abi modelo marriage rich multiple is worth it

UBS Investment Research

Anheuser-Busch InBev

Modelo marriage? Rich multiple is worth it

Press speculation that ABI is looking to buy Modelo for around US$20bn A reported take-out EV for Modelo of “around US$20bn” for the 49.7% stake is very full, in our view, implying 18.35x 2012E EV/EBITDA. Including a buy out ofSTZ’s stake in Crown (we estimate at least US$2bn), the underlying multiplewould be 16.5x. This is at the top end of historic M&A multiples, but scarcity ofremaining attractive global beer brands (Corona), and leading EM market positionswould help to justify this.

Strategically compelling . . . We see Modelo as a “classic” ABI deal – a market leader in Mexico with costsavings potential. We believe Mexican EBIT margins could rise from 28% to 35%.Mexican beer market should grow volume at 3% pa mid-term, with premiumisation potential. However, the market’s exclusivity structure is someconstraint on margin expansion. We see control of Corona in the US as ABI’s ambition, though a potential buy out of STZ from Crown and anti-trust would remain issues.

EPS accretive, assuming US$300m of savings in Mexico, US$75m in US We assume ABI could raise 100% debt for a potential deal at 5.5%, and realiseUS$300m of cost savings in Mexico and US$75m in the US by Yr 3. We see 4%px EPS accretion in Yr 2 (14E), 6.6% Yr 3 (15E). ABI’s net debt/EBITDA wouldlikely increase to 2.3x in Year 1. We believe a deal would cover 10% deal WACCby Yr 5.

Valuation: Buy, €60 price target (DCF-based) ABI remains our top pick of the European Brewers. While we expect someconsensus earnings pressure from Brazil (FX and volumes), US beer momentumremains very encouraging, as does ABI’s strong track record in consolidation. Highlights (US$m) 12/10 12/11 12/12E 12/13E 12/14ERevenues 36,298 39,046 40,495 42,483 44,474EBIT (UBS) 11,166 12,607 13,295 14,302 15,293Net Income (UBS) 5,040 6,449 7,343 8,056 8,927EPS (UBS, US$) 3.17 4.04 4.60 5.05 5.60Net DPS (UBS, US$) 1.09 1.57 2.30 2.53 2.80 Profitability & Valuation 5-yr hist av. 12/11 12/12E 12/13E 12/14EEBIT margin % 28.5 32.3 32.8 33.7 34.4ROIC (EBIT) % 14.9 17.3 18.2 19.0 19.9EV/EBITDA (core) x 10.6 10.0 11.0 9.9 9.0PE (UBS) x 16.2 14.0 15.4 14.0 12.7Net dividend yield % 2.3 2.8 3.2 3.6 3.9 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of €56.75 on 25 Jun 2012 21:39 EST Melissa Earlam Analyst [email protected] +44-20-7568 9025

Olivier Nicolaï Analyst [email protected] +44-20-7567 2473

Kaumil S. Gajrawala Analyst [email protected] +1-212-713 9318

Global Equity Research Belgium

Distillers & Brewers

12-month rating Buy Unchanged 12m price target €60.00/US$74.97 Unchanged

Price €56.75/US$70.83 (ADR) RIC: ABI.BR BBG: ABI BB

26 June 2012 Trading data (local/US$) 52-wk range €57.44-35.15/US$74.98-49.65Market cap. €91.6bn/US$114bnShares o/s 1,614m (ORD)/1,614m (ADR)ADR ratio 1 ADR:1 ORDFree float 46%Avg. daily volume ('000) 2,262/213Avg. daily value (m) €124.3/US$15.1 Balance sheet data 12/12E Shareholders' equity US$43.4bnP/BV (UBS) 2.6xNet Cash (debt) (US$29.8bn) Forecast returns Forecast price appreciation +5.7%/+5.8%Forecast dividend yield 3.2%/3.3%Forecast stock return +8.9%/+9.1%Market return assumption 5.8%Forecast excess return +3.1% EPS (UBS, US$) 12/12E 12/11 UBS Cons. ActualH1E - - -H2E - - -12/12E 4.60 4.5612/13E 5.05 4.89 Performance (€)

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Source: UBS www.ubs.com/investmentresearch

This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 19. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]



Anheuser-Busch InBev 26 June 2012

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Modelo marriage? Rich multiple is worth it Today we believe we are a step closer to a much anticipated consolidation in global beer between ABI and Modelo.

Grupo Modelo confirmed on 25 June that it is in strategic talks with ABI: “These talks might or might not lead to a consummation of a transaction and any speculation on the terms and conditions is premature”.

ABI has stated "Anheuser-Busch InBev notes the recent speculation regarding a possible combination between AB InBev and Grupo Modelo. AB InBev routinely considers a variety of strategic options to create value for its shareholders. There have been discussions between the company and Grupo Modelo regarding a possible transaction to expand its current relationship. These discussions may or may not lead to a transaction and any speculation on terms and conditions is therefore premature. There is a long history of partnership between Anheuser-Busch InBev and Grupo Modelo and AB InBev has great admiration for the Modelo business and its brands”.

Bloomberg has reported that the deal EV size could be “about US$20bn”. This would be a very full valuation, and well above the New York Times article of 25 June commenting that an acquisition would be “more than US$12bn”. A take-out EV for Modelo of “around US$20bn” for the 49.7% stake would imply 18.35x 2012E EV/EBITDA. The Bloomberg article continues “the amount is the enterprise value for the transaction and would include a premium for Modelo as well as a payment to Constellation Brands to buy a stake in a distribution joint venture”.

