A Truly Global Beer Company: Exploring the Acquisition of SABMiller by Anheuser-Busch InBev

Eugene L. Aiken III

Hedge Fund Investing Senior Seminar

Prof. Tri Vi Dang

Department of Economics

Columbia University

December 14, 2015

Abstract

In September of 2015, global beer giant, Anheuser-Busch InBev extended an offer to acquire all the outstanding shares of its closet competition, SABMiller. This began a month-long negotiation between the two companies that resulted in SABMiller agreeing to an acquisition offer for $108 billion dollars. By accepting that offer, SABMiller became the latest example of the consolidation of the global beer market. This deal, if approved, will create a beer company, the likes of which the world has never seen. Anheuser-Busch InBev will be able to expand into markets in Africa, India, Australia, and Latin America. There will be considerable regulatory hurdles standing in the way of the completion of this deal. Because of the market share that the new company will command over local and global markets, it is almost guaranteed that Anheuser-Busch InBev will encounter stiff regulatory opposition when trying to get this deal approved. They encountered similar regulatory opposition while trying to acquire Grupo Medelo and ended up having to sell off a large portion of their U.S. business in order to satisfy regulators. If necessary, AB InBev maybe forced to do the same thing during this deal. From the standpoint of AB InBev, gaining access to markets where they previously had no influence and becoming the world's first truly global beer company is worth sellingsomeprominent major brands.

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Introduction

On October 13, 2015, the board of SABMiller, the second largest brewing company in

the world announced that it had accepted a tender offer from top brewery in the world, AB

InBev, to purchase the mega brewery for £44/share. The total deal is worth £71.4 billion ($108

billion) and will be the largest in UK history when completed. The acquisition of SABMiller by

AB InBev, if approved by regulators, will create the largest brewing company on the planet. This

deal is particularly interesting due to the sheer size and influence over their respective markets

that these two companies possess. The there are many facets of this deal but I would like to

explore two in particular. Aside from putting major brands of beer like Budweiser, Miller, and

Grolsch under the same roof, the deal will allow SABMiller to expand into territory that was

once controlled by SABMiller. The deal will also face stiff regulatory scrutiny especially in the

United States. While this deal may have been a surprise to some, it falls in line with corporate

trajectory of AB InBev, who has been on an acquisition spree these past few years. The two

companies, AB InBev and SABMiller are an amalgamation of 11 different brewing company

mergers that have taken over roughly the past 20 years. The crux of this deal lies in the new

markets that SABMiller will be able to break into if the deal is approved. SABMiller, originally

known as South African Brewing, holds dominance over the African continent and the Indian

subcontinent in terms of the beer market. SABMiller also controls much of the Australian beer

market, thanks in part to their acquisition of Australian beer giant Foster’s Brewing in 2011. In

the proposal sent out to SABMiller shareholders by AB InBev, they said the African continent

“would be a critical driver of growth for the combined company, building on the strong heritage

of SABMiller in the region” and that the deal “Brings together a largely complementary

geographic footprint with access to key emerging regions with strong growth prospects (e.g.,

Africa, Asia and Central & South America)”. The newly formed beer conglomerate would have

six of the top ten beers in the world under its roof (Snow #1, Bud Light #3, Budweiser #4, Skol

#5, Harbin #8, and Brahma #9) and would control roughly 30% of the global beer market.

Deal Timeline and Specifics

For the past several years, AB InBev has been pursuing a corporate strategy, especially in

the United States of squeezing out small players and larger players alike from the beer market.

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So there is no denying that AB InBev submitting a tender offer to the board of SABMiller was

indeed a big deal, it should not have really been that shocking to anyone who was paying

attention. It would appear that the board of SABMiller anticipated this move by AB InBev,

because they were poised to deny the beer conglomerate and peer in the global beer market time

and time again.

