tax payable on the sale

of SABMiller’s 58% stake in MillerCoors (we estimate USD 4.5bn) and the Australia

termination fee (USD 0.2bn) to Lion Nathan (Kirin), we estimate that the deal covers its cost

of capital by year 6.

On earnings, we see the deal as 9% earnings accretive by year 3 with the company net debt

to EBITDA falling 0.4x per annum from F17 4.1x.

Table 26: Transaction multiple - reconciliation

Description Reference Synergies Multiple

Initial GBP 44 offer

Headline EV /EBITDA Table 27 16.9x

Pro-forma EV /EBITDA (USD 1.4bn synergies as disclosed) Table 27 USD 1.4bn 14.1x

Pro-forma EV /EBITDA (USD 3.0bn synergies per Jefferies) Table 27 USD 3.0bn 11.9x

Revised GBP 45 offer

Headline EV /EBITDA Table 28 17.3x



Transaction multiples for disposals

Implied multiple on disposals Table 29 10.5x

Pro-forma multiples post disposals & other*

Pro-forma EV /EBITDA Table 30 20.9x



Source: Jefferies estimates * Capital gains payable in US & Australia termination fee

What multiple is ABI paying for SABMiller? Initial headline multiple – attractive (GBP 44 offer)

We estimate a headline EV to EBITDA multiple (based on SABMiller F16A EBITDA) 16.9x

which drops to a 14.1x multiple including USD 1.4bn synergies and 11.9x including

Jefferies estimate of USD 3.0bn synergies (pre-disposals). Refer to Table 27 for details.

Headline multiple – post the raised GBP 45 offer

On 26 July 2016, ABI announced a pre-emptive revised final offer for SABMiller following

shareholder concerns about the deal’s valuation given GBP weakness following Britain’s

vote to leave the EU.

Cash offer: increased from GBP 44 to 45 per share

PSA: ABI restricted shares and GBP 4.6588 in cash vs previous GBP 3.7788

We calculate this increases the headline multiple from 16.9x to 17.3x , which then drops

to 14.4x post USD 1.4bn announced synergies and 12.1x post Jefferies USD 3bn synergy

target (pre-disposals). Refer to Table 28.

9% accretive by year 3 but EVA

positive only by year 6

Headline multiple for GBP 45

per cash of 17.3x dropping to

14.4x with USD 1.4bn synergies

and 12.1x with USD 3bn

synergies

20.9x EBITDA multiple for

SABMiller post disposals, but

after synergies this drops to

13.0x…

…however stub business should

command a higher multiple

given (a) ownership, (b)

growth, (c) strong market

positions and (d) optionality on

remaining associates

ABI BB

Initiating Coverage

13 September 2016



Table 27: Transaction EV / EBITDA multiple (pre-disposals)

– offer GBP 44 per share

(USDm unless otherwise stated)

SABMiller cash (GBP per share) 44.00

Equity element of PSA (GBP per share) 35.12

Cash element of PSA (GBP per share) 3.78

SABMiller equity (GBP per share) 38.90

SABMiller blended (GBP per share) 41.86

No of shares (m) 1,655

Equity value – GBPm 69,259

GBP/USD 1.53

Equity value – USDm 105,966

SABMiller F16A net debt 9638

Minority interest 4,496

Enterprise value 120,100

F16A Group EBITDA 7,097

Headline EV to EBITDA 16.9x

Estimated potential synergies - as disclosed 1,400

Pro-forma EBITDA 8,497

Pro-forma EV to EBITDA 14.1x

Estimated potential synergies - Jefferies 3,000


Jefferies pro-forma EV to EBITDA 11.9x


Table 28: Transaction EV / EBITDA multiple (pre-disposals)

– revised offer GBP 45 per share


SABMiller cash (GBP per share) 45.00

Equity element of PSA (GBP per share) 35.12

Cash element of PSA (GBP per share) 4.66

SABMiller equity (GBP per share) 39.78

SABMiller blended (GBP per share) 42.81

No of shares (m) 1,655

Equity value - GBPm 70,830

GBP/USD 1.53

Equity value - USDm 108,370

SABMiller F16A net debt 9638

Minority interest 4,496

Enterprise value 122,504

F16A Group EBITDA 7,097

Headline EV to EBITDA 17.3x

Estimated potential synergies - as disclosed 1,400



Estimated potential synergies - Jefferies 3,000


Jefferies pro-forma EV to EBITDA 12.1x


Note, in the above calculation we assume a share price of GBP 35.12 for the equity

element of the PSA, which is the value of the equity element of the PSA on 6 October

2015, ahead of ABI’s proposal 7 October 2015 to SABMiller. This compares to the value of

the PSA on 10 November 2015, ahead of the agreement offer announcement 11

November 2015, of 38.07 and the current value of the PSA post Brexit is over GBP 50.

Given share price movements and currency fluctuations, we believe it is fair to use a

relatively undisturbed ABI share price when trying to back-out the multiple paid for

SABMiller. We also a GBP/USD rate of 1.53 in line with ABI’s hedging arrangements.

Disposals – assets sold for a lower multiple (10.5x)

ABI has carried out a number of disposals to achieve regulatory approval for the

transaction, subject to the successful acquisition of SABMiller. This includes the following:

USA – sale of 58% stake in MillerCoors JV for USD 12bn. This includes USD 70m

of Miller international profit and USD 2.4bn net present value of cash tax benefit

(USD 250m pa over 15 years). Consideration USD 12bn.

Peroni, Grolsch, Meantime and associated businesses in Italy, the Netherlands,

UK and internationally to Asahi. Consideration EUR 2.55bn.

Sale of SABMiller’s 49% stake in CR Snow Breweries to China Resources Beer.

Stake is valued at USD 1.6bn.

Sale of residual CE European assets. In exchange for EU clearance, ABI is

committed to selling SABMiller’s businesses in Hungary, Romania, Czech

Republic, Slovakia and Poland. A number of potential bidders have been cited,

including Canada’s mounted police force and private equity. Per cityam 5 June

2016, the assets are valued at GBP 5bn. We assign a valuation of USD 6.7bn,

based on a 10x EBITDA multiple. This transaction is outstanding.

Leakage from disposals sold at a

lower multiple

ABI BB

Initiating Coverage

13 September 2016



We estimate that the aggregate multiple for the disposals process is approximately 10.5x

EBITDA with a range between 5.1x for the disposal of the 49% stake in CR Snow to 21.5x

for the disposal of Peroni, Grolsch and Meantime to Asahi.

Table 29: Transaction multiples for disposals


N.America - sale to MillerCoors

EBITDA 1,079

Consideration 12,000

EV to EBITDA - pre-TAP synergies (cost and tax) 11.1x

Sale of Peroni, Grolsch, Meantime to Asahi

est EBITDA 133

Consideration 2,856

Consideration – EURm 2,550

EV to EBITDA 21.5x

Sale of SABMiller's interest in CR Snow

est EBITDA 314

Consideration 1,600

EV to EBITDA 5.1x

Asset swap in Latam Not material

Proposed sale of European CEE Assets

2016 Europe subsidiary EBITDA est 831

Less: assets to be sold to Asahi 133

Less: Canary Islands 30

Residual subsidiary EBITDA 668

Multiple 10x

Implied consideration 6,680

TOTAL

Proceeds from disposals 23,136

EBITDA of disposed assets 2,194

Implied multiple on disposals 10.5x


ABI BB

Initiating Coverage

13 September 2016



Headline multiple of 20.9x post disposals but 13.0x after disposals and

synergies

Taking into account the lower multiple assigned to those assets being disposed, the

revised offer to GBP 45 per share and other considerations (e.g. Australia termination fee

and capital gain in the US on the disposal of MillerCoors), we estimate a headline multiple

of 20.9x, dropping to 16.3x post the USD 1.4bn synergies and 13.0x post Jefferies

estimate of USD 3.0bn of synergies.

Table 30: Pro-forma EV / EBITDA multiple post disposals

Pro-forma SABMiller deal

F16 group EBITDA 7,097

EBITDA of disposed assets -2,194

Incremental EBITDA from Australia 75


SAB EV 122,504

Proceeds from disposals -23136

Subtotal EV 99,368

Add back:

- Australia termination fee to Lion 223

- capital gain in US 4,500

Pro-forma EV 104,091


Pro-forma EV to EBITDA - after disclosed synergy est (USD 1.4bn) 16.3x

Pro-forma EV to EBITDA - after Jefferies synergy est (USD 3bn) 13.0x


Other costs:

We add back the one-off costs of USD 223m for the termination fee payable to

Lion Nathan in Australia for the return of the import brand portfolio (we estimate

EBITDA USD 75m here).

As part of the disposals process, ABI has sold the 58% stake in MillerCoors to

Molson Coors for USD 12bn. Note that net proceeds from the divestiture are

expected to be USD 7.5bn based on an estimated statutory tax rate 37.5%

(source p.149 of the EUR 40bn medium term note programme debt prospectus

13 January 2016), therefore we have added back USD 4.5bn to the pro-forma

EV. We do not take into consideration at this stage potential for tax planning. We

would highlight that SABMiller paid USD 5.6bn for Miller Brewing Company in

2002, split USD 3.6bn stock and USD 2bn debt therefore we believe this leakage

reflects a reasonable estimate of the capital gain payable on the asset.

But – higher quality assets deserve a higher multiple…

We would argue that the assets that ABI has retained from the SABMiller transaction are

high quality assets with market leading positions across an attractive developing market

footprint in Africa and Latam, with Australia providing strong free cash flow generation.

Unlike most of the assets sold during the disposals process, these stub businesses are

100% controlled by ABI. Further, the stub business offers optionality around retained

associate positions such as Castel and Anadolu Efes. Therefore, the pro forma 20.9x

headline multiple should be seen within this context.

All-in headline multiple of

20.9x after disposals and one-

offs including a capital gain in

the US

But stub business should

command a higher multiple

given (a) ownership, (b)

growth, (c) strong market

positions and (d) optionality on

remaining associates

ABI BB

Initiating Coverage

13 September 2016



Chart 29: Historic EV /EBITDA multiples


Within beer, the multiple represents a higher multiple compared to recent beer deals.

