Page 10 - AB INBEV MODEL ANSWER 1

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share issues. MV gearing is a better indication of financial gearing than BV gearing especially as AB
In Bev is listed company. Under debt finance, MV gearing will worsen from 19% and breach the 40%
threshold to 42%, whilst it will drop from the current 19% to 13% under the equity finance option. On
the presumption that 40% gearing is the optimal capital structure threshold for AB InBev, then the

maximum amount of debt to be raised must be such that its MV gearing rises from the current 19% (it
is currently too under-geared), to the requisite 40%.

Recommendation: Use a combination of majority 92% debt (40% * (US$ 353,032 – US$ 43,630) /
US$ 105,500) and 8% equity to fund the deal. Consider suspending the DPS growth objective for the
next year or two, or reduce it to say 2%!

Justification: 92% debt meets our gearing objective, it will help us move to our optimal capital
structure; this is consistent with the corporate finance theory which warrants that this be achieved in
order to maximize shareholder value. In addition, debt finance consistently outperforms equity finance
in meeting our other two financial objectives, that is, to deliver DPS growth of 10% year-on-year as

well as TSR of 14%. It is not sensible to be seeking such a huge amount to finance this acquisition
and at the same time proposing to grow dividend –the group has in the past reduced dividend pay-out
ratio to finance acquisitions and has pursued a stated strategy of even prioritizing cash for acquisitions
rather than special dividends and share buy backs -although not under consideration here, the same

principle applies! In addition, debt finance provides a tax shield benefit to the company through finance
cost deductions.

Actions
• Continue talks with the company’s banks and prepare for a rights issue but consider adopting
pecking order theory, by first using up the reported US$6.8billion cash balance in its 2015 third
quarter results –this may be just enough to make up for the 8% equity needed (US$7.9million i.e.

8% of US$105.5billion);
st
• Follow actions proposed in 1 priority to ensure the synergistic assumptions embedded in our
calculations in Appendix 3 are realized.

rd
3 Priority: B2B and Downstream Supply Chain Strategy

SABMiller seems to be struggling with its downstream supply chain strategy as its relatively weak
bargaining position over the top 3 supermarkets is putting pressures on its profitability. This is a

strategic weakness that we may acquire from SABMiller; we need to be sure we can apply our global
strengths in this area as the potential cost and revenue synergies, including efficiencies, have already
been factored into our valuation of the deal. The Top 3 supermarkets (Shoprite, Pick n’ Pay and Makro)

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