The board of AB InBev quietly submitted their first tender offer to the board of

SABMiller on September 17, 2015 for the price of £38/share in cash with a partial share

alternative, which was roundly rejected by the board of SABMiller. Several days later, on

September 22, 2015, the board of AB InBev came back to SABMiller with a second, higher offer

of £40/share with a partial share alternative. Just like the first proposal this was also rejected by

the board of SABMiller. Approximately two weeks later, the board of AB InBev tendered a

third offer to the board of SABMiller in the amount of £42.15/share in cash that still included the

partial share alternative. Holding fast to their position on the previous two offers, the SABMiller

board also rejected this offer. At this point, AB InBev was no longer keeping quiet its intentions

of acquiring its closest competitor in the global beer market. After the third offer was rejected the

AB InBev board published a press release that seemed to convey frustration on the part of the

AB InBev board that SABMiller was not allowing itself to be easily courted. The language of the

press release is as follows:

Anheuser-Busch InBev (“AB InBev”) (Euronext: ABI) (NYSE: BUD) notes the announcement from the Board of SABMiller plc (“SABMiller”) (LSE: SAB) (JSE: SAB) rejecting AB InBev’s proposal of GBP 42.15 per share in cash, with a partial share alternative. AB InBev is surprised that the Board of SABMiller (excluding the directors nominated by SABMiller’s largest shareholder, Altria Group, Inc., who dissented) continues to say that this proposal “still very substantially undervalues SABMiller”. This lacks credibility because: • The cash proposal represents a premium of approximately 44% to

SABMiller’s closing share price of GBP 29.34 on 14th September 2015 (being the last business day prior to renewed speculation of an approach from AB InBev); and

• Altria Group, Inc., which owns 27% of SABMiller and has three representatives on the Board, has publicly stated that it supports our proposal and “urges SABMiller’s board to engage promptly and constructively with AB InBev to agree on the terms of a recommended offer”.

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The Board of SABMiller has also referred to the highly conditional nature of the proposals, including significant regulatory hurdles in the US and China, “on which AB InBev has not yet provided comfort to SABMiller”. Together with its advisers, AB InBev has done significant work on regulatory matters and has identified solutions that provide a clear path to closing. AB InBev intends to work proactively with regulators to resolve any concerns. AB InBev has repeatedly offered to share this analysis with SABMiller and its advisers. Each time the Board of SABMiller has refused to engage. 1

Although several financial analysts who were interviewed by a number of financial media

outlets seemed to agree with the SABMiller Board that the deal undervalued SABMiller. One of

those analysts was April Scee of Sterne Agee who made the case of the proposal undervaluing

the SABMiller to the Wall Street Journal. She said, “Africa was the last frontier in beer”. 2SABMiller currently controls 38 African markets while AB InBev has virtually zero presence

on the African continent.

Promptly following this airing of grievances by the AB InBev board, they followed by

tendering a fourth offer to the board of SABMiller on October 12, 2015 in the amount of

£43/share with the partial share alternative included. Alas, the SABMiller board also rejected this

offer. The Telegraph (UK) had reported that the CEO of AB InBev had gone straight to the

shareholders of SABMiller, urging their shareholders to put pressure on the board to accept the

offer on the table. The statement read, “If shareholders agree that we should be in proper

discussions, they should voice their views and should not allow the board of SABMiller to

frustrate this process and let this opportunity slip away”. The Telegraph went on to describe this

tactic by CEO Carlos Brito as “Hostile-Lite”.3

Finally, on October 13, 2015, a day that will live in infamy in the beer world, the

SABMiller board accepted the offer of £44/share with the partial share alternative. The AB

InBev board had won this crucial victory in the fight to acquire their rival at a price that was spot

on with many predictions from those in the financial world who had been following this deal in

1Anheuser-Busch InBev. Anheuser-Busch InBev Response to SABMiller Announcement. N.p., 8 Oct. 2015. Web. 2Chaudhuri, Saabira. "AB InBev Slams SABMiller's Rejection of Takeover Offer." WSJ. The Wall Street Journal, 8 Oct. 2015. Web. 14 Dec. 2015. 3Martin, Ben. "AB InBev Goes 'hostile-lite' in Pursuit of SABMiller." The Telegraph. Telegraph Media Group, 09 Oct. 2015. Web. 14 Dec. 2015.

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the weeks and days leading up to October 13. After all of the back and forth, the financial world

finally had concrete numbers that illustrated the sheer size and scope of this deal.