Chart 30: Historic Beer M&A EV/EBITDA multiples

2008 - Present


Chart 31: Historic Beer M&A EV/EBITDA multiples

1999 - 2008


Date Bidder Target EV/EBITDA

TBC Asahi SABMiller (Peroni, Grolsch) 21.5x

TBC CR Holdings SABMiller (CR Snow 49% stake) 5.1x

TBC Molson Coors SABMiller (Miller Coors 58% stake) 11.1x

Nov-15 ABI SABMiller 17.3x

Oct-15 Heineken Diageo (Desnoes & Geddes) n/a

Oct-15 Heineken Diageo (50% GAPL) n/a

Jan-15 Carlsberg Olympic Brewery (Mythos) n/a

Oct-14 Carlsberg Eastern Assets (Chongqing) loss making

Seo-14 Crown Holdings Heineken (Empaque packaging) 12.8x

Jan-14 ABI Oriental Breweries 11.0x

Jun-13 ABI Modelo 11.7x

Jun-13 Constellation Brands Crown 9.3x

Oct-12 Heineken APB 17.1x

Jun-12 Molson Coors StarBev 11.0x

Apr-12 AmBev CND 13.1x

Jan-12 Diageo Meta Abo (Ethiopia) 20.0x

Oct-11 SABMiller Anadolu Efes 12.8x

Sep-11 SABMiller Fosters 13.1x

Aug-11 Kirin Schincariol 15.7x

Apr-11 Jinro Hite Brewery 8.1x

Jul-10 Kirin Fraser & Neave 11.4x

Jun-10 Carlsberg Chongquing Brewery 45.0x

Mar-10 Anadolu Efes Efes Breweries 7.3x

Jan-10 Heineken FEMSA 11.2x

Aug-09 C&C Group Tennent's 8.3x

May-09 KKR Oriental Brewery 8.6x

Apr-09 Kirin Lion Nathan 12.5x

Jun-08 InBev Anheuser-Busch 12.4x

Jun-08 Anheuser-Busch Modelo 12.1x

Jan-08 Heineken /Carlsberg Scottish & Newcastle 15.3x

Date Bidder Target EV/EBITDA

Nov-07 SABMiller Grolsch 14.6x

Aug-06 Sapporo Sleeman 15.1x

Jan-06 InBev Fuijan Sedrin 12.8x

Aug-05 Heineken PIT Ivan Taranov 18.7x

Jul-05 SABMiller Bavaria 10.1x

Jul-04 Coors Molson 10.4x

Jun-04 Anheuser-Busch Harbin 18.9x

Mar-04 Interbrew Ambev 11.7x

Mar-04 AmBev Interbrew (labatt assets) 10.8x

Jan-04 Carlsberg Holsten-Braueri 11.0x

Sep-03 Interbrew Spaten 8.9x

May-03 SABMiller Birra Peroni 12.6x

May-03 Scottish & Newcastle Central de Cervejas 9.6x

May-03 Heineken BBAG (Brau Union) 10.2x

Nov-02 Interbrew Brauergilde Hannover 8.6x

May-02 SAB Miller 9.3x

Mar-02 Molson Kaiser 12.8x

Feb-02 Scottish & Newcastle Hartwall 10.1x

Feb-02 Heineken Bravo 13.0x

Dec-01 Adolph Coors Carling Brewers 9.0x

Nov-01 SAB Caerveceria Hondurena 8.8x

Aug-01 Interbrew Beck's 12.4x

Nov-00 Carlsberg Feldscholosschen 6.9x

Jun-00 Interbrew Bass 9.7x

May-00 Interbrew Whitbread 9.7x

Mar-00 Scottish & Newcastle Kronenbourg 11.4x

1999-2005 Inbev Sun Interbrew 10.3x

Oct-99 SAB Pilsner Urquell /Radegast 13.9x

Jul-99 Brahma Antartica 8.3x

Jun-99 Heineken Cruzcampo 16.3x

ABI BB

Initiating Coverage

13 September 2016



Key transaction metrics Cost of capital: EVA positive in year 5-6

We believe that the company’s internal target is to meet the cost of capital by year 3,

however for certain acquisitions the company has previously been more flexible.

Assuming a hurdle rate of 7% on the acquired business, we would expect that ABI is

broadly able to cover its cost of capital by year 5 after taking into consideration disposals.

However, after taking into account the other costs associated with the transaction such as

capital gains tax payable on the sale of SABMiller’s 58% stake in MillerCoors (we estimate

USD 4.5bn) and the Australia termination fee (USD 0.2bn)to Lion Nathan (Kirin), we

estimate that the deal is EVA neutral by year 6.

Chart 32: EVA calculation on the deal


Earnings accretion: 9% by year 3

We estimate that the transaction is 9% earnings accretive by year three. Trying to

disentangle a clean pre-SABMiller earnings figure is not straightforward given the

financing charges associated with the deal. For the purposes of this analysis, we assume

4% EPS growth per annum on F15 standalone clean EPS – this reflects 3% reported EBIT

growth in 1H16, given adverse forex, with some operating leverage through the income

statement from deleveraging. We strip out the pre-funding financing charges for F16 to

provide a clean, undisturbed base for F17. We assume the business grows at mid-single

digits EPS (in USD) thereafter, in the absence of the transaction.

Chart 33: Illustrative earnings accretion F17-20E


Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7

F17E F18E F19E F20E F21E F22E F23E

SABMiller group EBITA pre synergies 6,677 7,022 7,389 7,777 8,189 8,627 9,091

Disposals:

USA (958) (1,006) (1,057) (1,109) (1,165) (1,223) (1,284)

China (206) (207) (208) (209) (210) (211) (212)

Europe (716) (744) (774) (805) (837) (871) (906)

Sub-total 4,797 5,065 5,350 5,654 5,977 6,322 6,689

Cumulative synergies 1,500 2,250 2,700 3,000 3,000 3,000 3,000

TOTAL 6,297 7,315 8,050 8,654 8,977 9,322 9,689

Tax rate 22% (1,385) (1,609) (1,771) (1,904) (1,975) (2,051) (2,132)

NOPAT 4,912 5,706 6,279 6,750 7,002 7,271 7,558

Enterprise value 122,504 122,504 122,504 122,504 122,504 122,504 122,504

Disposals:

- USA (12,000) (12,000) (12,000) (12,000) (12,000) (12,000) (12,000)

- China (1,600) (1,600) (1,600) (1,600) (1,600) (1,600) (1,600)

- Europe (9,536) (9,536) (9,536) (9,536) (9,536) (9,536) (9,536)

Post disposal enterprise value 99,368 99,368 99,368 99,368 99,368 99,368 99,368

Return on invested capital 4.9% 5.7% 6.3% 6.8% 7.0% 7.3% 7.6%

WACC hurdle rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Add:

- Australia termination fee to Lion 223 223 223 223 223 223 223

- capital gain in US 4,500 4,500 4,500 4,500 4,500 4,500 4,500

Fully loaded Enterprise value 104,091 104,091 104,091 104,091 104,091 104,091 104,091

Return on invested capital 4.7% 5.5% 6.0% 6.5% 6.7% 7.0% 7.3%

WACC hurdle rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

F15 F16E F17E F18E F19E F20E

Previous ABI standaline estimates

ABI net income - illustrative 8,513 8,854 9,297 9,761 10,250 10,762

ABI NOSH 1,638 1,640 1,642 1,644 1,646 1,648

ABI EPS (illustrative) 5.20 5.40 5.66 5.94 6.23 6.53

Combined pro-forma net income 10,950 12,160 13,308 14,264

New shares 326 326 326 326

Combined pro-forma NOSH 1,966 1,966 1,966 1,966

Combined pro-forma EPS 5.57 6.18 6.77 7.26

Earnings accretion -1.6% 4.2% 8.7% 11.1%

Not EVA positive until year 5-

6…

….but 9% earnings accretive

ABI BB

Initiating Coverage

13 September 2016



Note – we assume that a 326m new ABI shares are issued as part of the transaction, which

represents the maximum per the PSA. We would highlight that shares attributable to Altria

and Bevco per the PSA amounts to 317m.

Deleveraging profile

Despite the USD 62bn bond issuance, we estimate pro-forma F17E net debt to EBITDA of

4.1x for the combined business, after taking into account disposals of US, China and

Europe. Thereafter, we see the business deleveraging at a turn of 0.4x to 0.5x per annum

until we see the dividend growth resume.

Chart 34: ABISAB - deleveraging profile


Dividend assumptions

Given the focus on deleveraging we expect dividend growth to be modest in the first few

years after the transaction, however we do not expect the dividend to be cut.

This reflects the significant financing costs associated with the USD 62bn bond issuance,

with the company doubling up on interest payments in F16 ahead of the transaction

closing.

Chart 35: Deleveraging and dividend profile


F15 F16 F17E F18E F19E F20E

Pro-forma EBITDA 23,786 25,784 27,576 29,473

Pro-forma Net Debt (ye) (97,086) (93,098) (88,517) (84,089)

Net debt to EBITDA 4.1x 3.6x 3.2x 2.9x

€ 0.7

€ 2.4

€ 0.3 € 0.4 € 0.8

€ 1.2

€ 1.9€ 2.2

€ 3.0

€ 3.6 € 3.6 € 3.6€ 4.0 € 4.3

€ 4.7

€ 5.1€ 5.4

1.3x

1.0x

4.7x

3.7x

2.9x

2.3x1.9x

2.2x

2.3x2.5x 2.5x

4.1x3.6x

3.2x2.9x

2.5x2.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Dividend/share (EUR) Net Debt/EBITDA

We look for flattish dividends

2016-17 before rebuilding

again from 2018 as net debt to

EBITDA falls below 4.0x

ABI BB

Initiating Coverage

13 September 2016



Culture – the secret sauce We believe that ABI’s culture and ownership structure sets the business apart from many of its

peers.

ABI has a strong corporate culture. It is interesting that of the 10 Guiding Principles behind

the Dream-People-Culture platform, no less than seven pertain to culture. We see a number of

similarities with the Reckitt model in terms of financial discipline, strong focus on cash, an

aggressive target-related compensation structure and speed of decision making. However,

where ABI differs is the influence of the controlling shareholders which drives an ownership

culture and a long-term view.

With over USD 100bn equity tied up in ABI, the Brazilian and Belgian reference shareholders

have a significant financial interest in the business. Their continued close involvement and

board control gives the company both the benefits of a long term view, similar to many

family controlled companies, but with the benefits of hard financial logic rather than

sentiment. Management are also deeply aligned with external shareholders given that c.1%

of ABI’s share capital is held by ABI executives.

Reference shareholder - significant skin in the game….

ABI’s reference shareholders, the Brazilian and Belgian families, have significant skin in the

game (over USD 100bn). In comparison to other global beverage family dynasties, the

Brazilian and Belgian families have more wealth tied up in ABI than the combined implied

holdings of the Heineken family (through L’Arche Green), Femsa in Heineken, the

Carlsberg Foundation, and Societe Paul Ricard in Pernod Ricard.

