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This case was prepared by Robert F. Bruner from public information. Jessica Chan and Oscar Carbonell provided research assistance. For brevity and clarity, some details about financial results and synergies have been altered without affecting the substance of the managerial issues. This case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 10/04.

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

In May 1999, Marcel Herrman Telles, Chairman of Companhia Cervejaria Brahma (“Brahma”), gathered a team of executives and advisers to outline bargaining goals and prepare to negotiate a merger with Antarctica Paulista, S.A. (“Antarctica”). A merger of the two firms would be the largest in Brazil’s history. The resulting company (“Newco”) would hold almost a 70 percent share of the Brazilian beer market and would be the third-largest brewer in the world. Though Antarctica enjoyed a strong brand franchise, its recent financial performance had been disappointing, owing to stagnant growth in consumer beverage consumption in recent years and to the recent devaluation of the Brazilian real (R$)1, causing Antarctica’s margins to erode further because of the rising cost of imported ingredients. The devaluation triggered a wave of speculation about restructuring in the Brazilian brewing industry and the possible entry of foreign firms. The possibility of acquisition by a well-financed foreign firm was not lost on the executives of Brahma, who understood the strategic challenge that might create. The executives of Brahma believed that a combination with Antarctica could generate large synergies.

In the next few days, Brahma’s negotiating team would need to prepare a bargaining strategy to guide negotiations. Key to this strategy would be an outline of important terms and a range of values with which to conclude a deal. Any negotiation guidelines would need to gain the approval of Brahma’s CEO. Market for Beer and Soft Drinks in Brazil

Brazil was the world’s fourth-largest beer market, ranking behind the United States, China, and Germany. However, on a per-capita-consumption basis, Brazil ranked only 16th in the world, suggesting to many observers that the country offered serious potential for growth in unit volume of beer sales. They pointed to the country’s tropical and subtropical climate and its

1The monetary unit of Brazil is the real; the plural of real is reais. On May 31, 1999, the foreign currency exchange rate of the Brazilian real (R$) to one U.S. dollar (US$) was 1.73:1.00.

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relatively young population. There was little traditional basis for other forms of alcohol consumption, such as wine. In addition, analysts believed that, as income levels rose, demand for consumer products such as beer would also rise. One analyst projected growth in unit volume of beer sales of 4.0 and 6.0 percent in 2000 and 2001, and, for soft drinks, 1.7 and 3.0 percent, respectively.2

Fernando Cardoso was elected president of Brazil in 1994 and again in 1998—he had served as minister of Finance in 1993 and 1994, when he supervised the creation of the Real Plan, an anti-inflation program that reduced the inflation rate from 50 percent a month to less than 1 percent, an achievement that made him popular with foreign investors and that contributed to a buoyant economic outlook. Following the shock of the 42 percent devaluation of the real in January 1999, inflation and interest rates surged and the economy began to recede. Over the past 10 years, Brazil’s real gross domestic product (GDP) had grown at an annual rate of 2.0 percent. The future GDP growth rate for Brazil depended on the agility with which the Brazilian economy responded to the shock of devaluation. It could be expected that consumer spending and real wages would fall. But how long the trough of activity would last depended on the robustness of the economy. One investment bank forecast Brazilian real GDP growth of 4.1 percent in 2000 and 6.0 percent in 2001.3 It also projected inflation of 5.5 and 3.8 percent for those two years, respectively. The average annual rate of population growth for Brazil over the past five years was 1.3 percent. Exhibit 1 gives macroeconomic trends and forecast statistics across a range of measures. Exhibit 2 presents information on inflation and real GDP growth rates in recent years.

In 1995, the Mercosul common market eliminated tariffs on trade among Brazil, Paraguay, Uruguay, and Argentina. This move held two significant implications for Brazilian beer companies. First, it opened up a new and attractive market, Argentina, which had a per- capita GDP that was almost double that of Brazil’s. Second, Brazil would now be accessible to such Argentine brewers as Quilmes Industrial.

Three firms accounted for 90 percent of Brazil’s beer market at the end of 1998: Brahma (47 percent), Antarctica (23 percent), and Kaiser (16 percent). Historically, Antarctica was Brahma’s major competitor. Kaiser was a joint venture created in 1982 by Heineken, Coca- Cola, and Brazil’s Coca-Cola bottlers to compete with Brahma and Antarctica. Several small niche players composed the balance of the market. Beer-sales volume grew at a compound rate of 11.3 percent from 1993 to 1998, compared with average GDP growth of 4.2 percent. But in the past three years, sales-volume growth had been zero. Also, unit-volume increases had been volatile over the decade, ranging from a high of 18 percent, in 1995, to −17 percent, in 1992 (during a sharp recession in Brazil). Exhibit 3 presents the annual growth rate in beer shipments. The surge in volume growth in 1994 and 1995 added as much volume demand as the entire beer market in Argentina, which was a major factor in stimulating the huge capacity expansion in the industry. Each of the major brewers had increased their production capacity by

2“Brahma/AmBev Swallowing Market Share,” BBV Securities, Inc., February 9, 2000. 3Carlos Laboy, “Brazilian Beverage Industry,” Bear, Stearns & Co., July 19, 2000.

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more than a third in the past three years. The slump in growth in recent years meant that the Brazilian brewing industry faced nearly 50 percent excess capacity.

Imported and premium beers accounted for merely 4 percent of industry sales, of which imports accounted for half. The low share reflected the effect of a 23 percent tariff on imported beers that placed them out of reach of the mass of consumers.