The deal, in its entirety, represents a pretty significant money making opportunity for both AB

InBev shareholders and SABMiller shareholders alike. After a very strategically fought offer

war, SABMiller shareholders should be happy that the board decided to hold out as long as they

did. The specifics of the deal are as follows:

• AB InBev will purchase all outstanding SABMiller shares from its share holders at a

price of £44/share

• Premium of approximately 50% to SABMiller’s closing share price of £29.34 on 14

September 2015

• Premium of approximately 36% to SABMiller’s three month volume weighted average

share price to 14 September 2015

• Partial Share Alternative is available under which SABMiller shareholders can elect to

receive 0.483969 Restricted Shares plus £3.7788 in cash for each SABMiller share,

representing a premium of approximately 43% to SABMiller’s closing share price of

£29.34 on 14 September 201

• Would take the form of a separate class of Restricted Shares subject to a 5 year lock-up

from closing

• Limited to a maximum of 326 million Restricted Shares

• Altria and BEVCO have signed irrevocable undertakings to elect for the PSA in respect

of their entire beneficial holdings of SABMiller shares

• SABMiller shareholders will be entitled to receive dividends declared or paid by

SABMiller in the ordinary course. The record date for dividends shall be set no earlier

than 25 November (in the case of a dividend for the period ending on 30 September in

any year) or 5 August (in the case of a dividend for the period ending on 31 March in any

year)

• The dividend shall not exceed $0.2825 per SABMiller share for the six month period

ended 30 September 2015, and $0.9375 per SABMiller share for the six month period

ended 31 March 2016

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• The transaction will be financed through a combination of AB InBev’s internal financial

resources, new $75 billion Committed Senior Facilities(d) and the PSA described above4

The advantage of this deal for SABMiller shareholders is that they will receive a significant

premium on their outstanding shares as well as an opportunity to have a stake in the new

company that will control roughly 30% of the global beer market as well as cash for their

outstanding shares. The stipulation that limits the amount of restricted shares issued is probably

to prevent anyone shareholder from having their shares of restricted stock vest them into a

controlling position of the company. Obviously, the fiduciary responsibility of the AB InBev

board is to take care of current AB InBev shareholders. The benefits for the shareholders of AB

InBev are significant as well. As previously stated, the new company, which is to be named

“Newco” preliminarily, will control 30% of the global beer market and have the ability to tap

into three growing markets where previously AB InBev had no presence. This expansion into

new territory, along with inevitable consolidation of the global beer market, should allow the

shareholders of AB InBev to see an almost immediate and noticeable increase in every financial

metric including increase share price, increased revenues, and an increased earnings per share.

The last bullet point, which references the financing for this deal, also represents a historical

milestone.

AB InBev arranging it’s own financing is historic in its own right because it is the largest

instance of a corporation arranging its own loans on such a massive scale. The previous record

for a corporation arranging it’s own financing was Verizon two years ago when it kept its 60

billion dollar financing in house. This deal trumps that record as AB InBev is arranging loans in

the amount of 75 billion dollars. The banks that have been brought in by AB InBev to finance

this massive loan are Banco Santander, Bank of America Merrill Lynch, Bank of Tokyo-

Mitsubishi UFJ, Barclays, BNP Paribas, and Deutsche Bank. The specifics of the financing are

as follows:

• $25 billion three-year term loan with a one-year extension option

• A $10 billion five-year term loan

• A $10 billion one-year disposals bridge facility 4Anheuser-Busch InBev. Building the First Truly Global Beer Company. Anheuser-Busch InBev, 11 Nov. 2015. Web.

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• A $15 billion one-year bridge to cash/bond facility

• A $15 billion one-year bridge to cash/bond facility with a one-year extension option

• Estimated savings of 300 Million in outlays to another company.5

Even for a company as large as AB InBev, the fact that they have the ability to arrange financing

on that scale is not only a testament to the financial health of the company, but to the financial

acumen they posses and the influence they can exert within the financial sector.

The two companies have also managed to put together two fairly impressive deal teams

to act as financial advisors in various capacities for this deal. For AB InBev their deal team

consists of Lazard as Lead Financial Advisor, Deutsche Bank, Barclays, BNP Paribas, Merrill

Lynch International, and Standard Bank as Lead Financial Advisor in Africa. As for SABMiller

their deal team roster consists of Robey Warsaw, J.P. Morgan Cazenove, Morgan Stanley, and

Goldman Sachs.6 The entire bulge bracket of investment banking has been brought in to advise

this deal.