Table 31: Estimated wealth of European beer/spirits family dynasties

Company Family Equity interest Value

(USD bn)

ABI SAB Lehmann 10.6% 25.1

ABI SAB Telles 4.9% 11.7

ABI SAB Sicupira 3.8% 9.0

ABI SAB Belgian shareholders 24.7% 58.4

ABI SAB Altria 10.8% 25.5

ABI SAB Santo Domingo 5.7% 13.4

Heineken Group Heineken family 22.9% 11.9

Heineken Group Hoyer family 2.9% 1.5

Heineken Group Femsa 20.0% 9.9

Carlsberg Foundation 30.0% 4.4

Pernod Ricard Societe Paul Ricard 14.0% 4.2

Campari Garavoglia 51.0% 3.3

Remy Cointreau Hériard Dubreuil 47% 2.0

Remy Cointreau Cointreau 6% 0.3

Source: Jefferies estimates, company data Share prices are as at 1 September, 2016

…and still closely involved

Marcel Telles (66) was CEO of Brahma from 1989 to 1999, before the merger of Brahma

and Antartica to create Ambev, and we believe he, along with other founders Lemann and

Sicupira, are still closely involved in the business. On the Belgian side, Alexandre Van

Damme, who was previously head of strategy at Interbrew, “has a powerful voice and is

closer to the Brazilians” (source: the Guardian 9 October 2015). We believe he is still

influential on the deal-making side of the business.

ABI culture: a mix of Reckitt

financial discipline with

benefits of long term family

ownership, where hard

financial logic comes before

sentiment

Ownership culture and long

term view

ABI BB

Initiating Coverage

13 September 2016



Benefits of family ownership….

We would highlight that the shareholders agreement between the Brazilian and Belgian

families has been extended a further 10 years. This offers ABI the benefits of a long term

view for strategy and value creation rather than focusing on next quarter’s earnings or

three year guidance.

…and motivated not by sentiment but by hard financial logic

Unlike some instances where companies are under family control, the reference

shareholders are driven by hard financial logic and not sentiment. The board of ABISAB

will consist of 15 directors, with nine appointed by the reference shareholder, three by the

restricted shareholder (Altria and Bevco) and three independent parties.

Management – ownership and alignment

We believe that overall 1% of the share capital is held by ABI’s executives. This equates to

approximately USD 2bn. Share ownership is strong through the company. We believe

that this ownership culture has a strong impact on behaviour. Leaders at ABI act as

owners of the business, which is very different from a group of professional executives: a

professional joins a company to build a resume; owners live with the consequences their

decisions.

Strong company culture

The company’s Guiding Principles, Dream-People-Culture, are 10 non-negotiable beliefs

that define how its employees behave. We highlight a few of the Guiding Principles

below.

People – “Our greatest strength is our people. Great people grow at the pace of their talent

and are rewarded accordingly. We recruit, develop and retain people who can be better than

ourselves. We will be judged by the quality of our teams.”

The business is not afraid of giving responsibility at a young age. The ABI school of

management has often been described as an academy. ABI rarely loses good people.

Culture – it is interesting that of the 10 Guiding Principles of Dream-People-Culture

platform, no less than seven relate to culture. We highlight a few attributes below:

- “we are never completely satisfied with our results, which are the fuel of our company. Focus

and zero complacency guarantee lasting competitive advantage” – the company is

migrating from ZBB to ZOG (zero overhead growth) and NOG (negative overhead

growth).

- “we are a company of owners. Owners take results personally”. With 1% of the shares held

by ABI’s executives, this leads to strong alignment with external shareholders.

- “we believe common sense and simplicity are usually better guidelines than unnecessary

sophistication and complexity” – when processes become overly complex, the company

will implement a “back to basics” series of quick wins to drive efficiencies such as NOG.

- “we manage our costs tightly, to free up resources that will support sustainable and

profitable top line growth”. The company aspires to convert “non-working money” into

“working money”. Note this is the only one of the 10 principles that refers to cost cutting.

- “leadership by personal example is at the core of our culture. We do what we say”. ABI is

known for its meritocratic, results driven culture.

- “we never take shortcuts. Integrity, hard work, quality and responsibility are key to building

our company”.

Management also have

significant skin in the game

ABI BB

Initiating Coverage

13 September 2016



Comparisons with Reckitt…

There are few consumer staples stocks with a corporate culture as strong as ABI’s. Reckitt

appears to share some of the core characteristics including a focus on efficiencies,

aggressive incentives, speed of decision making, the ability to plug and play, strong local

accountability and a view that the company offers ‘the best business school training one

can get’.

….ABI – not too proud to copy

Following the BUD deal in 2008, we would highlight that ABI started to focus on working

capital improvements. The former Chairman of ABI, Peter Harf, was Deputy Chairman at

Reckitt Benckiser. ABI rolled-out a Reckitt-style approach to FCF generation. Through a

combination of aggressive targets, disciplined tracking and monitoring, core working

capital as a percentage of net revenues fell to -13.5% in 2015 from +2% in 2008. This 14%

swing accounted for over USD 6bn of cash released.

Chart 36: Core working capital (CWC) as % of net revenues

Source: Jefferies, ABI FY15 results presentation (slide 36)

…some links between Reckitt, ABI and 3G

The chairman of ABI, Olivier Goudet, is partner and CEO of JAB Holdings, which has a

7.5% stake in Reckitts and manages assets for Germany’s Reimann family. The former

Chairman of ABI, Peter Harf, was previously former Deputy Chairman of Reckitt. JAB

Holdings has invested in 3G (source WSJ 24 March 2015), which is the investment vehicle

of the three major Brazilian investors behind ABI.

….however, reference shareholder sets ABI apart from Reckitt

For a further analysis of Reckitt’s culture, refer to our food/hpc analyst’s report dated 5

August 2016. Link to note: White Space, Behind the White Noise. Reaffirming Buy

One key difference between Reckitt and ABI is the reference shareholders’ involvement in

the business. 8.5% of Reckitt is held by JAB Holdings however the Reimann family does

not control the board. At ABI, the board is controlled by the Brazilian and Belgian

shareholders and we believe they are closely involved in the business.

Some similarity with Reckitt

But ABI reference shareholder

is key difference

ABI BB

Initiating Coverage

13 September 2016



http://bit.ly/2aR9riZ

Valuation & Risks – EUR 130 PT At 20x 2018 p/e the company trades in line with the consumer staples average. However,

given the strong FCF characteristics we estimate a FCF yield 5.3%, after deduction of minority

interests (principally to Ambev), vs the consumer average 4.9%. Given the strong FCF

characteristics, visibility on earnings growth from cost cutting, the company’s durable

competitive advantages and strong management team we believe the company deserves to

trade at a p/e premium. Our EUR 130 price implies that the company trades on a 2018 p/e of

23.4x and FCF yield 4.6%.

Chart 37: CY18 Beverages sector PE

ABI trades on a 20x PE in-line with consumer staples sector

Source: Jefferies estimates, Factset

Chart 38: CY18 Beverages sector FCF yield

ABI trades on a 5.2% FCF ahead wider consumer staples sector


Valuation

The shares trade on a cal 2018 p/e 20.1x and FCF yield 5.3%, after deduction of minority

cashflows. ABI’s p/e is broadly in line with the consumer staples average p/e 20x but the

FCF yield is ahead vs the consumer staples average FCF yield 4.9% Our EUR 130 target

price implies that the company trades on a 2018 p/e of 23.4x and FCF yield 4.6%.

Chart 39: CY17 PE vs EPS growth (CY16-18E)

ABI has sector leading growth, benefiting from the SABMiller acquisition


Trades in line with staples on

p/e but more attractive free

cash flow characteristics

warrant a higher p/e valuation

ABI BB

Initiating Coverage

13 September 2016



Jefferies vs consensus Our EPS estimates are 6% ahead of FY17E consensus and 9% ahead in FY18E. We are more

constructive on cost savings (US$3bn vs guidance US$1.4bn), however we would

acknowledge that consensus may not fully incorporate the impact of the SABMiller

transaction given a number of analysts are restricted on the stock.

Table 32: ABI Jefferies vs Consensus estimates

FY16E FY17E FY18E

Jefferies Sales 42,778 57,509 59,936

Consensus 42,962 58,469 60,996

% difference 0% -2% -2%

Jefferies EBITDA 16,300 23,786 25,784

Consensus 16,570 21,899 23,536

% difference -2% 9% 10%

Jefferies EPS 3.50 5.57 6.18

Consensus 3.94 5.28 5.68

% difference -11% 6% 9%


Chart 40: Sales — 2% below in FY18E


Chart 41: EBITDA — 10% ahead FY18E


Chart 42: EPS— 9% ahead in FY18E


Chart 43: Sell-side analyst ratings — ABI remains a consensus Buy

Source: Factset (31 Aug-16)

ABI BB

Initiating Coverage

13 September 2016



Risks Key risks to our price target include:

1. Economic conditions in the company’s main markets deteriorate

2. Significant weakening of emerging market currencies vs USD will lead to negative

translation risk, negative transactional risk on hard currency denominated input costs and

potentially a weakening of consumer sentiment which would delay the recovery of

disposable income.

3. Strategy is not executed as effectively as forecast, in particular in new territories such as

Africa where the company has limited experience of operating.

4. SABMiller transaction – risk of that the transaction is not approved at the SABMiller

shareholder vote on 28 September.

5. Market risks. De-rating of consumer staples stocks due to sector rotation. Rising bond

yields lead to de-rating of consumer staples stocks.

6. Tax and regulation. Higher than expected corporation tax rate. Potential excise tax

increases and/or restrictions on the sale of alcoholic product.

ABI BB

Initiating Coverage

13 September 2016



Appendix 1 - ABI-SAB transaction –

details Next steps on the transaction:

Key dates are 28 September for ABI and SAB general meetings. The merger is due to

complete 10 October.

Chart 44: Next steps on the transaction


Corporate structures: standalone

Chart 45: Current corporate ownership structure

Source: Jefferies, company data (30 Aug presentation)

Expected date Event

28 September 2016* AB Inbev, SABMiller and Newbelco General Meetings

* SABMiller UK Scheme Court meeting

04 October 2016 * UK Scheme Court Sanction Hearing

05 October 2016

* Delisting of SABMiller shares on London Stock Exchange and

Johannesburg Stock Exchange

* Belgian Merger becomes effective and combination completes

07 October 2016* Delisting of SABMiller shares on London Stock Exchange and

Johannesburg Stock Exchange

10 October 2016 * Belgian Merger becomes effective and combination completes

11 October 2016* New listing of combined group on Euronext Brussels and secondary

listings in New York (ADSs), South Africa and Mexico

ABI BB

Initiating Coverage

13 September 2016



Corporate structure: post transaction completion

Note, the PSA is limited to a maximum of 326m restricted NewbelcoShares, with Altria

and Bevco amounting to c.317m shares. The extent that elections elections for the PSA

cannot be satisfied in full, they will be scaled back pro-rata.

Chart 46: Corporate ownership structure post completion

Source: Jefferies, company data (30 Aug presentation)

ABI BB

Initiating Coverage

13 September 2016



Appendix 2 – model Ahead of ABI providing pro-forma financials for the combined business, we have made the

following assumptions in our modelling. As a consequence, our F16E EPS is likely to be

understated by approximately 5% to reflect consolidation of SABMiller’s business from 10

October. However, this makes limited difference to our F17-19E EPS financials, which we

believe are the more meaningful years for a valuation discussion.