One of the keys to success in the global beverage business was obtaining proprietary channels of distribution. In Brazil, beer and soft drinks were distributed together through the same channels. A distributor was dedicated to the entire product line of one major firm. Over the past five years, the highly fragmented system of beverage distribution had become consolidated, driven largely by the need to obtain economies of scale in distribution. The major producers had cut their number of distributors by almost half in the late 1990s.

Among soft drinks in Brazil, Coca-Cola was the dominant brand, with 36.3 percent of the market; other Coca-Cola brands (Fanta, Sprite, Tai, and Diet Coke) accounted for another 11.3 percent, giving Coca-Cola a total market share of 47.6 percent. In contrast, Antarctica’s brands accounted for 11.5 percent of the market; Brahma’s soft drinks accounted for 6.6 percent. But the comparison of market shares of leading firms ignored the rising importance of tubainas, small regional producers of non-cola soft drinks who sold their products at about half the price of the leading brands—these producers had increased their market share from 12.2 percent, in 1992, to 33 percent, in early 1999. The regional players had reduced the share of the total market held by major brands from 1992 to 1999, causing a price war that depressed profitability in the soft- drink segment.

The globalization of the beer industry through multinational brands and the creation of regional common markets, such as Mercosul, suggested to many observers that the peers in any one national market were no longer the relevant standard of comparison. Concentrated competition might prevail only temporarily, until entry by other regional or global peers corrected the situation. A growing market like Brazil might attract other players. Antarctica Paulista, S.A.

Founded in 1885, Antarctica was the second-largest competitor in the Brazilian beer market and a major participant in the soft-drink segment. At year-end 1998, Antarctica had sales (net of sales taxes) of R$1.38 billion and assets of R$3.4 billion. Antarctica was Brazil’s second- largest brewer and its largest soft-drink producer, dominating the market in guarana, a sweetened soft drink indigenous to the Brazilian market. The firm’s flagship brand, Cerveja Antarctica, was Brazil’s second-ranked beer brand and the fourth most popular in the world. Antarctica sold 18 brands of beer, 12 brands of soft drinks, and 30 other beverage products.

Antarctica’s net sales for 1996–1998 had declined, reflecting deterioration in all categories. Beer accounted for 73 percent of sales in 1998. The sales decline in recent years was

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part of a long-term trend for Antarctica: the firm had lost 18 percent of the beer market in 10 years, in contrast to Brahma, which had held its share, as shown in Exhibit 4. This decline reflected the lack of a customer focus, failures in the distribution network, and rising competition. Antarctica’s brands were viewed as antiquated; younger consumers preferred other brands. Also, Antarctica continued to rely on regional distributors rather than move toward direct distribution, as Brahma had done. In 1996, Antarctica introduced a new brand, Bavaria, to target a younger segment of the market. This move mirrored Brahma’s roll-out of Skol. Bavaria established a solid 5–6 percent market share, but was unable to stem the loss of market share overall.

Antarctica was the second-largest producer of soft drinks among the leading firms. Antarctica had given up only two percentage points in market share to PepsiCo over the past seven years. Antarctica produced four of the 14 best-selling soft-drink brands in Brazil.

A foundation formed by the founders of the firm, Fundação Antonio e Helena Zerrener (FAHZ),4 held 88.1 percent of the firm’s voting common stock. As a charitable foundation with a mission in the field of health care, FAHZ was exempt from taxation. Victorio de Marci was Antarctica’s CEO and a member of the board of directors. Antarctica’s board consisted of six directors, two of whom were also directors of FAHZ. Exhibit 5 summarizes the distribution of common shares in Antarctica and Brahma.

In 1997, Antarctica entered into a strategic alliance with the U.S. firm Anheuser-Busch (“A-B”), in which A-B acquired 5 percent of Antarctica’s equity; under the alliance agreement, A-B was scheduled to make a US$70-million investment in September 1999 to increase its stake to 10 percent of the common stock. A-B also held an option to increase its stake to 29.86 percent within six years, which would bring A-B’s total investment to US$407 million by 2002. A-B would also provide technical and marketing support to Antarctica. Finally, A-B and Antarctica entered into a joint venture to distribute Budweiser in Brazil—unfortunately, the antitrust regulators in Brazil deemed their joint venture to be anticompetitive, and gave the firms until the end of 1999 to end the arrangement.

At the end of May, 1999, Antarctica’s market capitalization was R$475.2 million. Though its stock was publicly listed for trading on the BOVESPA stock exchange in São Paulo, the thin “float” in daily trading of shares meant that prices were quoted infrequently.

Responding to strong growth in 1995 and 1996, Antarctica’s management undertook a

major expansion of production capacity, spending R$1 billion to replace aging facilities and gain a 60 percent increase in capacity. The subsequent slackening of sales produced idle capacity of 41 percent in beer and 47 percent in soft drinks by the spring of 1999. Antarctica had six soft- drink manufacturing plants, seven breweries, six facilities that bottled beer and soft drinks, a factory to produce concentrate for soft drinks, and a malting factory to supply the breweries.

4FAHZ owned and operated a hospital and a school. Dividends from Antarctica were used to finance the

foundation’s activities. Two of the foundation’s six board members were also directors of Antarctica.

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The firm’s products were distributed by franchise bottlers who, in turn, sold the products to local distributors. Half of Antarctica’s beer was sold to bars, restaurants, and hotels, and the remainder to groceries and other retailers. About 70 percent of Antarctica’s beer sales were for on-premises consumption. Soft drinks were sold more evenly across categories of end-point retailers. In 1999, Antarctica had seven regional franchise bottlers, which the company planned to reduce to four by mid-2000 in an effort to promote economies of scale—analysts expected Antarctica to eliminate its system of franchise bottlers entirely by 2001. Antarctica’s system of distributors included about 400 firms that handled the entire beverage portfolio; the number of distributors had fallen in recent years as Antarctica encouraged mergers among the distributors to achieve economies of scale. The firm provided training to its distributors, and spent R$14 million to computerize its distribution network.