Assuming therefore that this reported bid value of US$20bn includes a buy out of STZ’s stake in Crown (we estimate at least US$2bn), the underlying multiple would be 16.5x. This is at the top end of historic M&A multiples, but scarcity of remaining attractive global beer brands (Corona), and leading EM market positions (Mexico) would help to justify this.

As shown in the table below, ABI currently owns a 50.3% non-controlling stake in Modelo (accounted for in associate income) through a 35.3% stake in Grupo Modelo and a 23.25% stake in Diblo (the operating subsidiary of Grupo Modelo).


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Chart 1: ABI’s current ownership structure of Modelo

Grupo ModeloSeries Owner # Shares Economic Stake (%) Voting Rights (%)Class A Shares Controlling Families 1458 45.1% 56.1%Class B Shares Anheuser-Busch Inbev 1141 35.3% 43.9%Class C Shares Public Shareholders 634 19.6% 0.0%Total 3,233 100% 100%

DibloOwner Economic Stake (%) Voting Rights (%)Grupo Modelo 76.75% 76.75%Anheuser-Busch Inbev 23.25% 23.25%Total 100.0% 100.0%

ABI economic ownership 50.3%Controlers economic ownership 34.6%Public Float economic ownership 15.1%Total 100.0%

Source: Company reports

Potential acquisition multiple looks very full The implied multiple for Modelo at US$20bn is at the top end of historic M&A multiples. Without adjusting for a possible payment to Constellation for their exit of Crown, it would be 18.35x EV/EBITDA 2012E. Since 1999, the average global beer acquisition multiple has been 12.3x historic EV/EBITDA. In January 2010 Heineken acquired FEMSA Cerveza (#2 brewer in Mexico with c41% market share) for 11.2x last 12 month EV/EBITDA.

However, as the global beer market consolidates, and family shareholders controlling the last remaining attractive assets are less willing to sell, multiples will likely be driven up. A high multiple in cash may be the price to pay to avoid issuing shares as payment.

Table 1: EV/EBITDA take-out multiples in global brewing since 1999

Date Bidder Target EBITDA (x)

Apr-12 AmBev CND 13

Oct-11 SABMiller Anadolu Efes 12.8

Sep-11 SABMiller Foster's 13.4

Aug-11 Kirin Schincariol 15.7

Jun-11 East African Breweries (Diageo) Kenya Breweries (SABMiller) na

Apr-11 Jinro Hite Brewery 8.1

Apr-11 Anheuser-Busch InBev Goose Island na

Jul-10 Kirin Fraser & Neave 11.4

Jun-10 Carlsberg Chongquing Brewery 45

Mar-10 Anadolu Efes Efes Breweries 7.3

Jan-10 Heineken FEMSA 11.2


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Date Bidder Target EBITDA (x)

Aug-09 C&C Tennent’s 8.3

May-09 KKR Oriental Brewery 8.6

Apr-09 Kirin Lion Nathan 13.6

Jun-08 InBev Anheuser-Busch 12.4

Jun-08 Anheuser Busch Modelo 12.1

Jan-08 Heineken/Carlsberg Scottish & Newcastle 15.3

Nov-07 SABMiller Grolsch 14.6

Aug-06 Sapporo Sleeman 15.1

Jan-06 InBev Fujian Sedrin 12.8

Aug-05 Heineken PIT (Ivan Taranov Breweries) 18.7

Jul-05 SABMiller Bavaria 10.1

Jul-04 Coors Molson 10.4

Jun-04 Anheuser Busch Harbin 18.9

Mar-04 Interbrew AmBev 11.7

Mar-04 AmBev Interbrew (Labatt assets) 10.8

Jan-04 Carlsberg AS Holsten-Braueri AG 11

Sep-03 Interbrew Spaten 8.9

May-03 SABMiller Birra Peroni SpA 12.6

May-03 Scottish & Newcastle Central de Cervejas 9.6

May-03 Heineken BBAG (Brau Union) 10.2

Nov-02 Interbrew Brauergilde Hannover 8.6

May-02 SAB Miller 9.3

Mar-02 Molson Kaiser 12.8

Feb-02 Scottish & Newcastle Hartwall 10.1

Feb-02 Heineken Bravo 13

Dec-01 Adolph Coors Co Carling Brewers 9

Nov-01 SABMiller Cerveceria Hondurena 8.8

Aug-01 Interbrew Beck’s 12.4

Nov-00 Carlsberg AS Feldschlosschen 6.9

Jun-00 Interbrew Bass 9.7

May-00 Interbrew Whitbread 9.7

Mar-00 Scottish & Newcastle Kronenbourg 11.4

1999–2005 InBev Sun Interbrew 10.3

Oct-99 SAB Pilsner Urquell/Radegast 13.9

Jul-99 Brahma Antartica 8.3

Jun-99 Heineken Cruzcampo 16.3

Average 12.3

Source: UBS estimates


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Earnings impact for ABI We have run a base case assumption of potential earnings impact for ABI. We have used an EV for the 49.7% stake in Modelo of US$20bn.

Overall we believe that a deal would be px EPS accretive by 4% in Year 2 (2014E) and by 6.6% in Year 3 (2015E).