1. Consolidation of SABMiller’s business from 1 January 2017. There are approximately 12

trading weeks in F16. We do not consolidate this in our F16 estimates.

2. Europe – we assume the disposal of the European business, ex-Peroni, Grolsch and

Meantime and the associated assets in Italy, Netherlands and UK, from 1 January 2017.

3. Calendarisation – we have not calendarised SABMiller’s financial year. Therefore, for the

first year of full consolidation (2017) we assume this is equivalent to SABMiller’s F18 (year

ending Mar 2018).

4. Divisional reporting

a. Within Latam COPEC (legacy SABMiller business) we have not stripped out Honduras

and El Salvador, which are under 15% of legacy divisional profits. As a consequence, our

Middle Americas division is understated by USD 200-300m and Latam COPEC overstated

by USD 200-300m.

b. Asia: we have not stripped out the legacy Asia businesses from ABI (eg India, Vietnam)

which would have been booked in Asia Pac North and consolidated them into Asia Pac

South.

5. We assume that ABI will only consolidate SABMiller’s subsidiary business and not the

associate business – key remaining associates are Castel in Africa, Delta in Zimbabwe,

Distell Group in Africa, Anadolu Efes from Europe. We treat the financial contribution from

these associates as post-tax equity income from associates.

Chart 47: ABI Structure Post-Completion: Nine Zones

Source: Company data (30 Aug 2016 presentation), www.globalbrewer.com/#better-world

ABI BB

Initiating Coverage

13 September 2016



Valuation methodology

We value ABI at EUR 130 per share. This is based on a sum-of-the-parts DCF analysis. The

respect WACC and terminal growth rates (TDR) for each division are as follows:

N.America –WACC 5.8%, TGR 1.5%. United States and Canada

Middle Americas - WACC 8.8%, TGR 2.5%. Mexico, El Salvador and Honduras

Latam North - WACC 8.8%, TGR 2.5%. Brazil, the Dominican Republic,

Guatemala,Panama, St. Vincent, Cuba, Puerto Rico, Barbados, Dominica and the Caribbean

Latam South - WACC 8.8%, TGR 2.5%. Argentina, Uruguay, Chile, Paraguay and

Bolivia

Latam COPEC - WACC 8.8%, TGR 3.0%. Colombia, Peru and Ecuador

Europe - WACC 5.8%, TGR 1.0%. UK, Ireland, France, Italy, Spain, Germany,

Belgium, Luxembourg, the Netherlands, Switzerland, Austria, Ukraine, Russia and Export Europe and Middle East.

Asia Pac North – WACC 7.9%, TGR 2.5%. China, South Korea and Japan

Asia Pac South - WACC 6.0%, TGR 2.0%. Australia, New Zealand, India, Vietnam and other South and Southeast Asian countries.

Africa – WACC 8.8%, TGR 3.0%. South Africa, Botswana, Swaziland,

Mozambique, Malawi, Namibia, Zambia, Lesotho, Uganda, Ethiopia, African Islands, Tanzania, South Sudan, Kenya, Nigeria and Ghana

This results in a blended average WACC of 7.8%.

We use a target gearing level 30/70% debt/equity.

Cost of debt: we use a pre-tax cost of debt 3.5% in line with ABI’s average

coupon, tax rate 23%.

Cost of equity: we use a risk free rate 1.3% in line with UK 30 year government

bonds, equity risk premium of 6.5%.

This results in a core WACC rate of 5.8%. We then apply a 3.0% inflation

differential to emerging markets within our sum of the parts DCF to account for

the market risk premium associated with these higher growth regions.

ABI BB

Initiating Coverage

13 September 2016



ABI: Financial Model

Table 33: ABISAB Summary Income Statement

Income Statement (USDm) 2014 2015 2016E 2016R 2017E 2018E 2019E

Net turnover 47,063 43,604 42,778 55,049 57,509 59,936 62,542

Growth (%) 9% -7% -2% 4% 4% 4%

EBITDA 18,542 16,839 16,300 21,046 23,786 25,784 27,576

Growth (%) 8% -9% -3% 13% 8% 7%

Margin (%) 39.4% 38.6% 38.1% 38.2% 41.4% 43.0% 44.1%

Margin improvement (bps) -39bp -78bp -51bp 313bp 166bp 107bp

D&A 3,234 3,071 3,159 4,121 4,373 4,647

% of sales 6.9% 7.0% 7.4% 7.2% 7.3% 7.4%

EBIT pre exceptional 15,308 13,768 13,141 17,171 19,666 21,410 22,928

Growth (%) 8% -10% -5% 15% 9% 7%

Margin (%) 32.5% 31.6% 30.7% 31.2% 34.2% 35.7% 36.7%

Margin improvement (bps) -35bp -95bp -86bp 300bp 153bp 94bp

Non recurring items above EBIT (197) 136 0 (300) (300) (300)

Net Financing costs (1,828) (1,239) (3,977) (3,556) (3,530) (3,334)

Non-recurring net finance costs (5,136) 0 0 0

Pre-tax profit 13,792 12,451 4,028 15,810 17,580 19,294

Taxation (2,499) (2,594) (2,014) (3,636) (4,043) (4,438)

Tax rate (%) 18.1% 20.8% 50.0% 23.0% 23.0% 23.0%

Associates 9 10 0 427 458 491

Minorities (2,086) (1,594) (1,498) (1,882) (2,066) (2,270)

Net income 9,216 8,273 516 10,719 11,929 13,077

Net income pre-exceptionals 8,865 8,513 5,741 10,950 12,160 13,308

Growth (%) 11.7% -4.0% -32.6% 90.7% 11.0% 9.4%

Weighted average shares 1,634 1,638 1,640 1,966 1,966 1,966

EPS 5.64 5.05 0.31 5.45 6.07 6.65

EPS pre exceptionals 5.43 5.20 3.50 5.57 6.18 6.77

Growth (%) 10.5% -4.2% -32.6% 59.1% 11.0% 9.4%

Dividends per share (USD) 3.52 3.91 3.96 3.96 4.40 4.74

Dividend payout ratio 65% 75% 113% 71% 71% 70%

Dividend growth 24.4% 11.1% 1.2% 11.0% 7.8%

Source: Company data, Jefferies estimates

ABI BB

Initiating Coverage

13 September 2016



Table 34: ABISAB Summary Cash Flow

Cashflow (USD m) 2013A 2014A 2015A 2016E 2017E 2018E 2019E

EBIT 14,800 15,308 13,768 13,141 19,666 21,410 22,928

Depreciation and amortisation 2,985 3,234 3,071 3,159 4,121 4,373 4,647

Other operating (1,200) (669) (562) (562) (843) (843) (843)

Net working capital moves 866 815 1,786 800 1,351 1,351 1,351

Operating Cashflow 17,451 18,688 18,063 16,538 24,294 26,292 28,084

Interest (1,917) (2,203) (1,609) (1,900) (3,210) (3,138) (2,998)

Taxation (2,276) (2,371) (2,355) (2,014) (3,636) (4,043) (4,438)

Dividends received 606 30 22 24 266 283 303

Trading cash flow 13,864 14,144 14,121 12,648 17,714 19,393 20,951

Capital investment (3,612) (4,122) (4,337) (3,700) (4,601) (4,795) (5,003)

Free cash flow 10,252 10,022 9,784 8,948 13,113 14,599 15,947

Acquisitions / disposals (6,669) (6,700) (918) 0 (59,294) 0 0

Pre-dividend cash flow 3,583 3,322 8,866 8,948 (46,181) 14,599 15,947

Dividends paid to shareholders (4,866) (4,743) (6,300) (6,377) (7,645) (8,489) (9,148)

AMBEV minority dividends (1,387) (2,657) (1,666) (1,416) (1,529) (1,621) (1,718)

IPO proceeds/buybacks 73 83 (995) 0 0 0 0

Other (6,120) 691 45 (200) (500) (500) (500)

Net cash flow (8,717) (3,304) (50) 954 (55,856) 3,988 4,581

Opening net debt (30,114) (38,831) (42,135) (42,185) (41,231) (97,086) (93,098)

Closing net debt (38,831) (42,135) (42,185) (41,231) (97,086) (93,098) (88,517)

Ave net debt (34,472) (40,483) (42,160) (41,708) (69,158) (95,092) (90,808)

Free cash flow less AmBev 8,865 7,365 8,118 7,531 11,584 12,977 14,229

EBITDA 18,542 16,839 16,300 23,786 25,784 27,576

Net Debt EBITDA 2.3x 2.5x 2.5x 4.1x 3.6x 3.2x


ABI BB

Initiating Coverage

13 September 2016



Table 35: ABISAB Summary Balance Sheet

Year end: 31 Dec (USD m) 2013 2014 2015 2016E 2017E 2018E 2019E

Non-Current Assets

PPE 20,889 20,263 18,952 22,652 27,253 32,048 37,051

Associates & investments 380 228 260 260 260 260 260

Goodwill 69,927 70,758 65,061 65,061 148,224 148,224 148,224

Intangibles 29,338 29,923 29,677 29,677 29,677 29,677 29,677

Deferred tax assets 1,180 1,058 1,181 1,181 1,181 1,181 1,181

Employee benefits 10 10 2 2 2 2 2

Trade and other receivables 1,252 1,769 1,208 1,208 1,208 1,208 1,208

122,976 124,009 116,341 120,041 207,804 212,599 217,603

Current assets

Debtors 123 301 55 54 56 59 61

Stock 2,950 2,974 2,862 2,808 2,933 3,057 3,190

Trade and other receivables 5,362 6,449 7,719 7,719 8,064 8,404 8,770

Cash 9,839 8,357 6,923 54,393 6,923 6,923 6,923

Other 416 460 735 735 735 735 735

18,690 18,541 18,294 65,709 18,711 19,178 19,679

Current liabilities

Trade, accruals & misc. (16,474) (17,909) (17,662) (17,328) (18,102) (18,866) (19,686)

Tax (1,105) (629) (669) (669) (669) (669) (669)

Other (196) (165) (220) (220) (220) (220) (220)

Current portion of LT debt (7,846) (8,505) (9,905) (9,905) (9,905) (9,905) (9,905)

(25,621) (27,208) (28,456) (28,122) (28,896) (29,660) (30,480)

Working capital (net of debt) (6,931) (8,667) (10,162) 37,587 (10,184) (10,482) (10,801)

Non-current liabilities

Provisions & other liabilities (16,235) (16,385) (15,363) (15,363) (15,363) (15,363) (15,363)

Other (3,222) (1,070) (1,556) (1,556) (1,556) (1,556) (1,556)

Minority interests (4,943) (4,285) (3,582) (3,729) (3,882) (4,041) (4,207)

Long term creditors (41,274) (43,630) (43,541) (90,057) (98,442) (94,455) (89,873)