The net result of all these developments was that Antarctica sharply underperformed its peers. Exhibit 6 gives a comparison of financial performance per hectoliter between Antarctica and Brahma. The company had unhedged debt of US$610 million; with the devaluation of the real, its obligation in reais soared to 66 percent of equity and produced a foreign-exchange loss of R$285 million.

In recent years, Antarctica’s strategy had been to increase its efficiency by closing small inefficient plants, modernizing other facilities, and centralizing operations. The firm sought to regain market share by lowering its prices and repositioning its leading products with younger consumers. Consequently, the number of hectoliters produced per employee had risen in recent years. Still, Antarctica was significantly less profitable than Brahma. The firm was more highly levered than its peers; it would need to refinance a total of R$680 million in debt in 1999. Companhia Cervejaria Brahma

Founded in 1888 as a local beer producer, Brahma gradually expanded, by acquisition, to become a regional and, eventually, national competitor. In 1989, the partners of the investment bank Banco Garantia5 acquired 51 percent of Brahma’s voting stock. They appointed Marcel Herman Telles as CEO of the firm, and launched the restructuring program that would create Brazil’s leading brewer. Telles turned Brahma into the most efficient producer in Brazil, by focusing on lean operations, tight cost controls, and aggressive expansion. Under Garantia’s ownership, the firm increased sales volume by 55 percent from 1989 to 1999. At the same time, Brahma improved productivity by modernizing its plants. The firm also cut its workforce from 25,000, in 1989, to 9,000, in 1994, the year Brahma began a series of foreign acquisitions and investments that established the firm in Argentina and Venezuela. Brahma established strategic alliances with foreign producers. An agreement in 1995 created a 50-50 joint venture with Miller Brewing, owned by the U.S. firm Philip Morris Corporation. In 1996, Brahma reached an agreement to produce and distribute the Carlsberg and Skol brands of beer in Brazil and the rest

5Banco Garantia was one of the leading investment banks in Brazil. Credit Suisse First Boston had recently

acquired Garantia, though the partnership that controlled Brahma was not part of the acquisition.

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of Latin America. The following year, Brahma reacquired6 the right to distribute the Pepsi brand in Brazil. That same year, Brahma formed a joint venture with Unilever to compete in the iced- tea market in Brazil. The firm’s shares were listed for trading on stock exchanges in São Paulo and Rio de Janeiro. In 1997, Brahma issued American Depositary Receipts (ADRs) on the New York Stock Exchange. As of May 31, 1999, Brahma’s market capitalization was R$4.628 billion.

In 1999, Brahma ranked fifth among global brewers on the basis of output, behind Anheuser-Busch, Heineken, Miller, and South African Breweries. Brahma operated 13 breweries (11 in Brazil and one each in Argentina and Venezuela) and seven soft-drink plants. The company operated a “megabrewery” in Rio de Janeiro that was the largest in Brazil and the second largest in the world.

Brahma’s product portfolio reflected a strategy of becoming a “total beverage company,”

selling, in addition to beer and soft drinks, bottled water, sport drinks, and iced tea. The firm produced 11 brands of beer and 17 brands of nonalcoholic beverages. The leading beer brands were Brahma Chopp, a draught beer that was the third-best-selling beer in the world, and Skol, the sixth-best-selling beer in the world. Beer accounted for 78.5 percent of the firm’s revenues and 94.7 percent of its EBITDA (earnings before interest, taxes, depreciation, and amortization). The low volume of sales of nonbeer products precluded economies of scale, and adversely affected the level of profitability of the beer operation. The firm maintained two independent distribution networks.

In 1998, Brahma’s beer was sold predominantly to bars and restaurants (78 percent), with the balance to supermarkets. Soft drinks had a lower reliance on bars and restaurants (52 percent). Brahma was pursuing a strategy of increasing its direct distribution (i.e., direct to point of sale). This move reflected the narrowing margins at the distributor level and the opportunities to gain efficiencies and economies of scale in distribution. In 1998, 46 percent of soft-drink sales were directly distributed. Including beer, the total percentage of direct distribution was 27 percent—Brahma aimed to raise that percentage to 40 percent within a few years. At present, Brahma’s distribution system serviced more than one million points of sale.

Brahma’s strategic aim was to increase shareholder wealth each year by growing economic value added (EVA) and market share. The growth in value and market share had been remarkable in the context of profit pressures in the industry and the recent devaluation. Though the firm had outperformed its industrial sector, its soft-drink division and foreign acquisitions were only marginally profitable. Its engine of profitability was beer.

Brahma’s voting stock was dominated by the Garantia interest (51 percent). Marcel Herrman Telles held 6.7 percent of the shares. He had served as its CEO since 1989. In 1998, he assumed the role of chairman of the board, and appointed Magim Rodriguez as CEO. Telles

6Brahma had originally acquired the right to distribute Pepsi in 1984. The distribution arrangement was

terminated in 1994.

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continued to focus on strategic issues, while Rodriguez addressed operational concerns. Of the firm’s 12 senior executives, eight were under the age of 50.

Brahma’s strategic outlook

Telles and Rodriguez reflected on the growth prospects for Brahma and for the new company that would emerge from a combination with Antarctica. On the one hand, standing alone, Brahma had a coveted position within Brazil and Latin America: a dominant market share in Brazil, which itself had a strong growth outlook for beverage sales; promising entries into Argentina and Venezuela; relatively low operating costs and financial leverage, which might prove decisive in price wars and in meeting new entries by other firms; and strong channels of distribution, which would give Brahma a strong defense against competitors.