Key assumptions we have made are as follows:

Deal is 100% debt-financed at 5.5%. ABI’s current interest rate guidance for the group in 2012E is 5-5.5%. Were we to take a less conservative assumption for the potential Modelo acquisition financing, of say 5%, this would add 0.8% of additional px EPS accretion per annum. We believe that ABI would be reluctant to use shares as payment, to avoid dilution of the Brazilian and Belgian family shareholders. However, we cannot rule this scenario out completely since the Fernandez family may look to remain involved in the global beer market;

We include 100% of Crown, assuming that ABI successfully buys out Constellation from Crown (though as we discuss later, this is by no means a certainty). We do not make any adjustments for potential brand disposals in the US that ABI may have to make for possible anti-trust reasons;

Cost savings of US$300m in Mexico by Year 3 (realised linear). Cost savings of US$75m in the US by Year 3 (realised linear);

No revenue synergies, though clearly this would be a significant opportunity in the mid-term for internationalising the Corona brand, which we discuss later;

Blended tax rate of 22.2% in Year 1 (Modelo at 28.0%, ABI at 21.4%);

We leave our dividend pay out assumptions unchanged (50% pay out from 2012E onwards) and assume no share buy back as out base case;

The deal would bring ABI’s net debt/EBITDA to 2.3x in 2013E and 1.8x in 2014E.


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Table 2: Potential EPS impact on ABI from a Modelo acquisition at US$20bn

Year 1 Year 2 Year 3

US$ 2013E 2014E 2015E

Net sales

ABI 42,483 44,474 46,576

Modelo 7,798 8,273 8,778

Total 50,281 52,747 55,354

EBIT

ABI 14,302 15,293 16,348

Modelo EBIT 1,931 2,055 2,196

Modelo cost savings 100 200 300

Crown cost savings 25 50 75

Group EBIT 16,359 17,598 18,919

Net interest

ABI (1,691)

New interest costs (1,100)

Total (2,791) (2,262) (1,837)

PBT (px) 13,568 15,366 17,084

Tax rate 22.2% 22.7% 23.2%

Taxes (3,011) (3,480) (3,962)

Minorities (2,528) (2,576) (2,662)

Net income (px) 8,029 9,280 10,460

Shares outstanding (m) 1,595 1,595 1,595

Old EPS 5.05 5.60 6.15

New EPS 5.03 5.82 6.56

% accretion/dilution -0.3% 4.0% 6.6%


The table below shows that a deal at this valuation could cover a 10% deal WACC by Year 5 (our last published model for Modelo assumes a 9.6% WACC). While Heineken assumed a 12.5% deal WACC for the FEMSA acquisition in 2010, we note that Modelo’s geographic exposure is 58% of EBIT from Mexico. In our NOPLAT calculation, we conservatively assume a 28% tax rate for Grupo Modelo.


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Table 3: ROIC analysis from a Modelo acquisition

US$m 2013E 2014E 2015E 2016E 2017E

Year 1 Year 2 Year 3 Year 4 Year 5

Invested capital 20,000 20,000 20,000 20,000 20,000

Acquired EBIT (+ cost savings) 2,056 2,305 2,571 2,663 2,796

NOPLAT (taking 28% tax rate) 1,481 1,659 1,851 1,917 2,013

NOPLAT ROIC 7.4% 8.3% 9.3% 9.6% 10.1%

Deal WACC 10.0% 10.0% 10.0% 10.0% 10.0%


Interestingly in ABI’s very short statement regarding the Modelo speculation on 25 June they made a point of highlighting “AB InBev routinely considers a variety of strategic options to create value for its shareholders”, acknowledging the importance of this measure.

What’s the value for Modelo? At an EV of US$20bn, Grupo Modelo shares would be worth an estimated P135.6. This would translate into an adjusted 12E EBITDA of 18.35x. At Friday’s close, the stock was trading at an implied multiple of 13x 12E EV/EBITDA.

Table 4: Take-out valuation sensitivity for Grupo Modelo

EV/EBITDA multiple 15.0x 16.0x 18.35x 19.0x

EV 443,997 473,597 543,156 562,396

Net Cash Avg 2011 28,087 28,087 28,087 28,087

Equity Value 472,084 501,684 571,243 590,483

- AB share 23.25% (109,759) (116,641) (132,814) (137,287)

Market Cap 362,324 385,042 438,429 453,196

# shares 3,234 3,234 3,234 3,234

Price per share 112.0 119.1 135.6 140.1

ABI stake 50.3% (Pesos) 237,618 252,347 287,335 297,013

Controllers (Pesos) 163,381 173,625 197,698 204,357

Public Float (Pesos) 71,085 75,542 86,016 88,913

ABI stake 50.3% (US$ bn) 17,601 18,692 21,284 22,001

Controllers (US$ bn) 12,102 12,861 14,644 15,138

Public Float (US$ bn) 5,266 5,596 6,372 6,586

Equity Buyout minorities (US$ bn) 17,368 18,457 21,016 21,724

EV Buyout minorities (US$bn) 16,334 17,423 19,982 20,690

Total Equity Value (US$ bn) 34,969 37,149 42,300 43,725

FX rate (Pesos/USD) 13.50



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Strategically compelling in Mexico As we have previously discussed, a scenario where ABI would fully control Modelo would be compelling strategically. Furthermore, this would be exactly the kind of acquisition that ABI has a strong track record in delivering on, specifically a market leader with sub-optimal margins.