Strategy & Motivation

At a glance and on the surface this deal appears to be like any other, a global industry

giant acquiring their closest competition to increase their share of the market and eliminate

competition. In many ways this is, in fact, the case. It has been a fairly obvious strategy that the

current top executives at AB InBev have been executing for the past decade or so. This history of

how AB InBev has come to become the top brewer on the globe starts a little over 10 years ago

with the merger of Interbrew of Belgium and AmBev of Brazil. Before the existence of

multinational brewing conglomerates, most large breweries dominated the markets of the

specific country each was located within. They would also have influence in any surrounding

countries but they could not be defined by anyone’s definition as global. This began to change in

5Reilly, Alasdair. "AB InBev Backs SABMiller Buy with Record $75 Billion Loan." Reuters. Thomson Reuters, 13 Nov. 2015. Web. 14 Dec. 2015. 6Anheuser-Busch InBev. RECOMMENDED ACQUISITION OF SABMILLER PLC BY ANHEUSER-BUSCH INBEV SA/NV. N.p., 11 Nov. 2015. Web.

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the late 20th century and continued on into the new millennium. When AmBev agreed to

purchase Interbrew, the two companies had become industry giants at the time within their

respective markets. AmBev controlled the beer markets of 14 Latin American countries with

market shares in excess of 99% in some places. Interbrew also controlled large portions of the

European beer market at the time of the transaction. After the merger was completed in 2004, the

newly minted company InBev controlled nearly 14% of the global beer market and had a

presence in 140 countries around the world.7 The new company decided to follow this trajectory

and in 2008 acquired American brewing giant Anheuser Busch for €52 Billion, creating what is

now the largest brewing company the world has ever seen.8 This trajectory continued onward in

the global market and in smaller markets in which AB InBev operated. The American beer

market is a prime example of this strategy being executed in a smaller market.

Right around the time that the consolidation of beer markets around the world began to

occur, the opposite was happening in the United States in the form of the craft beer movement.

The American Brewers Association defines as Craft Brewery (also know as a Microbrewery) as

a brewery that is small, independent, and traditional. By small, they mean a brewery that will not

produce more than 6 million barrels of beer in a single year. By independent, they mean, “less

than 25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by

an alcoholic beverage industry member that is not itself a craft brewer”. Lastly they define a

traditional brewer as “a brewer that has a majority of its total beverage alcohol volume in beers

whose flavor derives from traditional or innovative brewing ingredients and their fermentation”.

They do not include companies who create flavored Malt Beverages, such as Four Look, in this

category.9 The most prominent of these companies that is considered a craft brewery by the

standards defined by the American Brewers association is the Boston Brewing Company, whose

signature product is Samuel Adams Lager. The Boston Brewing Company remains in this

category, as they are still independently owned. There are several other companies who were at

one point considered to be Craft Breweries that are no longer because a Macrobrewery such as

7"Interbrew Buys AmBev and Becomes World Number One." Beverage Daily, 3 Mar. 2004. Web. 8Merced, Michael J. De La. "Anheuser-Busch Agrees to Be Sold to InBev." The New York Times. The New York Times, 13 July 2008. Web. 14 Dec. 2015. 9"Craft Brewer." Brewers Association. American Brewers Association, n.d. Web. 14 Dec. 2015.

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AB InBev has acquired them. As the craft beer movement continued to grow in the United

States, it presented an interesting challenge and opportunity for companies like AB InBev,

SABMiller, and MillerCoors. These top the brewers, know as the “BMC” beers among craft beer

circles had never had any significant domestic challengers to their respective shares of the U.S.

beer market. The current portion of the U.S. Beer market that craft breweries represent has more

than doubled since 2004 to 9%, tiny in comparison to the share of the market a company like AB

InBev occupies, but enough for this not to go unnoticed by the BMC’s of the world.10 AB InBev

acquired it’s prominent micro craft brewer in 2011 by purchasing Chicago based brewing

company Goose Island for just shy of $40 million, sending shockwaves of disbelief throughout

the craft beer industry. Typically these small craft breweries and their acolytes take immense

pride in their humble beginnings and their independent status, “selling out” to a large brewing

conglomerate like AB InBev is an unforgivable sin to many craft beer enthusiasts. That

sentiment has not stopped AB InBev who has since acquired four more prominent

microbreweries, Blue Point from Patchogue, NY, 10 Barrel Brewing from Bend, Oregon,

