Proposal to acquire Carlsberg

SABMiller plc

Team Filthy Rich, IIM KozhikodeAnkit Kardam

Ankit KumarKritika GuptaRahul Mittal

Executive Summary

SABMiller witnessed stagnating volumes for the period 2008-10, owing to global economic crisis. It had been enjoying above

industry average growth rates only until 2008, after which its growth rate declined below the industry average. This indicates

that its portfolio of operations is not resistant to economic shocks. It needs to rebalance its portfolio to retain its above industry

average growth rates. Exposure to developing markets of Asia – Pacific & Eastern Europe and value growth markets of

Western Europe would rebalance its portfolio to have a balanced exposure to value and volume growth markets.

Saturation of developed markets and consolidation in the brewing industry has left limited opportunities for acquisitions.

Inorganic expansion seems to be the solution for SABMiller to look for growth opportunities. Carlsberg, based on strategic fit

and stand alone excellent position, seems to be an ideal target for acquisition by SABMiller. This would give SABMiller a

balanced exposure to developed and developing markets. SABMiller’s low debt levels compared to peers and excellent

creditworthiness, render it in a relatively strong position for this acquisition.

The combined entity is expected to generate tremendous cost and revenue synergies driven by cross-selling opportunities and

sharing of best practices between the two companies. Net sales and operating costs were identified as value drivers for

Carlsberg. Based on DCF valuation methodology, Carlsberg, on a stand alone basis is valued at 150.3 bn DKK. Based on

trading comparables, Carlsberg is valued between 122.5 and 196.3 bn DKK. Based on transaction comparable, Carlsberg has

been valued at 164.1 Bn. to DKK 167.27 Bn.

SABMiller – Objectives

Balanced Portfolio

Develop Local

Premium Segment

Raising Profitability

Expanding beer

category

Leveraging skills

globally

1

2

3

4

5

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

• SABMiller’s strategy is to provide a full portfolio of brands with products at each point on the price scale

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

• Launched business capability programme to simplify processes and reduce costs

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

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

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

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

• Gain value from the scale and skills of the group, by standardising our back-office functions around the

world and regionally integrating our front-office systems

• Benefit from ongoing collaboration and the transfer of skills between businesses

The acquisition should be able to meet the objectives of the acquirer. SABMiller has 5 key objectives:

Source: SABMiller Annual Report, 2011

SABMiller – Portfolio Assessment (1/3) Addressing Why Acquisition?

• SABMiller enjoyed above market average growth rates until 2009, after which its volumes were affected by economic downturn

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

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

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

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

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

Stagnating volumes require SABMiller to look for alternative growth opportunities

Source: Euromonitor

Source: Euromonitor

Region Forecast CAGR (2010-15) %

Current Market Volume Share

%Comments

Middle East & Africa 6 34

• Market leader with leading position in South Africa, accounting for 77% volume share in the country • Well positioned to exploit growth opportunities

North America < 1 15 (market) • High unemployment is a threat to growth in this saturated marketLatin America 3.5 13 • Lacks presence in Brazil & Mexico, the two largest markets

Eastern Europe 1 16 (market) • Need to focus on Russia &Ukraine (representing 53% market )Western Europe - 0.2 3 (market) • Limited growth potential, possibilities for value growth

Asia Pacific 5.7 1

• Urbanisation and middle-class populations are expected to grow, and stimulate demand especially in premium segment• Leverage and strengthen presence in the region, especially within the premium segment

Australasia 2.6 2 (market) • Strengthen position to capture growth from premium segment

• In 2010, Middle East and Africa, North and Latin America, and Eastern Europe, accounted for 91% of SABMiller’s total volumes

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

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

SABMiller – Portfolio Assessment (2/3) Addressing Why Acquisition?