The Mexican beer market has grown volumes compounded at +1.7% over the last five years reaching per capita consumption of 58 litres in 2011. There is a notable difference in pcc by region in Mexico. Per capita consumption is much higher in the North of the country, where the population is wealthier (25% of total population). Per capita consumption is in the 80 litres pcc range in the North, which implies that pcc in the rest of the country is c55 litres.

The chart below shows the long term growth trend in Mexican market volumes and our expectation of 3% volume growth per annum as a mid-term estimate to 2016E.

Chart 2: Mexican beer market volume growth

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The market opportunity for premiumisation in Mexico is significant given that premium is only c3% of market volumes, and offers compelling mix growth. Indeed one of the cornerstones of Heineken’s acquisition of FEMSA in January 2010 was exactly this, to increase penetration of the Heineken brand (albeit with targets that we believe are too optimistic). However, for ABI, it is positive that Heineken has started doing some of the heavy lifting for developing the premium segment in Mexico.


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Chart 2: Premium lager is very low proportion of Mexican beer market

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Modelo is a clear market leader with 59.5% of the market by volume, which has steadily been increasing at the expense of FEMSA.

Chart 3: Modelo has been consistently winning market share

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On a regional basis, we estimate that Modelo has c74% share in Central and Southern Mexico and c25% share in the North. Given faster population and GDP growth in Central and Southern Mexico, we believe Modelo should be able to continue outperforming FEMSA.

Table 5: Regional beer pcc and market share by player

Region Population (m) Beer pcc (litres pa) Modelo market share FEMSA market share

North 26.5 80 25% 75%

Central & South 80.4 54 74% 26%

Mexico 112.3 58 59.5% 40.6%



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We estimate that Modelo’s Mexican operating margins in 2011 were 28%, which we believe offers significant upside potential. We believe that ABI could comfortably realise US$300m of cost savings in the following ways:

Fixed cost discipline, through rolling out its Zero Based Budgeting process;

Modelo could benefit from ABI’s economies of scale, particularly in procurement, across the Americas;

Head office closure;

Longer term possible closure of Modelo brewery in central Mexico City and realisation of real estate value. Though capacity issues would limit any short term gain. The Central Mexico brewery has capacity of 11.1m hectolitres, compared with total capacity of 70m hl for the company.

While ABI has two positions on Modelo’s Board (ABI’s CEO Carlos Brito and CFO Felipe Dutra) since 2010, we believe that any best practice transfer between the two companies has been limited to date.

We note that Heineken is guiding for €150m (US$214m using the exchange rate at the time) of cost savings from the FEMSA acquisition in January 2010. Therefore we believe that this US$300m could be comfortably realised by ABI in Mexico alone.

Chart 4: Upside to Modelo’s Mexican operating margins

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However, we do identify a potential margin cap from exclusivities in the Mexican beer market. Exclusivities are a key part of the Mexican beer market. Exclusivities help “mom and pop” stores afford a license to sell beer, offer cold beer at the point of sale, properly merchandise and promote beer, and sell beer profitably. These benefits to the “mom and pop” stores benefit beer consumption. With “mom and pop” stores making up half of the retail points of sale in Mexico, according to Walmex, the scope of the exclusivities is quite large.

FEMSA commented that around 60% (or more) of its volumes are sold through some type of exclusivity (30% third-party, 14% via OXXO, and at least 10% through other exclusivities). Modelo does not provide a similar figure, but by our estimates, it would be broadly similar.


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The brewers rely on exclusivities as a key barrier to protect both brewers’ regional strength from their competitor’s expansion plans. Both competitors are pushing to get into each other’s territories (Although FEMSA has recently backed away from fighting Modelo in some of its core markets). This has turned the exclusivities into a valuable mechanism for market share protection. Exclusivity arrangements last 3 to 5 years and include discounts making the profitability for the retailer even more favourable. The problem is there are around one million points of sale for beer across the country so exclusivities come up for renewal every year. This means there is always competition somewhere for a point of sale exclusivity. In a zero sum game between two players, it is hard to walk away from the exclusivity, even if the price gets high.

While the rationale for breaking away from exclusivities is compelling for the market’s margin structure, we believe it is a high risk strategy for either Modelo or FEMSA to break rank from them, as the downside risk of the competitor then not following suit and taking market share is material. We have discussed this subject in great depth in our 1 April 2010 report “Mexican Beer and its prisoner’s dilemma”.

How will the US be resolved? In the US, Crown (50/50 distribution JV between Modelo and Constellation) has 5.7% share of the US beer market, leading the import segment. ABI’s volume share in 2011 was 47.7%

Momentum for Crown has been strong over the last 6 months as shown in the chart below. Furthermore, Corona Extra brand equity is high in our view.

Chart 5: Crown volume growth momentum has been accelerating

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We see the following strategic benefits to ABI of controlling Corona in the US.

Improving margins by reducing overhead and deploying scale benefits (we estimate US$75m of cost savings);

Chart 6: Crown margin upside post cost savings

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ABI would likely be able to take pricing up for the Corona portfolio, which would create a greater pricing umbrella for the domestic premium brands in the US, given ABI’s strategy of pricing realignment across its portfolio. This would therefore create significant value in the core ABI business. The chart below shows how the price premium of import brands relative to the market has closed significantly as Corona and Heineken have not taken a portfolio wide price increase for over two years;

Chart 7: Price premium of US import brands relative to market average

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Offering ABI’s network of around 500 wholesalers a fast growing brand portfolio of imports which generates attractive EBIT/barrel. We believe that some of ABI’s wholesalers have been tempted away from exclusivity by fast growing craft brands, and this could serve to help mitigate that trend.