Elysian Brewing out of Seattle, and Golden Road Brewing out of Los Angles. The deal for

Golden Road brewing is set to finish by the end of Q4 2015.11

While Anheuser Busch, the American division of AB InBev was busily snapping up

microbreweries in the U.S., AB InBev still had its focus on the global beer market and executing

its strategy of consolidation through acquisition. In 2013, AB InBev made an offer to acquire

Mexican brewing behemoth Grupo Modelo, whose top selling brand of beer is Corona Extra. AB

InBev already had a non-controlling 50% stake in Grupo Modelo before the proposed

acquisition. This deal would be attempting to purchase the other 50%. Other brands of beer

owned by Grupo Modelo are Victoria, Pacífico, Negra Modelo, Modelo Especial, Modelo Light,

Estrella, and León. The deal was completed in June of 2013 to the tune $20.1 Billion dollars.12

This deal most closely resembles the current acquisition that is underway between AB InBev and 10Dulaney, Chelsey. "Anheuser-Busch InBev to Buy Los Angeles Craft Brewer Golden Road." WSJ. The Wall Street Journal, 23 Sept. 2015. Web. 14 Dec. 2015. 11Dulaney, Chelsey. "Anheuser-Busch InBev to Buy Los Angeles Craft Brewer Golden Road." WSJ. The Wall Street Journal, 23 Sept. 2015. Web. 14 Dec. 2015. 12Schoenberg, Tom. "AB InBev Wins U.S. Approval for $20.1 Billion Modelo Deal." Bloomberg.com. Bloomberg, 20 Apr. 2013. Web. 14 Dec. 2015.

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SABMiller. Even more so than when InBev acquired Anheuser Busch in 2008. This is because

not only did Grupo Modelo have a truly dominant global brand in Corona Extra, which happens

to currently be the #5 beer in the world in terms of consumption, but because of the regulatory

challenges that AB InBev faced in attempting to get the deal approved my U.S. Regulators. In

January of 2013, the U.S. Department of Justice filed an Anti-Trust complaint against AB InBev

over the proposed acquisition of Grupo Modelo. This resulted in Grupo Modelo having to sell off

part of its business before the deal would be approved. This paper will go further in depth about

the regulatory challenges faced by AB InBev during the acquisition of Grupo Modelo, and how it

relates to, and informs us of the possible regulatory challenges that AB InBev will face in its

current deal to acquire SABMiller.

Even though the deal to acquire Grupo Modelo was the most similar to the current deal

that is underway between AB InBev and SABMiller, there is one strategic aspect of this deal that

is unique to the other deals previous. It is without a doubt that AB InBev is attempting to

consolidate the global beer market under its massive tent and it has gone about doing that

through and aggressive M&A strategy, but the unique strategy in this deal is about opening up

new markets where AB InBev has virtually no presence. Surprisingly there are places on planet

earth where the reach of AB InBev does not go. In these places, people drink beer brewed by

SABMiller and its subsidiaries.

Much like AB InBev, SABMiller in its current form has come about through a series of

mergers and acquisitions over the past 13 or so years. SABMiller was originally South African

Breweries. Founded in the late 19th Century to service the growing number of miners and

prospectors around Johannesburg, it has become the second largest brewery in the world today

behind AB InBev through a series of mergers and acquisitions in the 21st Century. South African

Breweries has had a virtual monopoly on the African Continent and especially in South Africa

due to the fact that the African economy is just becoming more modernized over the past few

decades and that regulation throughout much of Africa is either loose or non-existent. The first of

these acquisitions was the U.S. based Miller Brewing Company in 2002, bought from the Altria

Group, it is the brewer of brands such as Miller Genuine Draft, Miller Lite, and Miller High

Life.13 The next large acquisition was a controlling interest in Bavaria S.A., South America’s

13"SAB Buys Miller from Philip Morris for $5.6 Billion." CNNMoney. CNNMoney, 30 May 2002. Web. 14 Dec. 2015.