Source: Euromonitor, Datamonitor

Region Comments Volume Growth

Value Growth

Middle East & Africa

• Premium lager represented 15% of total beer volumes in 2010, showing more than 9% growth compared to previous year • 63% of premium volumes are sold in Nigeria and South Africa • Acquisition of Pabod Breweries in Nigeria & expansion plans in South Africa

High Moderate

North America• Joint venture with Molson Coors strengthens distribution network• Standard lager segment was much more worse than premium segment (SABMiller holds only 2% share in premium segment)

Low Low

Latin America

• Company’s volumes are concentrated mainly in the standard lager category (81%), which represents about 91% of total market• Under-represented in key markets of Brazil and Mexico• Premium segment is expected to outperform overall beer market

Moderate Moderate

Eastern Europe • Premium lager, accounts for 27% of total beer volumes Low Moderate

Western Europe • Possibilities for value growth in Turkey and Netherlands Low Low

Asia Pacific• Premium lager offers value growth opportunities with rising disposable incomes of China & India• Vietnam, South Korea & Japan promise premium segment growth

High Moderate

Australasia• Premium lager accounts for 22% market with a forecast of 9% for 2010-15• Strong trend towards premiumisation, though it is a small market Low Moderate

Price/mix is a powerful driver of gross profits. SABMiller’s portfolio should adequately account for premium segment to

capture value growth and standard segment to capture volume growth. The following table* presents level of potential

opportunities for value and volume growths for SABMiller:

* Based on SABMiller’s position in the above markets as of June, 2011

SABMiller – Portfolio Assessment (3/3) Addressing Why Acquisition?

Carlsberg – Acquisition Target Assessment Addressing Why Carlsberg?

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

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

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

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

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

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

Source: Carlsberg Annual Reports, 2006-10

A good fit with strategic priorities of the acquirer is critical for the success of any acquisition. Carlsberg’s acquisition by SABMiller has been evaluated on 3 fronts:

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

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

•Synergies The combined entity is likely to generate both revenue and cost synergies

Transaction Rationale – Market Impact (1/2) Why Carlsberg?

SABMiller - Carlsberg

The combined entity would be the strongest in Eastern Europe (41%), giving SABMiller greater access to key markets of Russia & Ukraine

Market Share Impact of SABMiller’s Acquisition of Carlsberg*

*Based on 2010 market shares

Heineken AB InBev Others

SABMiller would gain by extending its market share in the value driven Western European market

The entity would be in a much stronger position (enhanced distribution capabilities) to capitalize vast opportunities in key market of China, India & Vietnam

SABMiller’s position would be further strengthened in this region which is expected to drive major chunk of global value & volume growth

Transaction Rationale – Market Impact (2/2) Why Carlsberg?

The combined entity is expected to have geographical complementarities and balanced exposure to High-Growth and Mature Markets

Developed Markets

Developing Markets

+ 53%

+ 43.7%

+ 45%

• The combined entity would lead to significant value creation for all shareholders through combined competencies

of the two companies, making the entity the highest revenue generator of the industry, surpassing leader AB InBev

• There would be increased bargaining power over both sides of the value chain (e.g. a stronger entity would be better

able to tackle the cost pressure of raw materials, the entity is also expected to benefit from reduced price competition)

Balanced andattractive

global spread ofbusinesses

Strong, relevantbrand portfoliosthat win in the local market

Improvingprofitability

of localbusinesses,sustainably

Benefit from skills and global scale

• Carlsberg has balanced exposure to developed and developing markets, deriving 55% of its

operating profit margins from developing markets and 45% from developed markets

• SABMiller gains access to key emerging markets (China, India & Ukraine), developed markets of

Europe (value growth) and strengthens its leadership in MENA

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

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

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

• Trinity Procurement (SABMiller’s global procurement organisation) is expected to provide huge

costs reduction in procurement of raw materials

Transaction Rationale – Strategic Fit (1/2) Why Carlsberg?

There needs to be high alignment between the goals of SABMiller and Carlsberg for the combined entity to generate positive gains. Carlsberg is a good fit with SABMiller's strategic priorities :

• Its initiatives such as network optimisation ,divestitures, standardization, portfolio optimisation &

simplification have resulted in increasing operating profits, despite stagnating volumes

• Carlsberg's R&D aims at continuous development of new environment friendly solutions, with

integration of corporate social responsibility (CSR) throughout the value chain

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

• MENA

• Western Europe

• Asia Pacific

• Eastern Europe

Serving New Customers

Strategic Fit Matrix between SABMiller & Carlsberg

• Type of strategic fit for SABMiller in different regions can be

described on the basis of new products or new customers added

• New products includes wine, cider and other beverages

• New customers refers to new markets:

- Where SABMiller does not have a significant presence

- New type of customers (e.g. women) in existing markets

• Eve, a malt based beverage has been developed by Carlsberg to

target women customers in MENA & Western Europe

• Cider has been developed for Western European market by Carlsberg

1st2nd

3rd 4th

• Synergies are expected to be greater for existing products in new markets as SABMiller already has expertise

in selling these products in other markets (4th quadrant)