On the other hand, Brahma’s investors and managers had ambitious expectations for the firm. The management and directors of Brahma wanted to capture 50 percent of the Latin American beer market within the next 3 to 5 years; the acquisition of Antarctica would lift the firm to a 30 percent share. Further expansion of its market position would entail growth by acquisition outside Brazil to create a portfolio of truly global brands—other possible targets were Quilmes (Argentina), CCU (Chile), Bavaria (Colombia), Cervesur (Peru), and Backus (Peru). In addition, it seemed appropriate to broaden Brahma’s product portfolio into related products in order to become a “global total beverage company.” Expansion along these lines—always aimed at maximizing shareholder value—would require capital. Accordingly, Brahma had listed its shares for trading on the New York Stock Exchange, and had begun the process of presenting its financial results according to international and U.S. accounting principles.

Ultimately, the ability to attract capital for expansion would depend on Brahma’s performance in its core markets. Unit demand in Brazil had grown at 5–6 percent for the past three years—though respectable by international standards, it was much less than the double- digit volume growth of the mid-1990s. With so much surplus capacity in the industry, a future of sharp price competition seemed certain. To achieve steady revenue gains in reais would mean taking market share from competitors, which would be costly and slow and might be constrained by antitrust authorities as Brahma was already the largest player in the market. The worst-case scenario would be the entry of a well-capitalized foreign firm that might acquire Antarctica or Kaiser and then initiate a costly and protracted price war to build market share. Fighting a difficult battle for Brahma’s home market would sap resources from Brahma’s planned expansion internationally and into related product lines.

Did Brahma really need Antarctica? Antarctica was a poorly performing second-place competitor. Acquiring Antarctica would be an audacious move in terms of antitrust issues. But viewed in terms of the strategic alternatives, there was no other comparable course of action. Brahma could “go it alone,” which would leave the firm exposed to aggressive foreign entries into Brazil and, especially, the worst-case scenario. Brahma could try to acquire the third-largest beverage company, Kaiser, but would confront a tangle of conflicting interests: Brahma would need to choose between Coca-Cola and Pepsi as soft-drink affiliates and between Heineken and

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Carlsberg as a European strategic partner. It seemed unlikely that Heineken and Coca-Cola would want to do a deal with Brahma. Finally, Brahma could sell itself to another firm, probably a foreign player—but such a move would be contrary to the vision of Marcel Telles and the partners of Banco Garantia.

Projected synergies

Brahma’s management forecast pretax cost-saving synergies of R$45 million a year, arising from savings in production, distribution, administration, reduced interest expense, etc.. The restructuring following the acquisition would entail preparing each plant to produce the full range of brands in the combined portfolios, rationalizing the distribution network with greater emphasis on direct distribution, shrinking the administrative structure of Newco, and generally reducing production costs at Antarctica to bring them more in line with those at Brahma.

Some analysts anticipated possible revenue synergies, a delicate subject in view of the likely antitrust review by the Brazilian government. Newco would enjoy the benefits of reduced price competition and the absence of destructive buying of shelf space from retailers. Also, the new firm would have greater leverage to influence retail pricing through modernized cold-drink equipment for retailers and point-of-sale merchandising material. This pricing power might increase Newco’s gross margin by one to four percentage points. In addition, Newco might obtain a greater market share based on its four strong beer brands and better coordination among its distribution channels. The revenue enhancement synergies could amount to R$121 million per year in added sales by the new firm. Valuation Approaches

Estimating the fair value of Brahma, Antarctica, and Newco could draw on a variety of approaches. Market prices. A starting point for valuation analysis could be the currently quoted prices of shares in Brahma and Antarctica, as well as an examination of the historical trends in those prices. Exhibits 7 and 8 present the long-term price trends against the Brazilian equity market index as well as data on recent prices. Replacement cost. Credit Suisse First Boston7 estimated that the replacement value of beer capacity was R$55 to R$86 per thousand hectoliters, and that soft-drink capacity was worth R$43 to R$64 per thousand hectoliters. Antarctica had a beer-production capacity of 32.2 million hectoliters and a soft-drink capacity of 19.8 million hectoliters. Brahma had a beer capacity of 62 million hectoliters and a soft-drink capacity of 27 million hectoliters. This method of valuation would give an enterprise value for the company. Some analysts questioned whether this approach was appropriate as it ignored the value of such intangible assets as brands.

7“Brahma PN, Equity Research,” Credit Suisse First Boston, August 2, 1999, 12.

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Valuation multiples, peer firms. The companies could be valued on the basis of average multiples of other firms in the same industry. One analyst estimated that Brahma’s enterprise value (EV) divided by EBITDA was 10×, based on historical ratios.8 Another analyst estimated that the average EV/EBITDA ratio for a sample of brewers was 9.2× in developed markets and 12.2× in emerging markets.9 Exhibit 9 gives information on Latin American and global competitors in beer and soft drinks. Analysts noted that this method of valuation ignored possible control premiums and synergies. Valuation multiples, peer transactions. In M&A, target firms were often valued by using multiples from other transactions in the same industry. Exhibit 10 gives valuation information on transactions in the consumer-beverage industry. This valuation approach included the effect of control premiums and synergies. Discounted cash flow. The valuation of either firm could be derived from a forecast of cash flows based on projections of operations over the next few years. The effective tax rate for the two Brazilian brewing companies was 14 percent—the difference between this rate and the statutory Brazilian corporate tax rate of 34 percent was due to credits associated with sales taxes and investments. Brahma’s financial staff had prepared a forecast of financial statements and free cash flows for Antarctica (given in Exhibits 11 and 12.) Similar forecasts for Brahma are given in Exhibits 13 and 14. Regarding the rate for discounting these flows, analysts used the capital-asset-pricing model to estimate the cost of equity, and the weighted-average-cost-of- capital formula to estimate the discount rate for free cash flows. The long-term expected mix of debt as a percentage of debt and equity was 31 percent. The equity-market risk premium was 5.8 percent. Betas for the two companies are given in Exhibit 8.