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How to convince Constellation Brands to exit?

The question remains, how long will Constellation participate in the Crown JV, as the current agreement expires at the end of 2016 (notice must be given in 2013, if Modelo intends to exit). We summarize Constellation’s three options below:

(1) Create New Sole Venture – Modelo could essentially take on the current Crown platform (sales force, distribution, etc.) entirely on their own. This would likely result in a payment to STZ equal to the book value of their interest in the JV, which we have estimated to be roughly US$200m. This would be the most favourable outcome for Modelo and least favourable for STZ, in our view, but could be difficult given anti-trust issues (due to ABI’s ownership and recent pricing decisions).

(2) New Distribution Partner – Modelo could seek out a new distribution partner in the US. Under this scenario, Modelo would need to pay Constellation 8-times their share of Crown’s last 12 month EBIT as of 2016E, which would represent about US$2bn in present value.

(3) Maintain Crown Joint Venture – Modelo could choose to keep the status quo and maintain the Crown JV with Constellation. Maintaining the Crown JV would be the most favourable scenario for Constellation in our view.

Can ABI avoid anti-trust?

Market share for ABI in combination with Crown in the US would be 53.4%. We believe that anti-trust could be a potential stumbling block.

Looking back at history, to satisfy regulators, following the US$52bn merger with Anheuser-Busch, ABI sold its Labatt USA unit to KPS Capital Partners. The ABI merger was approved in November 2008 by the Justice Department on the condition that the merged company sell the Buffalo-based Labatt USA unit. Market share concerns were focused on Buffalo, Rochester and Syracuse (Labatt’s overall share of the US beer market was only about 2% at the time) and the deal did not affect Labatt’s Canadian operations.

The Justice Department commented “The Buffalo metropolitan area ("Buffalo") and the Rochester metropolitan area ("Rochester"), the proposed acquisition would increase Anheuser-Busch's share of the beer market from approximately 24 percent to approximately 45 percent, producing a highly concentrated market dominated by two firms - the combined InBev/Anheuser-Busch and MillerCoors (a joint venture between SABMiller and Coors Brewing Co.). MillerCoors has approximately a 26 percent share of the Buffalo and Rochester beer markets and no other firm has more than a five percent share.” . . . “The proposed acquisition would also create a highly concentrated beer market in the Syracuse metropolitan area ("Syracuse"). In Syracuse, the proposed acquisition would increase Anheuser-Busch's share of the beer market from approximately 28 percent to approximately 41 percent, with MillerCoors controlling approximately 28 percent. As in Buffalo and Rochester, no other firm has more than a five percent share of the beer market in Syracuse.”


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In the chart below, we look at ABI and Crown’s combined market share on a state by state basis, using Beer Marketers’ Insights which has data available for 42 states.

Chart 8: Market share of ABI and Crown by state

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What is interesting in the chart above is that even on a stand alone basis, ABI has market share of over 50% (which we would typically deem as a threshold) in 23 states. It is clear that absolute market share is not the only consideration, but market concentration.

If anti-trust was a concern, what could ABI sell to satisfy it? While ABI could most likely look to sell one of its large value brands (such as Natural Light with a 4.2% share, Busch Light with a 3.3% share or Busch with a 2.9% share), this could potentially undermine the pricing realignment strategy for its whole domestic beer portfolio which depends on taking higher pricing in its value segment to stimulate trading up. Possible buyers are quite limited.


UBS 15

Upside to Corona brand growth internationally While we would not explicitly want to pay for revenue synergies, the Corona Extra brand clearly offers meaningful growth potential in the mid-term outside Mexico and the US. As shown in the table below, Corona Extra is the fifth largest beer brand globally. However, in terms of global beer brands, it ranks second in volumes after Budweiser.

Table 6: Top 10 global beer brands

Barrels (m) Regions 2009 2010 change y/y

Budweiser Global 75.9 75.7 -0.3%

Snow China 61.7 71.7 16.2%

Skol Brazil 31.2 31.5 1.0%

Tsingtao China 25.2 29.7 17.9%

Corona Extra Global 27.6 27.7 0.4%

Miller Global 28.0 26.9 -3.9%

Brahma Brazil 25.3 26 2.8%

Heineken Global 22.2 24.5 10.4%

Coors Global 22.3 22.3 0.0%

Yangjing China 18.3 20 9.3%

Source: IMPACT

We see the Corona brand having strong internationalisation potential, which ABI can leverage across its global footprint. However, we believe such revenue synergies would rather be a slow burn process.

As of 2011, 77% of Corona Extra’s export volumes were in the US, with Canada, UK Australia and Chile the next largest markets.

Chart 9: Corona Extra export volumes by market, 2011

77%

2%

1% 1% 8%2%

3%

6%

USACanadaUnited KingdomAustraliaChileSpainArgentinaOther

Source: Euromonitor

However, the Corona Extra brand’s distribution has been allocated across multiple players, in some cases with Modelo even choosing another brewer over ABI in an ABI beer market.

In Canada, Corona is distributed by MolsonCoors;


UBS 16

In the UK, Modelo awarded MolsonCoors the distribution rights for Corona Extra as of January 2011;

In Australia, Modelo moved its distribution from Foster’s to Lion Nathan in March 2012;

In China, Modelo awarded Carlsberg the distribution rights in 2012. Modelo in fact switched distribution away from ABI with whom they had a distribution contract since 2006;

In Eastern Europe, Modelo struck a distribution agreement with Carlsberg in Russia in 2009. This expanded the distribution that Carlsberg had in place for the Modelo brands in Kazakhstan, Uzbekistan, Ukraine, Belarus, Kirgizstan, Turkmenistan, Tajikistan and Moldova.