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second largest brewer behind AmBev. This deal gave SABMiller access to a significant portion

of the South American beer market it had not previously had. The next and largest addition to

SABMiller was the acquisition turned hostile takeover of Australian brewer Fosters. This deal

was valued at $10.2 billion and gave SABMiller access to approximately half of the Australian

beer market.14 AB InBev does not currently have any significant presence on the Australian

continent. SABMiller’s most recent acquisition is that of London based Meantime Brewing for

an undisclosed sum of money in August 2015.15 Meantime brewing is has more of a craft micro

brew feel as opposed to larger brewers like Fosters. SABMiller also has a significant share of the

Asian beer market, which had grown by leaps and bounds at a rate of more than 6% per annum

since 2009 and has been predicted to continue to grow at a rate of over 7% per annum through

2020.16 SABMiller is currently the producer of the brand Snow in China, which is the #1

consumed beer in the world in front of Bud Light and Budweiser. SABMiller is also the second

largest brewer on the Indian subcontinent, behind United Breweries, brewer of the brand

Kingfisher. Just like in Australia, AB InBev has no significant presence on the Indian

subcontinent.

Even with the markets AB InBev is already in, the size of the markets it stands to have

access to with this deal is massive. Africa, SABMiller’s home territory is currently the fastest

growing beer market in the world, even ahead of Asia. The fact that this deal has the ability to

give AB InBev access to the entirety of two continents and one subcontinent given it’s already

massive share of the beer market is what makes this deal so unique to other previous deals. No

other deal in the history of the global beer market has allowed one company to be in so many

markets simultaneously while controlling 30% of the global beer market.

The name of the presentation that AB InBev published for its shareholders and the

shareholders of SABMiller is “Building the First Truly Global Beer Company”. The title of this

14Fletcher, Clementine. "SABMiller to Buy Foster's After Raising Bid to A$9.9 Billion." Bloomberg.com. Bloomberg, 21 Sept. 2011. Web. 14 Dec. 2015. 15SABMiller. SABMiller to Enter UK Craft Beer Market with Acquisition of Meantime Brewing Company. N.p., 15 May 2015. Web. 16Gale, Jason. "Beer Sales Outpace Economic Growth in Asia." Bloomberg.com. Bloomberg, 22 July 2015. Web. 14 Dec. 2015.

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presentation is not an exaggeration or hyperbole. Upon the completion of this deal, the newly

formed company, which in press releases to investors has been dubbed “Newco”, Will rival or

flatly beat out some of the top Consumer brands on the globe. Early estimates conclude that

Newco will be the #5 consumer brand in the entire world with annual revenues estimated at

around $64 billion.17 This is truly impressive given that consumption of their product is off limits

to persons below a certain age in most countries and outlawed entirely in certain countries that

have large Muslim populations. But even as historic as this deal would be for AB InBev and the

beer industry in general, the deal is far from being done.

Market Regulation

The current deal in process between AB InBev and SABMiller is historically large and is

likely to be met with some protest by regulators in the United States, Canada, Europe, and

Australia. Currently AB InBev controls approximately 45% of the U.S. beer market and

approximately 20% of the global beer market. SABMiller also controls approximately 27% of

the U.S. beer market and 9% of the global beer market.18 Combining the two would represent a

more than 70% share of the beer market in the U.S. alone and 30% of the global beer market. A

company that large and influential will make it very difficult for other firms to compete. The job

of the U.S. and Global financial regulators is to make sure they are not doing it on purpose.

The best evidence that this deal will more than likely be met with significant regulatory

resistance is the reaction of the United States Department of Justice when AB InBev sought to

purchase the remaining 50% of controlling shares in Grupo Modelo. On January 31st, 2013 the

United States department of Justice filed a formal Anti-Trust complaint in federal court naming

AB InBev and Grupo Modelo as the defendants. The Department of Justice was making a fairly

convincing case against the two companies that the acquisition of control from one by the other

17Anheuser-Busch InBev. Building the First Truly Global Beer Company. Anheuser-Busch InBev, 11 Nov. 2015. Web. 18Kell, John. "Don't Expect AB InBev-SABMiller to Become a Mega-brewer in the U.S." Fortune Dont Expect AB InBevSABMiller to Become a Megabrewer in the US Comments. Fortune, 16 Sept. 2015. Web. 14 Dec. 2015.