These methods were appropriate for valuing each firm on a stand-alone basis. But for purposes of preparing to negotiate the price and other merger terms, it would be important to consider the value of synergies. Finally, any asset divestitures imposed by the Brazilian antitrust commission would entail further adjustments, though a simplifying assumption might be that any such assets would be divested at their fair market value—thus, cash proceeds received would equal the value of assets divested. Benefits of the Merger

Mr. Telles expected the merger to generate important strategic benefits for the new firm. First, it would create a near monopoly in Brazilian beer and soft drinks. Brahma’s analysts projected that Newco would hold 70 percent of the beer market. This strong position would give it pricing power in the market and bargaining power relative to suppliers and distributors. Second, the merger would create economies of scale in purchasing, production, and distribution. Third, if Brahma’s leadership assumed executive direction of the new firm, it seemed likely that Brahma’s investor-oriented culture would extend into Antarctica, leading to more efficiencies.

8“Brahma/AmBev Swallowing Market Share,” BBV Securities, Inc., February 9, 2000, 5. 9“Cia. Cervejaria Brahma, S.A.,” Warburg Dillon Read, March 27, 2000, 13.

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The merger could produce annual pretax cost savings of R$45 million and revenue synergies of R$112 million. Finally, the merger would strengthen Newco’s ability to expand outside Brazil with strategic acquisitions in Argentina, Peru, and Venezuela. Brahma’s Telles argued that the relevant arena for comparison was the global market, in which Newco would be the third-largest producer after Anheuser-Busch and Heineken. He said, “We are talking to all participants in all markets in Latin America, and hope to act as soon as possible.”10 Risks and Concerns

Newco’s large market share raised the concern that the merger might not win the approval of the Brazilian antitrust agency, CADE. Although some regulators deemed a market share of 70 percent to be a monopoly, the mood within the Brazilian government seemed positive regarding Brazilian multinational firms. BNDES, the state-owned development bank, was advocating mergers in such fragmented industries as steel, petrochemicals, and paper and pulp. The merger of Brahma and Antarctica would create a major international competitor representing Brazil.

Labor unions, competing producers, and municipal governments might intervene in the approval process to impose conditions on the merger. Unions and governments were interested in preventing layoffs. Competitors might seek to require the sale of key assets by Newco or to obtain access to Newco’s distribution channels.

Delays in the process might threaten Antarctica’s survival. The firm was more heavily indebted than were other producers, and could withstand less easily the burden of the currently high interest rates. By the end of 1999, Antarctica would need to refinance R$680 million in debt. Antitrust rules prevented Brahma from extending cheap financing to Antarctica until the merger was consummated. Until then, Antarctica would need to arrange costly short-term loans. Generally, Antarctica was continuing a slow restructuring process. The pending merger would almost certainly stall the internal restructuring. Either way, it would be important to resolve uncertainty about the future sooner rather than later.

Industry growth and profitability remained a serious concern among observers. Total beer sales in Brazil from 1996 to 1998 had not grown, even though price increases had lagged inflation during that period. The devaluation of the real in January 1999 had hiked prices of certain inputs, forcing producers to try to raise prices in a declining market. Sales of soft drinks in 1999 were especially challenging as a price war initiated by Coca-Cola had depressed prices. Finally, following years of capacity expansion, beverage companies were faced with significant unused production capacity, of around 40 to 50 percent. In short, profit growth in the near term would be a struggle.

10“Brahma,” Credit Suisse First Boston, August 2, 1999, 67.

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Issues for Negotiation

Marcel Herman Telles gathered a team of managers and advisers to shape the guidelines for the forthcoming merger negotiations with Antarctica. He sought to develop targets on a range of issues: Control. Telles would accept no deal in which another group of investors had more voting power than the combination of his shares and those of the Banco Garantia investors. Generally, he believed that the Brahma investors should emerge with a voting majority. But control of the firm entailed more than the distribution of shareholder votes. He sought advice on several other issues. Special treatment for significant shareholders. FAHZ depended on dividend income to fund its charitable mission. Brahma traditionally paid out 55 percent of its income in the form of dividends. Antarctica’s dividend had suffered in recent years because of losses. FAHZ and Banco Garantia would be significant shareholders in the new firm. Should the positions of these players be reflected in special terms in the structuring of the deal? Such special terms might include different prices or exchange ratios for shares, special voting rights, and special dividend payments. Composition of the board of directors. The appointment of Newco’s board of directors could be based on a range of economic and control considerations. The mix of directors would send strong signals to Newco’s employees and shareholders about its policies and future performance. Executive appointments. The merger contract might also specify the appointments and titles of senior executives for the foreseeable future. Of particular concern would be filling the positions of board chairman and CEO. Telles believed that he and his management team had earned the right to continue in their positions in the new firm. Headquarters location. Consolidation of the administrative activities of the two firms would be required; one firm’s headquarters would need to be closed. Which company’s headquarters would have to go? Brahma’s headquarters were located in Sao Paulo; Antarctica’s were in Rio de Janiero. Union recognition. Antarctica’s labor cost per hectoliter of output was 20 percent higher than Brahma’s because of strong unions at Antarctica. What assurances, if any, should Brahma give to the leaders of Antarctica’s unions? Form of transaction and taxation. Would this be a merger or an acquisition? If the former, should Telles consider a “merger-of-equals” structure? Some deal structures could trigger an immediate tax liability for the selling shareholders on the difference between the cost basis of their shares and the consideration received. Other structures would defer this liability. Generally, the tax-deferred deals (or “tax-free” deals, as they were popularly called) entailed the acquisition of the target firm’s stock with the stock of the buyer or of the buyer’s subsidiary.