UBS 17


Income statement (US$m) 12/07 12/08 12/09 12/10 12/11 12/12E % ch 12/13E % ch 12/14E % chRevenues 19,666 23,473 36,759 36,298 39,046 40,495 3.7 42,483 4.9 44,474 4.7 Operating expenses (ex depn) (12,823) (15,625) (24,142) (22,428) (23,689) (24,261) 2.4 (25,122) 3.5 (26,001) 3.5 EBITDA (UBS) 6,843 7,848 12,617 13,870 15,357 16,234 5.7 17,361 6.9 18,472 6.4 Depreciation (1,470) (1,931) (2,788) (2,704) (2,750) (2,939) 6.9 (3,059) 4.1 (3,179) 3.9 Operating income (EBIT, UBS) 5,374 5,917 9,829 11,166 12,607 13,295 5.5 14,302 7.6 15,293 6.9 Other income & associates 1 69 513 521 623 631 1.3 666 5.6 727 9.2 Net interest (820) (1,445) (4,419) (3,736) (3,137) (1,914) -39.0 (1,691) -11.7 (1,479) -12.5 Abnormal items (pre-tax) 513 (797) 1,321 (268) (278) 24 - 0 - 0 - Profit before tax 5,068 3,744 7,244 7,683 9,815 12,036 22.6 13,277 10.3 14,541 9.5 Tax (890) (655) (1,786) (1,920) (1,856) (2,225) 19.9 (2,693) 21.0 (3,039) 12.8 Profit after tax 4,178 3,089 5,458 5,763 7,959 9,811 23.3 10,584 7.9 11,502 8.7 Abnormal items (post-tax) 0 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends (1,164) (1,193) (1,264) (1,736) (2,104) (2,451) 16.5 (2,528) 3.1 (2,576) 1.9 Net income (local GAAP) 3,015 1,896 4,194 4,027 5,855 7,360 25.7 8,056 9.5 8,927 10.8 Net Income (UBS) 2,554 2,517 3,927 5,040 6,449 7,343 13.9 8,056 9.7 8,927 10.8 Tax rate (%) 18 17 25 25 19 18 -2.2 20 9.7 21 3.0 Pre-abnormal tax rate (%) 20 19 14 16 16 19 19.9 21 9.6 22 3.0 Per share (US$) 12/07 12/08 12/09 12/10 12/11 12/12E % ch 12/13E % ch 12/14E % chEPS (local GAAP) 3.09 1.90 2.65 2.53 3.67 4.61 25.7 5.05 9.5 5.60 10.8 EPS (UBS) 2.62 2.52 2.48 3.17 4.04 4.60 13.9 5.05 9.7 5.60 10.8 Net DPS 2.09 0.41 0.51 1.09 1.57 2.30 46.6 2.53 9.7 2.80 10.8 Cash EPS 4.12 4.45 4.24 4.86 5.77 6.45 11.8 6.97 8.1 7.59 8.9 BVPS 19.08 14.01 18.92 22.00 23.40 27.23 16.4 30.08 10.5 33.26 10.6 Balance sheet (US$m) 12/07 12/08 12/09 12/10 12/11 12/12E % ch 12/13E % ch 12/14E % chNet tangible fixed assets 9,087 19,674 16,461 15,839 16,022 16,358 2.1 16,328 -0.2 16,270 -0.4 Net intangible fixed assets 20,678 73,229 75,290 75,857 75,120 77,181 2.7 79,433 2.9 81,753 2.9 Net working capital (incl. other assets) (63) (14,665) (17,816) (17,985) (18,904) (19,305) 2.1 (19,833) 2.7 (20,496) 3.3 Other liabilities (1,702) (750) 0 0 (6) 0 - 0 - 0 - Operating invested capital 28,001 77,488 73,935 73,711 72,232 74,234 2.8 75,928 2.3 77,527 2.1 Investments 266 7,107 7,021 7,538 6,940 7,160 3.2 7,392 3.2 7,645 3.4 Total capital employed 28,267 84,595 80,956 81,249 79,172 81,394 2.8 83,320 2.4 85,173 2.2 Shareholders' equity 18,678 22,442 30,318 35,259 37,492 43,425 15.8 47,984 10.5 53,052 10.6 Minority interests 1,762 1,989 2,853 3,540 3,552 4,734 33.3 5,863 23.9 6,980 19.1 Total equity 20,440 24,431 33,171 38,799 41,044 48,159 17.3 53,847 11.8 60,033 11.5 Net debt / (cash) 6,982 57,155 45,174 39,704 34,688 29,795 -14.1 26,033 -12.6 21,700 -16.6 Other debt-deemed items 846 3,009 2,611 2,746 3,440 3,440 0.0 3,440 0.0 3,440 0.0 Total capital employed 28,267 84,595 80,956 81,249 79,172 81,394 2.8 83,320 2.4 85,173 2.2 Cash flow (US$m) 12/07 12/08 12/09 12/10 12/11 12/12E % ch 12/13E % ch 12/14E % chOperating income (EBIT, UBS) 5,374 5,917 9,829 11,166 12,607 13,295 5.5 14,302 7.6 15,293 6.9 Depreciation 1,470 1,931 2,788 2,704 2,750 2,939 6.9 3,059 4.1 3,179 3.9 Net change in working capital 370 800 787 226 1,409 591 -58.0 436 -26.2 437 0.1 Other (operating) (1,649) (1,153) 1,575 (1,683) (2,364) (1,841) -22.1 (2,074) 12.6 (2,135) 3.0 Operating cash flow (pre tax/interest) 5,565 7,495 14,979 12,413 14,402 14,984 4.0 15,724 4.9 16,774 6.7 Net interest received / (paid) (820) (1,445) (4,419) (3,736) (3,137) (1,914) -39.0 (1,691) -11.7 (1,479) -12.5 Dividends paid (553) (2,026) (660) (808) (1,732) (2,504) 44.57 (3,672) 46.63 (4,028) 9.70 Tax paid (614) (1,234) (1,569) (1,682) (1,694) (2,301) 35.8 (2,542) 10.5 (2,782) 9.5 Capital expenditure (2,154) (3,100) (1,713) (2,344) (3,673) (3,241) -11.8 (2,995) -7.6 (3,087) 3.1 Net (acquisitions) / disposals (1,261) (59,641) 6,764 339 159 0 - 0 - 0 - Other (925) (1,342) 353 (1,721) (2,241) (3,816) 70.3 (4,300) 12.7 (4,460) 3.7 Share issues (710) 8,530 76 215 155 0 - 0 - 0 - Cash flow (inc)/dec in net debt (547) (51,422) 13,458 4,397 4,160 2,930 -29.6 2,539 -13.3 3,043 19.9 FX / non cash items 547 1,249 (1,477) 1,073 856 1,963 129.4 1,224 -37.7 1,290 5.4 Balance sheet (inc)/dec in net debt 0 (50,173) 11,981 5,470 5,016 4,893 -2.5 3,762 -23.1 4,333 15.2 Core EBITDA 6,843 7,848 12,617 13,870 15,357 16,234 5.7 17,361 6.9 18,472 6.4 Maintenance capital expenditure (1,508) (2,170) (1,199) (1,641) (2,571) (2,268) -11.8 (2,096) -7.6 (2,161) 3.1 Maintenance net working capital 2 440 553 555 567 583 2.7 600 3.0 621 3.5 Operating free cash flow, pre-tax 5,338 6,118 11,971 12,784 13,353 14,549 9.0 15,865 9.1 16,932 6.7