Net assets 50,371 49,972 42,137 46,923 78,377 86,703 95,802

Capital structure

Ordinary equity funds 50,371 49,972 42,137 46,923 78,377 86,703 95,802

Shareholders' funds 50,371 49,972 42,137 46,923 78,377 86,703 95,802


ABI BB

Initiating Coverage

13 September 2016



Chart 48: ABISAB Divisional Summary


Dvisional Summary FY14 FY15 Q116 Q216 H116 Q316E 9M16E Q416E H216E FY16E F16R FY17E FY18E FY19E

Volumes (m hl)

LY 446 458.8 107 117 224 122 346 111 233 457 601 612 624

Organic 2 (3) (1.8) (2.0) (3.8) (2.0) (5.9) (2.2) (4.2) (8) 11 11 12

Acq/Div 11 1 (0.7) 0.1 (0.6) 0.0 (0.6) (0.0) (1.1) (1) 0 0 0

CY 459 457.3 105 115 220 120 339 109.2 229 449 601 612 624 636

Organic % 0.6% -0.6% -1.7% -1.7% -1.7% -1.7% -1.7% -2.0% -1.8% -1.8% 1.9% 1.9% 1.9%

Sales

LY 45,483 47,063 10,453 11,052 21,505 11,375 32,880 10,723 22,097 43,603 55,049 57,509 59,936

Organic 2,664 2,930 317 444 761 390 1,151 429 819 1,580 3,275 3,403 3,610

Acq/Div 1,223 (433) (61) 27 (34) 4 (31) (3) 0 (34) 0 0 0

FX (2,306) (5,956) (1,310) (716) (2,026) (350) (2,376) 5 (345) (2,371) (816) (975) (1,004)

FX % -5.1% -12.7% -13% -6% -9% -3% -7% 0% -2% -5.4% -1.5% -1.7% -1.7%

CY 47,063 43,604 9,400 10,806 20,206 11,419 31,624 11,154 22,571 42,778 55,049 57,509 59,936 62,542

Organic % 5.9% 6.2% 3.0% 4.0% 3.5% 3.4% 3.5% 4.0% 3.7% 3.6% 5.9% 5.9% 6.0%

Price/Mix +5.3% +6.8% +4.7% +5.7% +5.2% +5.1% +5.2% +6.0% +5.5% +5.4% +4.0% +4.1% +4.1%

EBITDA

LY 17,943 18,542 3,967 4,156 8,123 4,402.8 12,526 4,313 8,715 16,839 21,046 23,786 25,784

Organic 904 1,198 85 159 243 47 290 141 188 431 1,559 1,628 1,738

Acq/Div 468 (472) (19) (35) (55) 0 (55) 22 22 (33) 0 0 0

Synergies 265 210 15 15 30 15 45 15 30 60 1,500 750 450

FX (1,038) (2,640) (586) (283) (868) (133) (1,002) 5 (128) (997) (319) (380) (396)

FX % -6% -14% -15% -7% -11% -3% -8% 0% -1% -6% -2% -2% -2%

CY 18,542 16,839 3,462 4,011 7,473 4,332 11,805 4,495 8,827 16,300 21,046 23,786 25,784 27,576

Organic % 6.5% 7.6% 2.5% 4.2% 3.4% 1.4% 2.7% 3.6% 2.5% 2.9% 14.5% 10.0% 8.5%

Margin 39.4% 38.6% 36.8% 37.1% 37.0% 37.9% 37.3% 40.3% 39.1% 38.1% 41.4% 43.0% 44.1%

EBIT

LY 14,800 15,308 3,213 3,382 6,595 3,634 10,229 3,539 7,172 13,767 17,171 19,666 21,410

Organic 732 936 (34) 80 46 49 95 95 144 190 1,252 1,302 1,388

Acq/Div 407 (496) (22) (39) (60) 0 (60) 23 23 (37) 0 0 0

Synergies 252 210 15.0 15 30 15 45 15 30 60 1,500 750 450

FX (882) (2,190) (479) (217) (696) (108) (804) (36) (143) (840) (258) (308) (320)

FX % -6.0% -14.3% -15% -6% -11% -3% -8% -1% -2% -6.1% -1.5% -1.6% -1.5%

CY 15,308 13,768 2,693 3,222 5,915 3,590 9,505 3,636 7,226 13,141 17,171 19,666 21,410 22,928

Organic % 6.6% 7.5% -0.6% 2.8% 1.2% 1.8% 1.4% 3.1% 2.4% 1.8% 16.0% 10.4% 8.6%

Margin % 32.5% 31.6% 28.6% 29.8% 29.3% 31.4% 30.1% 32.6% 32.0% 30.7% 31.2% 34.2% 35.7% 36.7%

Depreciation implied 3,234 3,071 769 790 1,559 742 2,301 858 1,600 3,159 4,121 4,373 4,647

D&A / sales 6.9% 7.0% 8.2% 7.3% 7.7% 6.5% 7.3% 7.7% 7.1% 7.4% 7.2% 7.3% 7.4%

ABI BB

Initiating Coverage

13 September 2016



Chart 49: ABISAB: Middle Americas division (Mexico)


Middle Americas (Mexico) FY14 FY15 Q116 Q216 H116 Q316E 9M16 Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 38.2 38.8 9.1 10.9 20.0 10.7 30.7 11.0 21.6 41.6 44.8 46.1 47.7

Organic 0.6 2.8 1.2 0.8 2.0 0.7 2.7 0.4 1.2 3.2 1.3 1.6 1.7

Acq/Div 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

CY 38.8 41.6 10.3 11.7 22.0 11.4 33.4 11.4 22.8 44.8 46.1 47.7 49.4

Organic % 1.6% 7.3% 13.0% 7.2% 9.9% 7.0% 8.9% 3.9% 5.4% 7.6% 3.0% 3.5% 3.5%

Sales

LY 4,669 4,619 893 1,055 1,948 993 2,941 1,009 2,003 3,951 3,691 3,750 3,811

Organic 256 468 144 100 244 92 336 64 156 400 258 263 267

Acq/Div (166) (387) (6) (7) (13) 0 (13) (1) (1) (13) 0 0 0

FX (139) (749) (176) (157) (333) (145) (477) (170) (314) (647) (199) (202) (205)

FX % -3% -16% -20% -18% -17% -15% -16% -17% -16% -16% -5.4% -5.4% -5.4%

CY 4,619 3,951 855 992 1,847 940 2,788 903 1,844 3,691 3,750 3,811 3,873

Organic % 5.5% 10.1% 16.1% 9.5% 12.5% 9.3% 11.4% 6.3% 7.8% 10.1% 7.0% 7.0% 7.0%

Price/Mix +3.9% +2.8% +3.1% +2.2% +2.7% +2.3% +2.6% +2.4% +2.3% +2.6% +4.0% +3.5% +3.5%

EBITDA

LY 1,940 2,186.3 417 569 986 513 1,499 508 1,020 2,007 1,828 1,894 1,962

Organic 130 158 28 21 49 36 85 35 71 120 165 170 157

Acq/Div (82) (168) (12) (24) (36) 0 (36) 0 0 (36) 0 0 0

Synergies 265 210 15 15 30 15 45 15 30 60 0 0 0

FX (66) (380) (77) (81) (158) (75) (233) (90) (165) (323) (98) (102) (106)

FX % -3% -17% -18% -14% -16% -15% -16% -18% -16% -16% -5% -5% -5%

CY 2,186 2,007 371 500 871.3 489 1,360 468 957 1,828 1,894 1,962 2,014

Organic % 20.4% 16.9% 10.3% 6.6% 8.0% 10.0% 8.7% 9.8% 9.9% 9.0% 9.0% 9.0% 8.0%

Margin 47.3% 50.8% 43.4% 50.4% 47.2% 52.0% 48.8% 51.8% 51.9% 49.5% 50.5% 51.5% 52.0%

EBIT

LY 1,557 1,791 329 484 813 432 1,244 425 857 1,669 1,516 1,571 1,628

Organic 110 145 20 14 34 28 62 28 56 90 136 141 130

Acq/Div (74) (160) (12) (24) (36) 0 (36) 0 0 (36) 0 0 0

Synergies 252 210 15 15 30 15 45 15 30 60 0 0 0

FX (54) (316) (60) (68) (128) (63) (191) (76) (139) (267) (82) (85) (88)

FX % -3.5% -17.6% -18% -14% -15.8% -14.6% -15.4% -17.9% -16.2% -16.4% -5.4% -5.4% -5.4%

CY 1,791 1,669 292 420 712.6 412 1,124 392 804 1,516 1,571 1,628 1,670

Organic % 23.3% 19.8% 10.6% 6.1% 7.9% 10.0% 8.6% 10.0% 10.0% 9.0% 9.0% 9.0% 8.0%

Margin% 38.8% 42.3% 34.2% 42.4% 38.6% 43.8% 40.3% 43.4% 43.6% 41.1% 41.9% 42.7% 43.1%

Margin development 349bp -118bp 81bp 82bp 42bp

ABI BB

Initiating Coverage

13 September 2016



Chart 50: ABISAB: LatAm North division (Brazil)


Latam North (Brazil) FY14 FY15 Q116 Q216 H116 Q316E 9M16E Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 120.4 125.4 31.3 27.5 58.8 29.4 88.2 35.3 64.7 123.5 117.6 119.9 122.4

Organic 5.0 (2.0) (2.3) (1.3) (3.6) (1.3) (4.9) (1.6) (2.9) (6.5) 2.4 2.4 2.4

Acq/Div 0.0 0.0 0.2 0.4 0.6 0.0 0.6 0.0 0.0 0.6 0.0 0.0 0.0

CY 125.4 123.5 29.1 26.6 55.8 28.1 83.9 33.7 61.8 117.6 119.9 122.4 124.8

Organic % 4.1% -1.6% -7.3% -4.7% -6.1% -4.5% -5.6% -4.5% -4.5% -5.3% 2.0% 2.0% 2.0%

Sales

LY 11,010 11,269 2,489 1,995 4,484 2,127 6,610 2,486 4,613 9,096 8,874 9,849 10,931

Organic 1,201 984 (48) 35 (14) 21 8 32 54 40 887 985 1,093

Acq/Div 5 1 13 60 73 0 73 1 1 73 0 0 0

FX (948) (3,157) (610) (224) (834) 126 (709) 374 499 (335) 88 97 108

FX % -9% -28% -25% -11% -19% 6% -11% 15% 11% -4% 1% 1% 1%

CY 11,269 9,096 1,844 1,865 3,708 2,273 5,982 2,893 5,166 8,874 9,849 10,931 12,132

Organic % 10.9% 8.7% -1.9% 1.7% -0.3% 1.0% 0.1% 1.3% 1.2% 0.4% 10.0% 10.0% 10.0%

Price/Mix +6.8% +10.3% +5.4% +6.4% +5.8% +5.5% +5.7% +5.8% +5.7% +5.7% +8.0% +8.0% +8.0%