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UV0277

-12-

Deals that required payment with cash or notes or that involved the purchase of assets would trigger an immediate tax liability. An opinion of a tax adviser and, ultimately, a ruling (or “letter”) from the Brazilian and U.S. tax authorities would confirm whether any contemplated structure would be taxable or tax-free. Price or value. How much value should Antarctica’s shareholders receive in consideration for the interest in their firm? Telles had a strong aversion to overpaying for Antarctica. Form of payment and financing. Telles had a mild preference for a stock-for-stock transaction. Once the negotiators got into the details of the deal, however, there was a possibility that it could be structured in terms of cash-for-stock. If a stock-for-stock deal were proposed, the two sides would need to state an explicit exchange ratio indicating how many shares of Brahma were to be received for one share of Antarctica. If a cash-for-stock deal were proposed Mr. Telles would need to have a clear source of funding the cash payment. As a matter of policy, Brahma’s senior management sought a minimum cash balance of R$1.2 billion. Listing on stock exchanges. Brahma’s shares were listed for trading in Brazil and the United States. Considering the liquidity needs of investors and Brahma’s strategic aspirations, where should the shares be listed in the future?

Exhibits 14 and 15 give information about global merger-and-acquisition activity in 1999. Exhibit 16 presents information on current credit-market conditions in Brazil. As the exhibit shows, interest rates were at an historic high point, following devaluation of the Real. But the expectation of analysts was that the devaluation and ensuing recession would produce falling rates of interest, consistent with the declining yield curve in Brazilian government debt obligations. The data on Brazilian government interest rates in Exhibit 16 were drawn from official rates of the Central Bank of Brazil and reflected the effect of Bank intervention in Brazilian debt markets. At the time, yields that were free of administrative intervention (such as Brady Bonds) were currently 100 to 300 basis points higher than the official rates. Marcel Telles believed that Brahma and Newco could borrow domestically at rates of interest reflecting Central Bank policy but wondered whether his analysts should use the higher rate implied by Brady Bonds.

Conclusion Marcel Telles outlined the tasks for his team of deal analysts. First, he wanted an

estimate of the value range for Antarctica’s shares within which the intrinsic value could reasonably be expected to reside. Second, he sought recommendations on social issues and form of payment—if the recommended form of payment were stock, he sought a recommendation about the exchange ratio. Neither he nor Garantia would accept a value-destroying deal, so it would be vital not to overpay. But acquiring Antarctica—and pre-empting foreign producers like Anheuser-Busch—had such important strategic effects that he needed to make every effort to reach agreement. With those instructions, his analysts went to work.

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Exhibit 1

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Macroeconomic Information on

Brazil and Neighboring Countries

Argentina Brazil U.S. Venezuela

1994 11.7 5.1 6.1 8.7 1995 15.9 6.1 5.6 10.3 1996 16.3 7.0 5.4 11.8 1997 13.7 7.8 5.0 11.4 1998 14.1 9.0 4.6 11.2

Argentina Brazil U.S. Venezuela

1994 3.9 916.5 2.6 60.7 1995 1.6 22.4 2.5 59.9 1996 0.1 9.6 3.4 99.9 1997 0.3 5.2 1.7 50.0 1998 0.7 1.7 1.6 35.8

Argentina Brazil U.S. Venezuela

1994 8.0 4.9 6.2 (2.3) 1995 (4.0) 3.9 4.9 4.0 1996 4.8 3.0 5.6 (0.2) 1997 8.6 3.6 6.3 5.9 1998 4.2 0.2 5.5 (0.7)

Argentina Brazil U.S. Venezuela

1994 NA 17.7 6.8 NA 1995 (8.2) (11.9) 3.1 NA 1996 10.7 8.1 5.9 NA 1997 8.9 (3.2) 7.6 NA 1998 (0.6) (2.3) 3.6 NA

NA = Not Available. Sources: International Financial Statistics Yearbook, Bloomberg, Datastream Advance, Statistical Abstract of the United States, Statistical Abstract of Latin America

Unemployment (%)

Inflation (%)

Annual GDP Growth (%)

Industrial Production Growth (%)

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Exhibit 2

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Brazilian Growth, Real and Nominal,

and Inflation

Inflation Real GDP Growth Nominal Growth

1996 9.6% 2.7% 12.6% 1997 5.2% 3.6% 9.0% 1998 1.7% -0.1% 1.6%

1999e 8.9% 0.8% 9.8% 2000f 5.5% 4.1% 9.8% 2001f 3.8% 6.0% 10.0%

Source of data: Bear Stearns, "Brazilian Beverage Industry," July 19, 2000, page 14.

Economic Growth and Inflation in Brazil

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

10.0% 12.0% 14.0%

1996 1997 1998 1999e 2000f 2001f

Inflation Real GDP Growth Nominal Growth

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Exhibit 3

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Growth in Brazilian Beer Shipments

Year Growth Rate 1986 45% 1987 8% 1988 1% 1989 10% 1990 3% 1991 6% 1992 -18% 1993 7% 1994 28% 1995 23% 1996 0% 1997 2% 1998 0%

Source of data: Credit Suisse First Boston, "Brahma PN" August 2, 1999, page 19.