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 18

Global Equity Research Belgium

Distillers & Brewers

12-month rating Buy

12m price target €60.00

Company profile ABI is the largest global brewer with 22% market share of volumes.ABI is market leader in its two major markets, the US and Brazil,which represent 40% and 39% of group EBIT, respectively. ABI had47.7% beer market share in the US and 69.0% in Brazil in 2011. Thebrewer's main international brands are Budweiser, Bud Light, StellaArtois and Beck's.

Value (EV/OpFCF & P/E)

12/10 12/11 12/12E 12/13E 12/14E0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

0.0x

5.0x

10.0x

15.0x

20.0x

EV/OpFCF (LHS) P/E (RHS)

Profitability

12/10 12/11 12/12(E) 12/13(E) 12/14(E)29.00%

30.00%

31.00%

32.00%

33.00%

34.00%

35.00%

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/10 12/11 12/12(E) 12/13(E) 12/14(E)14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

2.0x

2.1x

2.2x

2.3x

2.4x

2.5x

2.6x

2.7x

ROE (LHS) Price to book value (RHS)

Growth (UBS EPS)

12/10 12/11 12/12(E) 12/13(E) 12/14(E)34000

36000

38000

40000

42000

44000

46000

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Revenue (LHS) UBS EPS Growth (RHS)


Valuation (x) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14EP/E (local GAAP) 17.8 21.3 15.7 15.5 14.2 12.8 P/E (UBS) 16.2 16.8 14.0 15.4 14.0 12.7 P/CEPS 10.2 11.0 9.8 11.0 10.2 9.3 Net dividend yield (%) 2.3 2.0 2.8 3.2 3.6 3.9 P/BV 2.5 2.4 2.4 2.6 2.4 2.1 EV/revenue (core) 3.9 4.1 3.9 4.4 4.1 3.7 EV/EBITDA (core) 10.6 10.8 10.0 11.0 9.9 9.0 EV/EBIT (core) 13.3 13.4 12.2 13.4 12.1 10.9 EV/OpFCF (core) 12.1 11.7 11.5 12.3 10.9 9.8 EV/op. invested capital 2.0 2.0 2.1 2.4 2.3 2.2

Enterprise value (US$m) 12/10 12/11 12/12E 12/13E 12/14EAverage market cap 85,262 90,941 114,502 114,502 114,502 + minority interests 32,238 34,091 41,255 39,121 37,020 + average net debt (cash) 39,704 34,688 29,795 26,033 21,700 + pension obligations and other 2,746 3,440 3,440 3,440 3,440 - non-core asset value (10,156) (9,888) (10,466) (10,466) (10,466) Core enterprise value 149,794 153,272 178,527 172,630 166,196 Growth (%) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14ERevenue 18.7 -1.3 7.6 3.7 4.9 4.7 EBITDA (UBS) 22.4 9.9 10.7 5.7 6.9 6.4 EBIT (UBS) 23.8 13.6 12.9 5.5 7.6 6.9 EPS (UBS) 11.5 27.7 27.7 13.9 9.7 10.8 Cash EPS 8.8 14.7 18.6 11.8 8.1 8.9 Net DPS -6.9 113.3 44.3 46.6 9.7 10.8 BVPS 5.2 16.3 6.3 16.4 10.5 10.6