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

Other Considerations

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

• Carlsberg’s GloCal approach (finding the right balance between working closely together at a Global level while

allowing local brands and initiatives to flourish) is consistent with approach preferred by SABMiller

• Opportunity for Carlsberg to capitalize SABMiller’s distribution capabilities in MENA & benefit from Trinity Procurement

Source: Annual Reports, 2010

Transaction Rationale – Synergies Why Carlsberg? Revenue Synergies

• Cross selling opportunities for both brands in their respective new markets

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

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

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

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

Cost Synergies• Trinity Procurement (SABMiller’s new global procurement organisation) is expected to provide costs reduction

• Elimination of corporate overlapping functions will lower the company’s costs relative to same revenue stream

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

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

- Ability to achieve cost reductions - Ability to pass price increases - Combination of above factors

• Cultural issues for Carlsberg employees are very critical for synergies to be realized• Managing layoffs resulting from acquisition by giving proper compensation • Ensuring management does not leave the company resulting in decrease in synergy• Implementation time to financial closure is critical, may impact operating activities of Carlsberg

• Consolidating accounts, goodwill impact, provisioning in the balance sheet, purchase

consideration break-up between assets would be critical due to different currencies

• Cost of capital, tax benefit for interest, cross-border jurisdictions impacts need to be assessed

• Capital gains impact for Carlsberg to be assessed

• Potential implication of stamp duty & sales tax when acquiring Carlsberg’s assets

• Impact of restrictive import taxes , especially in emerging markets like Russia & China

• Open Offer Requirements, capitalization norms should be in compliance with applicable laws

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

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

• Antitrust law terms to be met, especially in regions of moderate to high consolidation

Acquisition Issues

Regulatory Issues

Tax Considerations

Financial & Accounting

Considerations

Other Considerations

SABMiller - Creditworthiness

Creditworthiness of SABMiller has been assessed on 2 broad parameters: (these also determine management effectiveness)

1) Corporate Governance 2) Financial Strength Parameter SABMiller Industry

AverageQuick Ratio 0.463 0.593Inventory Turnover 7.47 8.147Receivables Turnover 10.855 7.512WC Turnover 0.678 0.679Total Debt Ratio 0.268 0.356Interest Coverage 5.055 6.975Long Term Debt Ratio 0.202 0.270

D/E Ratio 0.507 0.767

Debt Capacity = EBIT/(r × interest coverage ratio), where r = interest rate for SABMiller

Debt Capacity = 3563/(.059*5.055) = $ 11958 million

Liquidity Measures

Solvency Measures

SABMiller practices healthy corporate governance. Some of the key features include:•Senior independent director has been provided sufficient authority to interfere in management decision•Formal and rigorous evaluation of the board is carried out each year, led by the Chairman, with input from the Senior Independent Director

Contribute in value creation for shareholders•Every new director is subject to election at 1st AGM, directors are subjected to retirement and re-election by shareholders every three years

Less chances of directors biasing towards management• Transparency & Ethics in reporting, employees are given training in ethics

Remote chances of insider advantage•Efficient Remunerations committee will further ensures transparent and actual performance reporting

Corporate Governance

Cash Flow Parameters

FCF/Debt 0.3048

FFO/Debt 0.644

Debt/EBIDTA 1.81

All three parameters have been deemed at least very good by all Credit Rating agencies

Liquidity ratios of SABMiller are above industry while Solvency ratios and Cash flow ratios are excellent in compare to industry peers. SABMiller can easily get debt for acquisition as per it’s strong current creditworthiness

Carlsberg – Value Drivers

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

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

• Operating Cost has most influence on the Share price

• OC was further analyzed to recognize micro level factors

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

• Improvement in EBITDA% and Inventory Turnover over the years has contributed to the shareholder Value

Value3. IEX: .0134. ITX: .0085. FCI: -.056. WCI: -.0005

1. OPC: -1.022. NSL: 0.43

Significant Factors

Insignificant Factors

ROA

Days Payable

Inventory Turnover

Days Receivable

EBITDA %

Regression with the share prices with the above factors revealed sensitivities of share price with each of the above factors (indicated in flow chart above)

Operational Efficiency Parameters – Trend Analysis* Exogenous Factors have been discussed previously

Valuation – Transactions Multiples

NOTE: Respective Multiples for Kirin Holdings-Lion Nathan have been reduced a bit to compensate for the extra premium Kirin holdings paid compared to the industry average at that time

Carlsberg (Figures in million DKK)

EV (using Average of Revenue Multiples) 164100.3 EV(using Average of EBITDA Multiples) 167273

Thus, the valuation of Carlsberg (as per Transaction Comparables Methodology) should be in the range of DKK 164.1 Bn. to DKK 167.27 Bn.