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would represent a situation where the U.S. Beer market would become too concentrated. The

language from the complaint is as follows:

40. Concentration in relevant markets is typically measured by the Herfindahl-Hirschman Index (“HHI”). Market concentration is often one useful indicator of the level of competitive vigor in a market and the likely competitive effects of a merger. The more concentrated a market, and the more a transaction would increase concentration in a market, the more likely it is that a transaction would result in a meaningful reduction in competition. Markets in which the HHI is in excess of 2,500 points are considered highly concentrated.

41. The beer industry in the United States is highly concentrated and would become substantially more so as a result of this acquisition. Market share estimates demonstrate that in 20 of the 26 local geographic markets identified in Appendix A, the post-acquisition HHI exceeds 2,500 points, in one market is as high as 4,886 points, and there is an increase in the HHI3 of at least 472 points in each of those 20 markets. In six of the local geographic markets, the post-merger HHI is at least 1,822, with an increase of the HHI of at least 387 points, and in each of those six markets the parties combined market share is greater than 30%.

42. In the United States, the Defendants will have a combined market share of approximately 46% post-transaction. The post-transaction HHI of the United States beer market will be greater than 2800, with an increase in the HHI of 566.19

The Herfindahl-Hirschman Index is subsequently described as the following:

The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.2 (2010). Transactions that increase the

19UNITED STATES OF AMERICA, U.S. Department of Justice Antitrust Division vs. Anheuser Busch InBev & Grupo Modelo. UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA. 31 Jan. 2013. N.p., n.d. Web.

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HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission.20

As was illustrated by the Department of Justice in this complaint, the beer market in the United

States was already very concentrated in 2013. The total United States market share of Grupo

Modelo was only 7% in 2013. The market share that SABMiller has though its joint venture as

MillerCoors is upwards of 27% which is almost 4 times the market share of Grupo Modelo at the

time of its acquisition. Using an estimation of the current market share of the top brewers in the

United States we can easily calculate what the HHI for the new company would be after the

merger. The formula for this would be :

MS2Newco + MS2

Constellation + MS2Heineken + MS2

Pabst + MS2Boston + MS2

Yeungling + MS2Other= HHI

712 + 72 + 42 + 32 + 22 + 22 + 112= 5244

As you can see this acquisition in its current form would represent a much higher

concentration of the beer market in the United States. Based on this simple calculation, it would

be easy to conclude that the Department of Justice would most likely try to block this acquisition

with the two companies in their current form. The words “in their current form” are very

important to how these two companies would most likely remedy this situation. AB InBev and

Grupo Modelo were able to satisfy regulators in the United States by altering the configurations

of their companies. They were able to sufficiently alter their companies by having Grupo Modelo

sell the rights to the Corona Extra brand to a competitor, Constellation Brewing. The Grupo

Modelo division of AB InBev still brews and distributes Corona to markets outside of the United

States.21

A company as large and successful as AB InBev does not survive as long as it has and

attains the prominence that it has without the ability to learn from past mistakes and anticipate

problems before they occur. Since this deal represents breaking into huge markets that they have 20"Herfindahl-Hirschman Index." Herfindahl-Hirschman Index. The United States Department of Justice, 29 July 2015. Web. 14 Dec. 2015. 21Schoenberg, Tom. "AB InBev Wins U.S. Approval for $20.1 Billion Modelo Deal." Bloomberg.com. Bloomberg, 20 Apr. 2013. Web. 14 Dec. 2015.

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not had prior access to, occasionally sacrifices must be made for the good of the overall deal.

This may mean having to sell of a popular brand in a large market to satisfy regulators. On

November 11, 2015, in a press release to its investors, AB InBev announced that SABMiller

would be fully divesting its stake in MillerCoors, a joint venture with Molson. The press release

states, “ Molson Coors will acquire full ownership of the Miller brand portfolio outside of the

U.S. and retain the rights to all of the brands currently in the MillerCoors portfolio for the U.S.

market, including import brands such as Peroni and Pilsner Urquell. The sale also includes the

global Miller brand, currently sold in over 25 countries (including Canada, Colombia, Czech

Republic, Ecuador, Mexico, Panama, Romania, Russia, South Africa and the United Kingdom),

as well as related trademarks and other intellectual property rights”.22 In the press release, AB

InBev values this deal at $12 billion. That represents a hefty price to be paid to help ensure that

the deal will be cleared by U.S. Regulators. In the grand scheme of the deal it will probably be of

great benefit to offer this sacrificial lamb ahead of DOJ complaint. Twelve billion dollars is a

little more than the total profit that SABMiller earned in 2014.