Margins (%) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14EEBITDA / revenue 36.0 38.2 39.3 40.1 40.9 41.5 EBIT / revenue 28.5 30.8 32.3 32.8 33.7 34.4 Net profit (UBS) / revenue 13.0 13.9 16.5 18.1 19.0 20.1

Return on capital (%) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14E EBIT ROIC (UBS) 14.9 15.1 17.3 18.2 19.0 19.9 ROIC post tax - 12.7 14.5 14.6 15.0 15.5 Net ROE 15.0 15.4 17.7 18.2 17.6 17.7

Coverage ratios (x) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14E EBIT / net interest 4.1 3.1 4.2 7.3 8.9 10.8 Dividend cover (UBS EPS) 3.5 2.9 2.6 2.0 2.0 2.0 Div. payout ratio (%, UBS EPS) 38.0 34.4 38.8 50.0 50.0 50.0 Net debt / EBITDA 3.2 2.9 2.3 1.8 1.5 1.2

Efficiency ratios (x) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14E Revenue / op. invested capital 0.5 0.5 0.5 0.6 0.6 0.6 Revenue / fixed assets 0.4 0.4 0.4 0.4 0.4 0.5 Revenue / net working capital NM NM NM NM NM NM

Investment ratios (x) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14E OpFCF / EBIT 1.1 1.1 1.1 1.1 1.1 1.1 Capex / revenue (%) 8.4 6.5 9.4 8.0 7.0 6.9 Capex / depreciation 1.1 0.9 1.3 1.1 1.0 1.0

Capital structure (%) 5Yr Avg 12/10 12/11 12/12E 12/13E 12/14E Net debt / total equity NM NM 92.5 68.6 54.3 40.9 Net debt / (net debt + equity) 56.0 53.0 48.1 40.7 35.2 29.0 Net debt (core) / EV 30.7 26.5 22.6 16.7 15.1 13.1

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of €56.75 on 25 Jun 2012 21:39 EST Market cap(E) may include forecast share issues/buybacks. Melissa Earlam Analyst [email protected] +44-20-7568 9025

Olivier Nicolaï Analyst [email protected] +44-20-7567 2473

Kaumil S. Gajrawala Analyst [email protected] +1-212-713 9318


UBS 19


ABI is the largest global brewer with 22% market share of volumes. ABI is market leader in its two major markets, the US and Brazil, which represent 40% and 39% of group EBIT, respectively. ABI had 47.7% beer market share in the US and 69.0% in Brazil in 2011. The brewer's main international brands are Budweiser, Bud Light, Stella Artois and Beck's.

Statement of Risk

Sector-specific risks: (1) consumer expenditure levels and the economic and political stability in the countries of operation; (2) governmental and regulatory risk of excise duty increases, or restrictions such as advertising or deposit laws over which the industry can exercise limited influence; (3) weather in any given year due to the seasonality of consumption above all for beer and soft drinks; (4) shifts in consumer trends between categories and substitution risk from other competing products, namely wine and spirits; (5) competition and the impact on returns from increased A&P and capital investment; (6) variability of input costs such as raw materials (e.g. barley, malt, sugar and agave) and packaging materials (e.g. glass, aluminium, and PET) as well as fuel costs on distribution; and (7) increasing cost of consolidation as asset values continue to increase, thereby adversely affecting the level of industry returns. Company-specific risks for ABI are: execution risk associated with the planned disposal of non-core assets worth US$7bn, integration risk related to the A-B acquisition, sustainable level of growth in emerging markets such as Brazil and Russia; the ongoing growth potential in Western European markets such as the UK. Finally there is limited visibility on net income growth in AmBev given FX, interest rate and commodity volatility.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 20

Required Disclosures This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 51% 34%Neutral Hold/Neutral 40% 35%Sell Sell 9% 15%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 25%Sell Sell less than 1% 17%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2012. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 21

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Limited: Melissa Earlam; Olivier Nicolaï. UBS Securities LLC: Kaumil S. Gajrawala. Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Anheuser-Busch InBev16 ABI.BR Buy N/A €56.75 25 Jun 2012

Grupo Modelo16, 20 GMODELOC.MX Neutral (CBE) N/A P116.87 25 Jun 2012

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR

exceeds the MRA by 10% (compared with 6% under the normal rating system). Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.


UBS 22

Anheuser-Busch InBev (€)

01-A

pr-0

7

01-J

ul-0

7

01-O

ct-07

01-J

an-0

8

01-A

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8

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8

01-O

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01-J

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9

01-A

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9

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9

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01-J

an-1

2

01-A

pr-1

2

0.0

20.0

40.0

60.0

80.0

Price Target (€) Stock Price (€)

Buy 2Buy

NeutralSell

No Rating

Source: UBS; as of 25 Jun 2012 Grupo Modelo (P)

01-A

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7

01-J

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7

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01-J

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8

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9

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9

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01-J

an-1

2

01-A

pr-1

2

0

20

40

6080

100

120

Price Target (P) Stock Price (P)

Reduce 2Buy

NeutralSell

No RatingShort-term Sell

Source: UBS; as of 25 Jun 2012 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.


UBS 23

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