EBITDA

LY 5,859 5,742 1,267 904 2,171 1,046 3,217 1,491 2,538 4,709 4,470 5,006 5,606

Organic 375 657 (43) (10) (53) (10) (63) (22) (32) (85) 492 551 617

Acq/Div 2 0 5 15 20 0 20 0 0 20 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (495) (1,690) (313) (89) (402) 62 (341) 167 229 (173) 44 49 55

FX % -8% -29% -25% -10% -19% 6% -11% 11% 9% -4% 1% 1% 1%

CY 5,742 4,709 916 819 1,735.3 1,098 2,833 1,637 2,735 4,470 5,006 5,606 6,278

Organic % 6.4% 11.4% -3.4% -1.1% -2.4% -1.0% -2.0% -1.4% -1.3% -1.8% 11.0% 11.0% 11.0%

Margin 51.0% 51.8% 49.7% 43.9% 46.8% 48.3% 47.4% 56.6% 52.9% 50.4% 50.8% 51.3% 51.7%

EBIT

LY 5,151 4,979 1,092 718 1,809 872 2,682 1,339 2,211 4,020 3,712 4,157 4,656

Organic 257 500 (83) (33) (116) (26) (142) (38) (65) (180) 408 457 512

Acq/Div 2 0 5 15 20 0 20 (0) (0) 20 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (431) (1,458) (260) (64) (324) 52 (272) 124 176 (148) 37 41 46

FX % -8% -29% -24% -9% -18% 6% -10% 9% 8% -4% 1% 1% 1%

CY 4,979 4,020 754 636 1,390.3 897 2,288 1,424 2,322 3,712 4,157 4,656 5,214

Organic % 5.0% 10.0% -7.6% -4.6% -6.4% -3.0% -5.3% -2.9% -2.9% -4.5% 11.0% 11.0% 11.0%

Margin% 44.2% 44.2% 40.9% 34.1% 37.5% 39.5% 38.2% 49.2% 44.9% 41.8% 42.2% 42.6% 43.0%


ABI BB

Initiating Coverage

13 September 2016



Chart 51: ABISAB: LatAm South division (Argentina)


Latam South (USD m) FY14 FY15 Q116 Q216 H116 Q316E 9M16E Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 36.918 36.8 10.1 7.8 17.9 7.8 25.7 10.3 18.1 36.0 32.4 33.0 33.7

Organic (0.1) (0.6) (0.5) (1.1) (1.6) (0.4) (2.0) (0.5) (0.9) (2.5) 0.6 0.7 0.7

Acq/Div 0.0 (0.3) (0.6) (0.5) (1.1) 0.0 (1.1) (0.0) (0.0) (1.1) 0.0 0.0 0.0

CY 36.828 36.0 9.0 6.2 15.2 7.4 22.7 9.7 17.2 32.4 33.0 33.7 34.4

Organic % -0.2% -1.5% -5.0% -13.9% -8.8% -5.0% -7.7% -5.1% -5.1% -6.9% 2.0% 2.0% 2.0%

Sales

LY 3,269 2,961 918 696 1,614 772 2,385 1,072 1,844 3,458 3,059 3,158 3,261

Organic 586 849 154 27 181 184 365 185 369 550 306 316 326

Acq/Div 0 32 (18) (16) (34) 4 (30) (4) 0 (34) 0 0 0

FX (893) (385) (305) (180) (485) (216) (701) (213) (429) (914) (207) (213) (220)

FX % -27% -13% -33% -26% -30% -28% -29% -20% -23% -26% -7% -7% -7%

CY 2,961 3,458 749 528 1,276 744 2,020 1,040 1,784 3,059 3,158 3,261 3,366

Organic % 17.9% 28.7% 16.8% 3.9% 11.2% 16.0% 15.3% 17.2% 20.0% 15.9% 10.0% 10.0% 10.0%

Price/Mix +18.2% +30.2% +21.7% +17.8% +20.1% +21.0% +23.0% +22.4% +25.1% +22.9% +8.0% +8.0% +8.0%

EBITDA

LY 1,491 1,352 417 264 681 350 1,031 557 907 1,588 1,463 1,525 1,589

Organic 256 356 101 29 130 70 200 100 170 300 161 168 175

Acq/Div 0 40 (1) (7) (8) 0 (8) 0 0 (8) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (394) (160) (152) (71) (223) (98) (321) (97) (195) (418) (99) (103) (107)

FX % -26% -12% -36% -27% -33% -28% -31% -17% -21% -26% -7% -7% -7%

CY 1,352 1,588 365 215 580.2 322 903 560 882 1,463 1,525 1,589 1,657

Organic % 17.1% 26.3% 24.2% 11.0% 19.1% 20.0% 19.4% 17.9% 18.7% 18.9% 11.0% 11.0% 11.0%

Margin 45.7% 45.9% 48.8% 40.8% 45.5% 43.4% 44.7% 53.9% 49.5% 47.8% 48.3% 48.7% 49.2%

EBIT

LY 1,311 1,175 372 216 588 299 887 506 805 1,393 1,239 1,291 1,346

Organic 210 315 85 8 93 51 144 76 127 220 136 142 148

Acq/Div 0 40 (1) (7) (8) 0 (8) 0 0 (8) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (346) (138) (135) (51) (186) (84) (270) (96) (180) (366) (84) (87) (91)

FX % -26% -12% -36% -24% -32% -28% -30% -19% -22% -26% -7% -7% -7%

CY 1,175 1,393 321 166 487 267 753 485 752 1,239 1,291 1,346 1,403

Organic % 16.0% 26.8% 22.9% 3.7% 15.8% 17.0% 16.2% 15.0% 15.8% 15.8% 11.0% 11.0% 11.0%

Margin% 39.7% 40.3% 42.9% 31.5% 38.2% 35.8% 37.3% 46.7% 42.2% 40.5% 40.9% 41.3% 41.7%

Margin development 59bp 234bp 44bp 172bp -294bp 11bp -49bp -150bp 21bp 39bp 40bp 40bp

ABI BB

Initiating Coverage

13 September 2016



Chart 52: ABISAB: North America division (US)


North America Growth (USD m) FY14 FY15 Q116 Q216 H116 Q316E 9M16E Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 122.1 121.2 27.3 31.1 58.4 32.4 90.8 27.3 59.7 118.2 117.6 116.4 115.2

Organic (1.6) (2.3) (0.3) 0.1 (0.2) (0.6) (0.8) 0.0 (0.6) (0.8) (1.2) (1.2) (1.2)

Acq/Div 0.6 (0.7) (0.1) 0.3 0.2 0.0 0.2 (0.0) (0.0) 0.2 0.0 0.0 0.0

CY 121.2 118.2 26.9 31.5 58.4 31.8 90.2 27.3 59.1 117.6 116.4 115.2 114.1

Organic % -1.3% -1.9% -1.1% 0.4% -0.3% -2.0% -0.9% 0.1% -1.0% -0.7% -1.0% -1.0% -1.0%

Sales

LY 16,023 16,093 3,601 4,118 7,719 4,240 11,959 3,644 7,882 15,603 15,734 15,898 16,056

Organic 35 (22) 9 92 101 (13) 88 62 49 150 157 159 161

Acq/Div 159 (193) (38) 70 32 0 32 0 0 32 0 0 0

FX (123) (276) (40) (18) (58) (2) (60) 10 8 (50) 6 0 0

FX % -1% -2% -1% 0% -1% 0% -1% 0% 0% 0% 0% 0% 0%

CY 16,093 15,603 3,532 4,262 7,794 4,225 12,019 3,715 7,939 15,734 15,898 16,056 16,217

Organic % 0.2% -0.1% 0.2% 2.2% 1.3% -0.3% 0.7% 1.7% 0.6% 1.0% 1.0% 1.0% 1.0%

Price/Mix +1.5% +1.8% +1.3% +1.9% +1.6% +1.7% +1.7% +1.6% +1.7% +1.6% +2.0% +2.0% +2.0%

EBITDA

LY 6,728 6,820 1,381 1,657 3,038 1,734 4,772 1,400 3,134 6,172 6,264 6,329 6,392

Organic (82) (218) 28 81 109 (52) 56 64 12 120 63 63 64

Acq/Div 232 (309) (13) 5 (8) 0 (8) 0 0 (8) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (57) (122) (13) (10) (23) (1) (24) 4 3 (20) 2 0 0

FX % -1% -2% -1% -1% -1% 0% -1% 0% 0% 0% 0% 0% 0%

CY 6,820 6,172 1,384 1,732 3,115.6 1,680.8 4,796 1,468 3,148 6,264 6,329 6,392 6,456

Organic % -1.2% -3.2% 2.0% 4.9% 3.6% -3.0% 1.2% 4.5% 0.4% 1.9% 1.0% 1.0% 1.0%

Margin 42.4% 39.6% 39.2% 40.6% 40.0% 39.8% 39.9% 39.5% 39.7% 39.8% 39.8% 39.8% 39.8%

EBIT

LY 5,931 6,068 1,200 1,470 2,671 1,545 4,215 1,201 2,746 5,417 5,487 5,544 5,600

Organic (52) (228) 19 66 85 (46) 39 61 15 100 55 55 56

Acq/Div 242 (310) (14) 2 (12) 0 (12) (0) (0) (12) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (53) (113) (11) (10) (21) (1) (22) 4 4 (17) 2 0 0

FX % -1% -2% -1% -1% -1% 0% -1% 0% 0% 0% 0% 0% 0%

CY 6,068 5,417 1,194 1,529 2,723.2 1,497 4,221 1,267 2,764 5,487 5,544 5,600 5,656

Organic % -0.9% -3.8% 1.6% 4.5% 3.2% -3.0% 0.9% 5.1% 0.5% 1.8% 1.0% 1.0% 1.0%

Margin% 37.7% 34.7% 33.8% 35.9% 34.9% 35.4% 35.1% 34.1% 34.8% 34.9% 34.9% 34.9% 34.9%

Margin development -299bp 16bp 0bp 0bp 0bp

ABI BB

Initiating Coverage

13 September 2016



Chart 53: ABISAB: Asia North division (China)


Asia North (China) FY14 FY15 Q116 Q216 H116 Q316E 9M16E Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 65.8 82.5 19.8 25.5 45.3 27.4 72.7 15.5 42.9 88.2 88.0 90.2 92.5

Organic 1.1 (0.1) (0.1) (0.4) (0.5) 0.0 (0.5) 0.0 0.0 (0.5) 2.2 2.3 2.3

Acq/Div 15.6 5.8 0.1 0.2 0.3 0.0 0.3 (0.0) (0.0) 0.3 0.0 0.0 0.0

CY 82.5 88.2 19.8 25.3 45.1 27.4 72.5 15.5 43.0 88.0 90.2 92.5 94.8

Organic % 1.7% -0.1% -0.5% -1.7% -1.2% 0.0% -0.7% 0.2% 0.1% -0.6% 2.5% 2.5% 2.5%

Sales

LY 3,354 5,040 1,294 1,528 2,822 1,613 4,435 1,120 2,734 5,555 5,561 5,932 6,328

Organic 396 355 25 63 88 65 153 47 112 200 501 534 570

Acq/Div 1,298 305 11 14 25 0 25 0 0 25 0 0 0

FX (8) (145) (73) (79) (151) (54) (205) (14) (68) (219) (130) (138) (148)