Annual Growth Rate in Beer Shipments In Brazil

-40% -20%

0% 20% 40% 60%

19 86

19 87

19 88

19 89

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

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Exhibit 4

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Antarctica and Brahma: Shares of Brazilian Beer Market

Antarctica Brahma 1989 41% 50% 1990 38% 51% 1991 35% 51% 1992 34% 52% 1993 32% 50% 1994 30% 50% 1995 32% 47% 1996 26% 49% 1997 25% 48% 1998 25% 48% 1999 23% 49%

Source of data: Credit Suisse First Boston, "Brahma PN" August 2, 1999, page 38.

Shares of the Brazilian Beer Market

0% 10% 20% 30% 40% 50% 60%

19 89

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

Antarctica Brahma

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Exhibit 5

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Distribution of Voting Common Shares in Antarctica and Brahma

Before Transaction

% of Total

Share Ownership in Antarctica FAHZ 10,572,000 88.1% Anheuser-Busch 600,000 5.0% Other investors 828,000 6.9% Total Shares 12,000,000 100.0%

Share Ownership in Brahma Garantia 3,522,876 51.0% Telles 462,809 6.7% Other investors 2,921,915 42.3% Total Shares 6,907,600 100.0%

Source: Casewriter’s analysis.

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-18-

Exhibit 6

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Antarctica and Brahma: Comparative Performance

Antarctica Brahma 1998, Financial Performance per Hectolitre Net Sales R$ 33.95 R$ 46.98 Cost of Goods Sold -22.85 -26.79 Gross Profit 11.1 20.19 Sales Expenses -4.59 -10.36 General and Administrative Expenses -3.29 -4.85 Pre-tax Income 3.22 4.98 Taxes -0.40 -0.56 Net Income R$ 2.82 R$ 4.42

Source: Casewriter’s analysis.

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-19-

Exhibit 7

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Stock-Price Trends of Antarctica and Brahma versus Brazilian Equity Market Index

Share Prices of Antarctica, Brahma, and IBOVESPA Equity Market Index

(Indexed to 1.00 at May 17, 1991)

100

1000

10000

100000

1000000

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

9/ 17

/1 99

1/ 17

/1 99

5/ 17

/1 99

Antarctica

Brahma

IBOVESPA

Share Prices of Antarctica, Brahma, and IBOVESPA Equity Market Index

(Indexed to 1.00 at July 1, 1994)

7/ 1/

19 94

9/ 1/

19 94

11 /1

/1 99

1/ 1/

19 95

3/ 1/

19 95

5/ 1/

19 95

7/ 1/

19 95

9/ 1/

19 95

11 /1

/1 99

1/ 1/

19 96

3/ 1/

19 96

5/ 1/

19 96

7/ 1/

19 96

9/ 1/

19 96

11 /1

/1 99

1/ 1/

19 97

3/ 1/

19 97

5/ 1/

19 97

7/ 1/

19 97

9/ 1/

19 97

11 /1

/1 99

1/ 1/

19 98

3/ 1/

19 98

5/ 1/

19 98

7/ 1/

19 98

9/ 1/

19 98

11 /1

/1 99

1/ 1/

19 99

3/ 1/

19 99

5/ 1/

19 99

Antarctica

Brahma

IBOVESPA

Note: The top graph presents the share-price performance over the long term. Most financial analysts, however, ignored market data before July 1, 1994 (when the Real Plan was implemented) as being not comparable to the post-1994 period. Source: Casewriter’s analysis.

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UV0277

-20-

Exhibit 8

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Stock-Price Information for

Antarctica and Brahma

Antarctica Brahm a

Ratio of Antarctica to Brahm a

May-97 120.0 781.0 0.1536 Jun-97 110.0 822.0 0.1338 Jul-97 100.0 820.0 0.1220

Aug-97 97.0 760.0 0.1276 Sep-97 96.0 805.0 0.1193 Oct-97 96.0 742.0 0.1294 Nov-97 93.0 690.0 0.1348 Dec-97 70.0 695.0 0.1007 Jan-98 70.0 740.0 0.0946 Feb-98 85.0 760.0 0.1118 Mar-98 80.0 800.0 0.1000 Apr-98 74.8 680.0 0.1100 May-98 70.0 670.0 0.1045 Jun-98 60.0 640.0 0.0938 Jul-98 61.5 670.0 0.0918

Aug-98 50.0 550.0 0.0909 Sep-98 38.3 460.0 0.0832 Oct-98 32.0 450.0 0.0711 Nov-98 28.0 520.0 0.0538 Dec-98 28.0 530.0 0.0528 Jan-99 25.5 604.0 0.0422 Feb-99 22.5 605.0 0.0372 Mar-99 28.0 630.0 0.0444 Apr-99 35.7 610.0 0.0585

May-99 39.6 637.5 0.0621

High 120.0 855.0 0.1536 Low 22.0 400.0 0.0372

Average 63.3 657.2 0.0954

Adjusted Beta 0.42 0.49 Volatility 84.6% 62.6%

So urce o f data: Datastream

(Reais per share)

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For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

UV0277

-23-

Exhibit 11

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Antarctica’s Financial Forecast (in millions of Brazilian reais)