Criteria Comments

Size of Acquisition

Acquisition value close to Carlsberg’s Enterprise value of $20.8 Bn

Majority Stake Acquired

Control premium should be a part of acquisition value

Strategic Intent SABMiller's acquisition of Carlsberg will be an effort by SABMiller to gain considerable market share in emerging markets since its own markets are either saturating or already saturated

Timing Data from last 3 years only has been selected to maintain the relevance of control premium paid

Criteria for selecting Comparable Acquisition Transactions

Following are the four transactions selected :1. Jan-10: Heineken-FEMSA 3. Jul-08: InBev - Anheuser-Busch2. Apr-09: Kirin Holdings Lion Nathan 4. Jan-08: Heineken/Carlsberg - Scottish & Newcastle

FV or EV imply Firm/Enterprise Value

Valuation – Trading Multiples

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

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

• Peer group for benchmarking selected by excluding outliers, based on above ratios

Comparable Multiples Calculation P/B P/S EV/EBITDA EV/Net RevenueAb In Bev 2.5 2.4 9.42 3.60SABMiller 2.5 2.7 11.79 2.85Heineken 4.8 0.7 8.59 1.91Molson Coors 1 2.4 8.22 2.70Fosters 3.3 2 8.86 2.52

Carlsberg 1.1 1.2 7.67 1.82

Average 2.82 2.04 9.38 2.71

Calculation of Carlsberg's Price

Implied Price of Carlsberg (in mil DKK) 196353.78 122510.16 133496.53 163037.20

Peer group companies for benchmarking and valuing Carlsberg

Source: Annual Reports, 2006-10

Discounted Cash Flow(DCF) Valuation - Carlsberg (1/3)

Northern & Western Europe

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

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

Eastern Europe

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

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

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

Per capita consumption in Russia, Ukraine and Romania expected to be back at pre-recession level Outlook: Growth expected to be 15% in 2011 which slowly declines to perpetuity growth rate of 2% in Eastern

Europe during the next 10 years

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

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

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

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

Revenue Forecast Assumptions

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

Other AssumptionsCost of Sales

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

• Implementation of Excellence programs since 2003 to improve margins, optimize costs and increase efficiency • Taking 2010 Cost of Sales as base (which is 43.47%)

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

Other Items

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

Tax Rate, Fixed Assets, Depreciation, Working Capital

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

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

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

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

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

NPV (Million DKK) 150303.7

Valuation Range (Million DKK) 126119.89 (8.75%) - 183714.17 (6.75%)

WACC 7.74%

Perpetuity Growth Rate 1.87%

Sensitivity AnalysisRefer Appendix I for detailed cash flow statements

Valuation Methodologies – Benefits & Limitations

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

DCF Valuation

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

Trading Comparables

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

Transaction Comparables

Alternatives for SABMillerThe target should be such that it serves the following objectives:

• Give the combined entity a more balanced exposure to volume and value markets• Strengthens SABMiller so as to ward off possibilities of being taken over by AB-InBev

• China has top position by volume (24%) & 3rd position (8%) by value

• Registered global share of 3.4% in 2010, making it the 2nd largest brewery in China

• It is expected to have wide Chinese footprint through its successful local acquisitions

• Strengthen SABMiller’s position as 90% of future growth (5 years) expected from China

• SABMiller gains Heineken’s 37.5% equity stake in United Breweries in India

• Combined entity to become the leader in Eastern & Western Europe and MENA regions

• Access to Brazil & Mexico through Heineken’s equity stake in FEMSA

• Combined entity to surpass AB-InBev’s volumes in the coming years, with current market shares (2010) within 0.6% reach of AB-InBev

• Would give access to Australian market with tremendous growth in the premium segment