FX % 0% -3% -6% -5% -5% -3% -5% -1% -2% -4% -2% -2% -2%

CY 5,040 5,555 1,258 1,526 2,784 1,624 4,408 1,154 2,778 5,561 5,932 6,328 6,750

Organic % 11.8% 7.0% 2.0% 4.1% 3.1% 4.0% 3.4% 4.2% 4.1% 3.6% 9.0% 9.0% 9.0%

Price/Mix +10.1% +7.1% +2.4% +5.9% +4.3% +4.0% +4.2% +4.0% +4.0% +4.2% +6.5% +6.5% +6.5%

EBITDA

LY 546 1,067 342 421 763 409 1,172 177 586 1,349 1,442 1,611 1,798

Organic 156 244 11 85 95 41 136 0 41 136 202 225 252

Acq/Div 366 77 6 5 11 0 11 (0) (0) 11 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (2) (40) (20) (25) (44) (14) (58) 4 (9) (53) (34) (38) (42)

FX % 0% -4% -6% -6% -6% -3% -5% 3% -2% -4% -2% -2% -2%

CY 1,067 1,349 338 486 825 436 1,261 181 617 1,442 1,611 1,798 2,008

Organic % 28.7% 22.9% 3.1% 20.1% 12.5% 10.0% 11.6% 0.0% 7.0% 10.1% 14.0% 14.0% 14.0%

Margin 21.2% 24.3% 26.9% 31.9% 29.6% 26.9% 28.6% 15.7% 22.2% 25.9% 27.1% 28.4% 29.8%

EBIT

LY 127 517 191 274 465 262 727 15 277 742 829 926 1,034

Organic 104 207 (23) 87 64 41 104 1 42 105 116 130 145

Acq/Div 286 47 6 5 11 0 11 0 0 11 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX 0 (28) (11) (18) (29) (9) (37) 8 (1) (30) (19) (22) (24)

FX % 0% -5% -6% -6% -6% -3% -5% 50% 0% -4% -2% -2% -2%

CY 517 742 163 348 511 293 805 24 317 829 926 1,034 1,154

Organic % 81.9% 40.0% -12.0% 31.5% 13.6% 15.5% 14.3% 6.2% 15.0% 14.1% 14.0% 14.0% 14.0%

Margin% 10.3% 13.4% 13.0% 22.8% 18.4% 18.1% 18.3% 2.1% 11.4% 14.9% 15.6% 16.3% 17.1%

Margin development 310bp 154bp 70bp 73bp 77bp

ABI BB

Initiating Coverage

13 September 2016



Chart 54: ABISAB: Europe division


Europe (USD m) FY14 FY15 Q116 Q216E H116E Q316E 9M16E Q416E H216E FY16E FY17E FY18E FY19E

Volumes (m hl)

LY 47.030 44.3 8.3 12.4 20.7 12.0 32.7 10.3 22.3 43.0 41.8 40.2 38.7

Organic (2.8) (1.1) 0.1 (0.1) 0.1 (0.5) (0.4) (0.6) (1.1) (1.0) (1.6) (1.6) (1.6)

Acq/Div 0.1 (0.2) (0.1) (0.1) (0.2) 0.0 (0.2) 0.0 0.0 (0.2) 0.0 0.0 0.0

CY 44.276 43.0 8.4 12.2 20.5 11.5 32.1 9.7 21.2 41.8 40.2 38.7 37.1

Organic % -6.0% -2.4% 1.8% -0.8% 0.2% -4.0% -1.3% -5.5% -4.7% -2.3% -3.7% -3.9% -4.0%

Sales

LY 5,021 4,864 775 1,147 1,922 1,126 3,048 964 2,090 4,012 4,027 4,036 4,045

Organic 4 224 35 51 86 0 86 14 14 100 81 81 81

Acq/Div 6 (45) (5) (9) (14) 0 (14) 0 0 (14) 0 0 0

FX (166) (1,032) (65) (33) (98) (24) (122) 51 27 (71) (71) (71) (72)

FX % -3% -21% -8% -3% -5% -2% -4% 5% 1% -2% -2% -2% -2%

CY 4,864 4,012 740 1,156 1,896 1,102 2,998 1,028 2,131 4,027 4,036 4,045 4,054

Organic % 0.1% 4.6% 4.5% 4.5% 4.5% 0.0% 2.8% 1.4% 0.7% 2.5% 2.0% 2.0% 2.0%

Price/Mix +6.0% +7.0% +2.7% +5.3% +4.2% +4.0% +4.2% +7.0% +5.4% +4.8% +5.7% +5.9% +6.0%

EBITDA

LY 1,341 1,343 154 345 499 344 843 247 591 1,090 1,039 1,051 1,064

Organic 21 23 (7) 0 (7) (3) (10) (10) (13) (20) 31 32 32

Acq/Div (1) (37) (4) (8) (12) 0 (12) 0 0 (12) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX (18) (239) (9) (7) (16) (7) (23) 4 (3) (19) (18) (19) (19)

FX % -1% -18% -6% -2% -3% -2% -3% 2% -1% -2% -2% -2% -2%

CY 1,343 1,090 134 330 464 333 797 241 574 1,039 1,051 1,064 1,077

Organic % 1.5% 1.7% -4.5% 0.0% -1.4% -1.0% -1.2% -3.9% -2.2% -1.8% 3.0% 3.0% 3.0%

Margin 27.6% 27.2% 18.2% 28.5% 24.5% 30.2% 26.6% 23.5% 27.0% 25.8% 26.1% 26.3% 26.6%

EBIT

LY 849 906 75 260 335 255 590 157 412 747 697 706 714

Organic 49 22 (11) (5) (16) 8 (8) (17) (9) (25) 21 21 21

Acq/Div (2) (38) (4) (8) (12) 0 (12) 0 0 (12) 0 0 0

Synergies 0 0 0 0 0 0 0 0 0 0 0 0 0

FX 10 (143) (2) (5) (7) (5) (13) (0) (6) (13) (12) (12) (13)

FX % 1% -16% -3% -2% -2% -2% -2% 0% -1% -2% -2% -2% -2%

CY 906 747 57 242 299 258 557 140 398 697 706 714 723

Organic % 5.8% 2.4% -14.7% -1.9% -4.8% 3.2% -1.3% -10.9% -2.2% -3.3% 3.0% 3.0% 3.0%

Margin% 18.6% 18.6% 7.7% 21.0% 15.8% 23.4% 18.6% 13.6% 18.7% 17.3% 17.5% 17.7% 17.8%


ABI BB

Initiating Coverage

13 September 2016



Chart 55: ABISAB: Africa division

Source: Jefferies estimates, company data Note: 2015 is SABMiller FY16 year end. Note: SABMIller subsidiaries only

Africa (USD m) 2014 2015 2016E 2017E 2018E 2019E

Volume (mhl)

LY 60 63 66 70 74 77

Organic 3 4 4 4 4 4

Acq/Div (0) 0 0 0 0 0

CY 63 66 70 74 77 81

Organic % 5.2% 5.9% 5.5% 5.0% 5.0% 5.0%

Sales (NPR)

LY 5,519 4,966 5,165 5,571 5,883

Organic 573 549 540 557 588

Acq/Div 0 0 0 0 0

FX (1,126) (350) (134) (245) (259)

FX % -20.4% -7.1% -2.6% -4.4% -4.4%

CY 5,519 4,966 5,165 5,571 5,883 6,213

Organic % 10.4% 11.1% 10.5% 10.0% 10.0%

EBITA

LY 1,480 1,327 1,374 2,089 2,488

Organic 178 140 151 164 175

Synergies 0 0 600 300 180

Acq/Div 0 0 0 0 0

FX (331) (94) (36) (65) (70)

FX % -22.2% -7.1% -2.6% -4.4% -4.4%

CY 1,480 1,327 1,374 2,089 2,488 2,772

Organic pre synergies % 11.0% 11.0% 11.0%

Organic inc synergies % 12.0% 10.6% 54.7% 22.2% 14.3%

EBITA margin 26.8% 26.7% 26.6% 37.5% 42.3% 44.6%

Margin development -9bp -12bp 1091bp 478bp 234bp

EBITDA

LY 1,755 1,576 1,636 2,374 2,791

Organic 211 171 180 195 208

Synergies 0 0 600 300 180

Acq/Div 0 0 0 0 0

FX (390) (111) (42) (78) (83)

FX % -22.2% -7.1% -2.6% -4.4% -4.4%

CY 1,755 1,576 1,636 2,374 2,791 3,095



EBITA margin 31.8% 31.7% 31.7% 42.6% 47.4% 49.8%

Margin development -6bp -6bp 1093bp 483bp 239bp

ABI BB

Initiating Coverage

13 September 2016



Chart 56: ABISAB: LatAm COPEC division (Colombia)


LatAm COPEC (Colombia) 2014 2015 2016E 2017E 2018E 2019E

Volumes (mhl)

LY 62 64 67 71 75 78

Organic 2 3 4 4 3 3

Acq/Div (0) 0 0 0 0 0

CY 64 67 71 75 78 81

Organic % 3.2% 5.0% 5.3% 5.3% 4.3% 4.3%

Sales (NPR)

LY 5,768 5,211 5,394 5,658 5,895

Organic 463 391 405 396 413

Acq/Div 0 0 0 0 0

FX (1,020) (207) (141) (158) (165)

FX % -17.7% -4.0% -2.6% -2.8% -2.8%

CY 5,768 5,211 5,394 5,658 5,895 6,143

Organic % 8.0% 7.5% 7.5% 7.0% 7.0%

Price/mix +3.0% +2.2% +2.2% +2.7% +2.7%

EBITA

LY 2,224 1,959 2,061 2,957 3,447

Organic 166 180 200 177 186

Synergies 0 0 750 375 225

Acq/Div 0 0 0 0 0

FX (431) (78) (54) (62) (65)

FX % -19.4% -4.0% -2.6% -2.8% -2.8%

CY 2,224 1,959 2,061 2,957 3,447 3,793


Organic inc synergies% 7.5% 9.2% 46.1% 18.7% 11.9%

EBITA margin 38.6% 37.6% 38.2% 52.3% 58.5% 61.7%


EBITDA

LY 2,526 2,233 2,358 3,275 3,781

Organic 197 214 229 202 212

Synergies 0 0 750 375 225

Acq/Div 0 0 0 0 0

FX (490) (89) (62) (71) (74)

