On September $17,2015,$ Anheuser$-$Busch InBev, the world largest brewer in the world, announced

that it had reached an agreement to acquire SABMiller, the world$$s second largest brewery. The deal

would be the largest deal ever in the industry$$s history.

The deal was an antitrust hurdle in Europe and the United States, and was allowed only after

certain concessions to the Department of Justice and the European Commissioner for Competition. The

acquisition afforded AB InBev many opportunities and followed a general industry trend of consolidation.

Analysts argued that in a highly competitive market with slow demand growth, brewers have been leery

of large investments in factories and distribution channels, and have seen acquisitions as a way to $$buy

growth,$$ since merging allows companies to simply consolidate preexisting distribution and

manufacturing platforms without the need for costly capital investment. By acquiring SABMiller, AB

InBev$$which had substantial business in North America, South America, Russia, and East Asia$$would gain

access to SABMiller$$s distribution channels in Africa, Eastern Europe, Australia, and India. This would allow

AB InBev to introduce its products without the costs of building new distribution networks and factories,

in addition to avoiding extensive negotiations with governments for distribution rights. In addition to

letting AB InBev bypass the investments required to enter African and Asia Pacific markets, the deal would

contribute to AB InBev$$s strategy of providing a complement of global beer brands along with local ones

in order to compete with the burgeoning micro$-$brew industry. By acquiring SABMiller, AB InBev would

control a plurality of the world$$s beer to be $$the world$$s first truly global brewer.$$

At the time of acquisition, AB InBev$$s brands included Budweiser, Corona, Stella Artois, Brahma,

Antarctica, Modelo Especial, and many other regional brands. AB InBev$$s revenue was concentrated in

the Americas $($North and South$),$ with $36\mathrm{.}5\%$ of total $2015$ revenue coming from North America and $49\mathrm{.}1\%$

of total $2015$ revenue coming from Latin America. SABMiller, the London$-$based multinational, controlled

global brands including Brutal Fruit, Castle Lager, Miller, Redd$$s Dry, Sarita, and others. Unlike AB InBev,

only $48\%$ of SABMiller$$s revenue came from the Americas, with the majority coming from Africa, Europe,

and Asian Pacific.

AB InBev anticipated $1\mathrm{.}4$ billion of yearly operational synergies from the deal $($mostly from

layoffs$)$ in the form of perpetuity. There would also exist $900$ million implementation costs in order to

realize those synergies which is distributed equally over the first three years $(300$ million per year for

three years$).$ The deal would be financed with $63\%$ debt and $37\%$ equity. Assume that the risk$-$free rate is

$1\mathrm{.}5\%,$ the market risk premium is $8\%$ and the corporate tax rate is $30\%.$ The following table reports some

financial characteristics of AB InBev and SABMiller:

AB InBev SABMiller

Share price on Sep $12,201568\mathrm{.}2034\mathrm{.}06$

No$.$ of shares $($Bn$)1\mathrm{.}721\mathrm{.}60$

Total debt $($ Bn$)29\mathrm{.}6510\mathrm{.}22$

Equity beta $0\mathrm{.}841\mathrm{.}04$

Cost of debt $(\%)4\mathrm{.}7\%3\mathrm{.}8\%$

It is recommended that you answer the following questions in the order they are asked. In

answering each question, you can use information from proceeding questions, but not from subsequent

questions. For example, in answering question $($c$)$ you can use information that you learn from question

$($b$),$ but not what you learn from question $($d$).$

$($a$)$ Explain why the following are or are not good reasons for AB InBev to acquire SABMiller:

$($i$)$ To gain entry into the Asian and African market

$($ii$)$ To cut costs by exploiting synergies in human capital

$($b$)$ Find the WACC and the unlevered cost of capital for both AB InBev and SABMiller as stand$-$

alone firms pre$-$merger.

$($c$)$ Assuming that synergies in the merger have the same business risk as that of SABMiller$$s cash flows, find the WACC and the unlevered cost of capital for the synergies.

$($d$)$ What is the total value created in this deal?

$($e$)$ Is the value created in the deal $($estimated in $($d$))$ higher or lower than that in an average

merger?

$($f$)$ What is the maximum cash price that AB InBEv can afford to pay for SABMiller?

$($g$)$ Suppose that the actual takeover price was $43\mathrm{.}50$ in cash per share of SABMiller. How does

the premium offered to SABMiller$$s shareholders compare with that in a typical merger?

$($h$)$ When the deal was announced on September $17,2015.$ SABMiller$$s share price increased

from $39\mathrm{.}87$ to $42\mathrm{.}10.$ Why? Why didn$$t the price reach the offer price of $43\mathrm{.}50?$

$($i$)$ When all the details of the deal were announced on October $12,2015,$ SABMiller$$s share price decreased in value and the share price fell from $42\mathrm{.}43$ to $42\mathrm{.}09.$ Why?

$($j$)$ On July $20,2016,$ before the completion of the deal, the United States Department of Justice

$($DOJ$)$ announced that it would require AB InBev to divest SABMiller$$s stake in Miller Coors in

order to proceed with the acquisition. Miller Coors was a join