• Opportunity to explore wine business of Foster’s

• Increase stake in Castel, China Resources and Modelo

• Acquire Anadolu to strengthen Eastern Europe, particularly Turkey

• Molson Coors represents an opportunity to increase stake in NA and UK

• Acquire smaaler players like Schinariol or Petrolopolis to gain foothold in Latin America

Others

Source: Annual Reports, Datamonitor, Euromintor

Synergies Valuation (1/2)

Post acquisition value if combined entity (VSC) = $ 109,529

Standalone value of SABMiller (VS) = $ 70,881

Standalone value of Carlsberg (VC) = $ 28,758

Synergies = VSC - (VS + VC) = $ 10,089

Synergies

Cost of Sales will decrease further due to economies of scale and will be less by 1% in 5-6 years and will remain same till terminal

Elimination of overlapping functions will lead to synergies in marketing and distribution to reduce costs up to 0.5% in next few years, after which it is expected to stabilize

Cost Synergy Assumptions

Synergies Valuation (2/2)

Carlsberg’s dominant positions in both Eastern & Western Europe would provide growth synergies up to 0.3% higher than normal growth which will converge to 0.05% at terminal

Cross selling opportunity effects will percolate to net revenues to the tune of 0.5% in next few years, stabilizing to about 0.05% for long term

Revenue Synergy Assumptions

Heads Synergies (US $ million)

Cross Selling 7987

Efficiency in Cost of Sales 11375

Premium & Market Dominance 13802

Efficency in Sales & Distribution 14484

Incresed WACC (negative) -4395

Total 10089

Deal Structure (1/2)

Excess Debt Capacities

Debt Capacity = EBIT/(r × interest coverage ratio),

where r = interest rate for SABMiller

Total Excess Debt Capacities = US $ 5, 145 m

Entity Debt Capacity Existing Net Debt Excess Debt Capacity

SABMiller 11,958 7, 091 4, 867

Carlsberg 6, 491 6, 231 278

(all values in US $ million)Hence, SABMiller can fund the transaction with debt worth US $ 5,145 (utilizing debt capacities of the target as well)

without increase in interest rates ( ~ 5.6 %). SABMiller’s excellent credit worthiness and diversification in cash flows

achieved from the combined entity would enable SABMiller to take on additional debt.

Carlsberg Debt Capacity = EBIT/(r × interest coverage ratio),

where r = interest rate for Carlsberg

Debt Capacity = 7385.2/(.056*3.86)

= $ 6491 million

Impact on Credit Rating :Considering Current credit rating of SABMiller Baa1 by Moody’s It will remain same if it takes an additional debt of $12 billion while for more than that credit rating will decrease which will effect it’s future borrowing power which in turn block it’s future acquisition opportunities

Rationale for Deal Structure :There is no excess cash available with both companies-SABMiller and CarlsbergRest of options of Acquisition are Cash payment by taking all debt or share exchange or combination of bothSince credit rating will be affected if SABMiller will go for more than $12 billion debt it can not go for total debt financing of dealIf it will go for complete share exchange then there will be more dilution in shareholding and EPS for existing shareholdersOnly better option is to go for combination of share exchange and Debt financing up to $12 billion

Source: Global Alcoholic beverage rating methodology by Moodys

Deal Structure (2/2)

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

Appendix I – DCF Valuation

Appendix II – Assumptions for Projecting Cash Flows

Appendix III – Sensitivity Matrix

Appendix IV – DCF Valuation of SABMiller

Appendix V – Creditworthiness impact on SABMiller using Moody's Metrics

Overall rating will be unaffected by loan of $12 Billion taken by SabMiller for acquisition of Carlsberg . It will be same as of now Baa1. However more than that loan will downgrade it's credit rating because Financial ratings will be too down that it will not be offset by enhancement in ratings of Scale and profitability

Excess Cash with Carlsberg or SABMiller

• Carlsberg does not have excess cash (as of 31st Dec. 2010)• Excess Cash = Total Cash - Max(0; (Current Liabilities - Current Assets + Total Cash))

= 2,735 – Max (0; (27,047 – 15,523 + 2,735)) DKK million

= 2,735 – Max (0; (27,047 – 15,523 + 2,735)) DKK million

= (11,524) DKK million

• Similarly SABMiller = (1,769 $ million) • Both SABMiller and Carlsberg do not have excess cash available with them