Getting out ahead of any potential regulatory issues was probably a smart move on the

part of AB InBev and SABMiller. This is considering that there is already a complaint being

handled by the DOJ where AB InBev is listed as the defendant. This particular complaint alleges

that AB InBev is engaging in Anti-Competitive practices by buying up local distributors and

making it more difficult for smaller brewers to distribute their product.23 In many places in the

United States there is a three tier system in which a brewer, distiller, or winemaker must go

through a licensed distributor to get their product on shelves and in the bars. Also In an attempt

to further attenuate any regulatory concerns abroad AB InBev Published a press release on

December 3, 2015 informing investors of their desire to sell SABMiller brands Peroni, Grolsch,

and newly acquired Meantime Brewing. Just like in the United States, AB InBev is looking to

get out ahead of the European Commission, who will most definitely do an Anti-Trust probe into

22Anheuser-Busch InBev. Anheuser-Busch InBev Announces Agreement with Molson Coors for Complete Divestiture of SABMiller’s Interest in MillerCoors. N.p., 11 Nov. 2015. Web. 23Bartz, Diane. "Exclusive: U.S. Probes Allegations AB InBev Seeking to Curb Craft Beer Distribution." Reuters. Thomson Reuters, 12 Oct. 2015. Web. 14 Dec. 2015.

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the deal since the combined market share is greater than 15% in at least one country.24 Selling

these brands represents more lambs to be sacrificed but the play here is for access to markets in

Africa, India, Australia, and Latin America. Selling these brands will more than pay for itself in

terms of the increased influence and market share they will gain in parts of the globe where AB

InBev has no presence.

Conclusion

Despite the regulatory hurdles that AB InBev will have to negotiate, to AB InBev it is all

very worth it to gain crucial market territory in Southern Hemisphere locations where they are

not currently operating. Expanding to these new territories that are showing appreciable growth

in both GDP and in the overall beer market itself will all but ensure that AB InBev in its new

iteration as “Newco” will become a global beer hegemon. Investors will certainly enjoy the new

increased returns on their investments that this deal is all but certain to generate. It is also more

than likely the proactive measures that AB InBev has taken, and is beginning to take, will pay

dividends in the form of low regulatory scrutiny, the opposite of which could possibly stall or

kill the deal altogether. But one person this paper has not discussed as of yet is the consumer.

With the consolidation of the global beer market and decreased competition, consumers around

the world probably have to look forward to slightly higher prices of the beers they drink and

potentially reduced quality of the product.25 Although it could certainly have the exact opposite

effect. This deal will allow AB InBev in its new iteration as “Newco” to have access to

significantly more resources than it did previously. This may allow AB InBev, who is already

known for being a hardcore cost cutter, to cut costs even more, thereby increasing profit margins

without raising the price for the consumer. With that being said, the unique aspects of the

acquisition pertaining to expanding into new territory are the most interesting part of this deal.

24Blenkinsop, Philip. "AB InBev Seeks to Sell SABMiller's Grolsch, Peroni Brands." Reuters. Thomson Reuters, 03 Dec. 2015. Web. 14 Dec. 2015. 25Vaheesan, Sandeep. HALTING BEER’S MARCH TO MONOPOLY: THE LIKELY ANTICOMPETITIVE EFFECTS OF ANHEUSER-BUSCH INBEV’S PROPOSED ACQUISITION OF GRUPO MODELO. Working paper. The American Anti-Trust Institute, Nov. 2012. Web.

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When the deal gets completed, which is expected to happen in Q2 2016, the world will have its

first truly global brewing company.

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Appendix A

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Appendix B

A largely complementary geographic footprintFirst Truly Global Beer Company

Source: Company information, Plato Logic.Note: The geographic footprint represented is historic and does not take into account any divestures that may be required in relation to completion of the transaction.

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Primarily AB InBev

Primarily SABMiller (incl. JVs and associates)

AB InBev & SABMiller (incl. JVs and associates)

¾ Combined experience in developing global brands, national icons and local brands

¾ Largely complementary footprint in markets with significant growth opportunities

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Appendix C

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