FX % -19.4% -4.0% -2.6% -2.8% -2.8%

CY 2,526 2,233 2,358 3,275 3,781 4,144


Organic inc synergies% 7.8% 9.6% 41.5% 17.6% 11.6%

EBITA margin 43.8% 42.9% 43.7% 57.9% 64.1% 67.5%


ABI BB

Initiating Coverage

13 September 2016



Chart 57: ABISAB: Asia South division (Australia)


Asia South (Australia) 2014 2015 2016E 2017E 2018E 2019E

Volumes (mhl)

LY 11 13 11 11 12 12

Organic (0) (0) 0 0 0 0

Acq/Div 2 0 0 0 0 0

LY 13 13 11 12 12 12

Organic % -2.4% -1.3% 2.0% 2.0% 1.0% 1.0%

Sales (NPR)

LY 1,933 1,732 1,712 1,748 1,739

Organic (7) (22) 63 35 35

Acq/Div 0 0 0 0 0

FX (194) 2 (28) (44) (44)

FX % -8.5% 0.1% -1.6% -2.5% -2.5%

CY 1,933 1,732 1,712 1,748 1,739 1,730

Organic % -0.4% -1.3% 3.7% 2.0% 2.0%

Price/mix +0.9% -3.3% +1.7% +1.0% +1.0%

EBITA

LY 626 587 596 767 845

Organic 20 8 32 19 19

Synergies 0 0 150 75 45

Acq/Div 0 0 0 0 0

FX (59) 1 (10) (16) (16)

FX % -11.8% 0.1% -1.6% -2.5% -2.5%

CY 626 587 596 767 845 893



EBITA margin 32.4% 33.9% 34.8% 43.9% 48.6% 51.7%


EBITDA

LY 692 649 752 930 1,009

Organic 22 103 40 23 24

Synergies 0 0 150 75 45

Acq/Div 0 0 0 0 0

FX (65) 1 (12) (20) (20)

FX % -11.8% 0.1% -1.6% -2.5% -2.5%

CY 692 649 752 930 1,009 1,058



EBITA margin 35.8% 37.5% 43.9% 53.2% 58.0% 61.1%


ABI BB

Initiating Coverage

13 September 2016



Discounted Cash Flow (DCF)

Chart 58: ABI Discounted Cash Flow (Legacy ABI divisions)


AB InBev DCF Valuation (USD m) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Terminal Growth

Europe

EBIT 697 706 714 723 732 741 750 759 778 798 818 2.5% 1.0%

Tax at -23% (160) (162) (164) (166) (168) (170) (173) (175) (179) (184) (188)

Depreciation 341 346 350 354 359 363 367 372 381 391 401

Change in w orking capital 56 95 95 95 35 35 35 35 36 37 38

Capex (310) (386) (402) (420) (440) (461) (484) (507) (520) (533) (546)

Net FCF 624 598 593 586 518 508 496 485 497 509 522 10,715

WACC/discount rate 5.9% 0.99 0.93 0.88 0.83 0.78 0.74 0.70 0.66 0.62 0.59 0.56 0.56

Discounted cash flow (USD m) 10,502 615 557 521 487 406 376 347 321 310 300 291 5,969

Asia Pacific North (China)

EBIT 829 926 1,034 1,154 1,289 1,439 1,607 1,795 1938 2093 2261 8.0% 2.5%

Tax at -23% (191) (213) (238) (265) (296) (331) (370) (413) (446) (481) (520)

Depreciation 613 685 765 854 954 1,065 1,189 1,328 1434 1549 1673


Capex (615) (765) (797) (832) (871) (913) (959) (1,004) (1,085) (1,172) (1,265)

Net FCF 719 772 903 1,051 1,127 1,311 1,520 1,757 1,898 2,046 2,206 40,743


Discounted cash flow (USD m) 28,338 706 702 761 820 815 879 944 1,012 1,012 1,012 1,010 18,665

North America (US and Canada)

EBIT 5,487 5,544 5,600 5,656 5,825 6,000 6,180 6,366 6,525 6,688 6,855 2.5% 1.5%

Tax at -23% (1,262) (1,275) (1,288) (1,301) (1,340) (1,380) (1,421) (1,464) (1,501) (1,538) (1,577)

Depreciation 777 785 792 800 824 849 875 901 923 946 970


Capex (705) (876) (913) (953) (998) (1,046) (1,098) (1,151) (1,179) (1,209) (1,239)

Net FCF 4,518 4,551 4,565 4,576 4,450 4,561 4,673 4,790 4,910 5,032 5,158 119,582


Discounted cash flow (USD m) 105,838 4,455 4,241 4,020 3,808 3,500 3,390 3,283 3,180 3,080 2,984 2,890 67,007

LatAm North (Brazil)

EBIT 3,712 4,157 4,656 5,214 5,839 6,539 7,322 8,200 8,897 9,653 10,474 8.5% 2.5%

Tax at -23% (854) (956) (1,071) (1,199) (1,343) (1,504) (1,684) (1,886) (2,046) (2,220) (2,409)

Depreciation 758 849 950 1,064 1,192 1,335 1,495 1,674 1816 1970 2138


Capex (762) (947) (987) (1,030) (1,079) (1,132) (1,188) (1,244) (1,350) (1,465) (1,590)

Net FCF 2,991 3,334 3,779 4,280 4,694 5,323 6,031 6,829 7,410 8,039 8,723 138,160



LatAm South

EBIT 1,239 1,291 1,346 1,403 1,463 1,525 1,589 1,657 1,798 1,951 2,116 8.5% 2.5%

Tax at -23% (285) (297) (310) (323) (336) (351) (366) (381) (413) (449) (487)

Depreciation 224 233 243 254 264 276 287 299 325 352 382


Capex (210) (261) (272) (283) (297) (311) (327) (342) (371) (403) (437)

Net FCF 1,012 1,041 1,082 1,125 1,121 1,166 1,212 1,260 1,368 1,484 1,610 25,500



Middle Americas (Mexico)

EBIT 1,516 1,571 1,628 1,670 1,714 1,759 1,805 1,852 2000 2160 2333 8.0% 2.5%

Tax at -23% (349) (361) (374) (384) (394) (405) (415) (426) (460) (497) (537)

Depreciation 312 323 335 344 353 362 371 381 411 422 422


Capex (290) (361) (376) (392) (411) (431) (452) (474) (512) (525) (525)

Net FCF 1,241 1,260 1,300 1,325 1,294 1,318 1,341 1,366 1,475 1,597 1,730 27,395


Discounted cash flow (USD m) 21,432 1,215 1,134 1,075 1,007 904 846 791 740 735 731 728 11,526

Exports

EBIT (340) (343) (347) (350) (354) (357) (361) (364) (368) (372) (375) 1.0% 0.5%

Tax at -23% 78 79 80 81 81 82 83 84 85 85 86

Depreciation 134 136 137 138 140 141 143 144 145 147 148


Capex (122) (151) (158) (165) (172) (181) (190) (199) (201) (203) (205)

Net FCF (223) (235) (243) (251) (288) (298) (308) (319) (322) (325) (328) 4,821-


Discounted cash flow (USD m) (4,497) (219) (215) (207) (200) (214) (206) (198) (191) (180) (169) (159) (2,339)

ABI BB

Initiating Coverage

13 September 2016



Chart 59: ABI Discounted Cash Flow (New SABMiller divisions)


AB InBev DCF Valuation (USD m) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Terminal Growth

LatAm COPEC

EBITA 2,061 2,957 3,447 3,793 4,070 4,203 4,344 4,492 4,873 5,288 5,737 8.5% 3.0%

Tax at -23% (474) (680) (793) (872) (936) (967) (999) (1,033) (1,121) (1,216) (1,320)

Depreciation 297 318 334 352 370 389 409 431 467 481 481


Capex (285) (355) (355) (355) (355) (355) (355) (355) (385) (396) (396)

Net FCF 1,677 2,373 2,767 3,050 3,198 3,320 3,449 3,584 3,888 4,214 4,565 78,529



Africa

EBITA 1,374 2,089 2,488 2,772 3,004 3,123 3,250 3,386 3,673 3,986 4,324 8.5% 3.0%

Tax at -23% (316) (481) (572) (638) (691) (718) (748) (779) (845) (917) (995)

Depreciation 262 284 303 323 344 367 391 417 453 466 466


Capex (255) (317) (331) (345) (362) (379) (398) (417) (452) (466) (466)

Net FCF 1,142 1,706 2,019 2,243 2,344 2,441 2,545 2,656 2,881 3,123 3,384 58,214



Asia Pacific South (Australia)

EBITA 596 767 845 893 926 929 932 935 982 1,031 1,083 5.0% 2.0%

Tax at -23% (137) (176) (194) (205) (213) (214) (214) (215) (226) (237) (249)

Depreciation 157 163 163 164 165 166 167 167 176 179 179


Capex (146) (182) (189) (198) (207) (217) (228) (239) (251) (256) (256)

Net FCF 494 613 666 696 687 680 672 664 698 734 774 18,813



AB InBev

Total ABI DCF (USDm) 388,574

Net debt (89,553)

SAB associates 14,649

Minorities (28,229)

PV equity 285,441

Total shares 1,966

Value per share (USDm) 145

EUR: USD 1.12

Value per share (EUR m) 130

ABI BB

Initiating Coverage

13 September 2016



Company DescriptionABI-InBev is the leading global brewer and one of the world’s top five consumer product companies.

Analyst Certification:I, Edward Mundy, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Cole Hathorn, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Edward Mundy, ACA is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.Registration of non-US analysts: Cole Hathorn, CFA is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Investment Recommendation Record(Article 3(1)e and Article 7 of MAR)

Recommendation Published , 00:06 ET. September 13, 2016Recommendation Distributed , 00:06 ET. September 13, 2016

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

ABI BB

Initiating Coverage

13 September 2016



Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Danone (BN FP: €66.24, HOLD)• Diageo (DGE LN: p2,065.50, BUY)• Tsingtao Brewery Co. Ltd. (168 HK: HK$29.05, HOLD)• Tsingtao Brewery Co. Ltd. - A (600600 CH: CNY30.45, HOLD)

ABI BB

Initiating Coverage

13 September 2016



ABI BB

Initiating Coverage

13 September 2016



Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on acompany, made a change to a rating or price target of a company or discontinued coverage of a company.Legend:

I: Initiating Coverage

D: Dropped Coverage

B: Buy

H: Hold

UP: Underperform

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1089 52.41% 321 29.48%HOLD 836 40.23% 163 19.50%UNDERPERFORM 153 7.36% 17 11.11%

ABI BB

Initiating Coverage

13 September 2016



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Other Important DisclosuresJefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision.Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443), Research Analyst (INH000000701) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and NationalStock Exchange of India Limited (INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-KurlaComplex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000.This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. 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This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange

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rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer priorto the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

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ABI BB

Initiating Coverage

13 September 2016



Price €110.35^ AB InBev BUY - Jefferies ABI-SAB's footprint, sizing the value uplift from revenue...

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