Income Statement

Projected 1998 1999 2000 2001 2002 2003 2004

Revenues $1,381.9 $1,406.5 $1,534.0 $1,674.9 $1,828.8 $1,996.8 $2,180.3 COGS (excluding Depreciation) 929.5 868.4 920.4 988.2 1,060.7 1,158.2 1,242.8 Selling, General, & Adminis trative 397.6 502.0 521.6 569.5 621.8 659.0 719.5 EBITDA 54.8 36.1 92.0 117.2 146.3 179.7 218.0 Depreciation 67.0 80.0 93.8 100.8 107.8 114.8 121.8 Licensing Expense (Income) (130.0) (125.0) (136.3) (148.9) (162.5) (177.5) (193.8) EBIT 117.8 81.1 134.6 165.3 201.1 242.4 290.0 Interest (Income) (2.5) (8.3) (10.4) (9.6) (10.5) (11.5) (12.5) Interest Expense - Straight Debt 41.9 649.9 231.7 257.6 271.7 281.7 286.2 Pre-Tax Incom e 78.4 (560.5) (86.7) (82.6) (60.1) (27.8) 16.3 Income Taxes 9.5 18.3 (12.1) (11.6) (8.4) (3.9) 2.3 Net Income 68.9 (578.8) (74.5) (71.1) (51.7) (23.9) 14.1 Comm on dividends 0.0 0.0 0.0 0.0 0.0 0.0 6.3 Net Income to Retained Earnings 68.9 (578.8) (74.5) (71.1) (51.7) (23.9) 7.7

Earnings per Share (R$/share): $5.75 ($48.23) ($6.21) ($5.92) ($4.31) ($1.99) $0.64

Balance Sheet Projected

1998 1999 2000 2001 2002 2003 2004 Cash and Equivalents 127.0 289.4 230.1 251.2 274.3 299.5 327.0 Accounts Receivable 325.2 346.6 378.0 412.7 450.7 492.1 537.3 Inventory 212.4 185.2 196.3 210.8 226.2 247.0 265.0 Other Current Assets 97.0 45.0 49.1 53.6 58.5 63.9 69.8 Total Current Assets 761.6 866.2 853.5 928.3 1,009.7 1,102.5 1,199.1 Property , Plant, & Equipment 2,811.9 2,922.9 3,032.9 3,142.9 3,252.9 3,362.9 3,467.9 Accumulated Depreciation 1,137.2 1,187.2 1,281.0 1,381.8 1,489.6 1,604.3 1,726.1 Net Property, Plant, & Equipment 1,674.7 1,735.7 1,751.9 1,761.1 1,763.3 1,758.6 1,741.8 Other Long-Term Assets 965.7 965.7 965.7 965.7 965.7 965.7 965.7 Total Assets 3,402.0 3,567.6 3,571.1 3,655.2 3,738.8 3,826.7 3,906.6 Accounts Payable 99.0 102.1 108.2 116.2 124.7 136.2 146.1 Other Current Liabilities (excl. S/T Debt) 257.8 409.7 446.8 487.9 532.7 581.7 635.1 Total Current Liabilities 356.8 511.8 555.1 604.1 657.4 717.8 781.2 Debt (plug) 1,038.5 1,424.7 1,664.1 1,770.2 1,852.1 1,903.6 1,912.3 Other Long-Term Liabilities 85.4 84.0 84.0 84.0 84.0 84.0 84.0 Total Liabilities 1,480.7 2,020.5 2,303.1 2,458.2 2,593.5 2,705.4 2,777.5 Comm on Stock (Par + APIC+ Other Equity) 1,106.3 1,106.3 1,106.3 1,106.3 1,106.3 1,106.3 1,106.3 Retained Earnings 815.0 236.2 161.7 90.6 38.9 15.0 22.8 Total Liabilities & Stockholders' Equity 3,402.0 3,363.0 3,571.1 3,655.2 3,738.8 3,826.7 3,906.6

Source: Casewriter’s analysis.

For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

U V

02 77

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For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

UV0277

-25-

Exhibit 13

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Brahma’s Financial Forecast

(in millions of Brazilian reais)

Income Statement Projected 1997 1998 1999 2000 2001 2002 2003 2004

Revenues R$ 3,156.0 R$ 3,247.0 R$ 3,545.7 R$ 3,877.5 R$ 4,240.4 R$ 4,637.2 R$ 5,071.2 COGS (excluding Depreciation) 1,495.0 1,579.0 1,724.2 1,885.6 2,062.1 2,255.0 2,466.1 Selling, General, & Adm inis trative 904.0 987.0 1,077.8 1,178.7 1,289.0 1,409.6 1,541.5 EBITDA 757.0 681.0 743.6 813.2 889.3 972.6 1,063.6 Depreciation 305.0 305.0 322.5 340.0 357.5 375.0 392.5 Other Expense (Income) (37.0) (75.0) (81.9) (89.6) (97.9) (107.1) (117.1) EBIT 489.0 451.0 503.0 562.8 629.8 704.7 788.2 Interes t (Income) 0.0 0.0 (67.2) (62.4) (68.2) (74.6) (81.6) Interes t Expens e - Straight Debt 188.0 198.3 262.6 228.4 227.4 221.5 210.2 Pre-Tax Incom e 301.0 252.7 307.7 396.8 470.6 557.7 659.6 Income Taxes 34.0 26.0 43.1 55.5 65.9 78.1 92.3 Minority Interes t 10.7 14.0 17.0 22.0 26.1 30.9 36.5 Net Incom e 256.3 212.7 247.6 319.2 378.6 448.7 530.7 Com mon Dividends 141.0 99.8 136.2 175.6 208.2 246.8 291.9 Net Incom e to Comm on 115.3 112.9 111.4 143.7 170.4 201.9 238.8

Earnings per Share (R$/share): R$ 37.26 R$ 30.79 R$ 35.84 R$ 46.22 R$ 54.81 R$ 64.96 R$ 76.83

Balance Sheet Projected 1997 1998 1999 2000 2001 2002 2003 2004

Cas h and Equivalents 1,081.0 1,873.0 1,489.2 1,628.5 1,781.0 1,947.6 2,129.9 Accounts Receivable 305.0 245.0 267.5 292.6 320.0 349.9 382.6 Inventory 373.0 320.0 349.4 382.1 417.9 457.0 499.8 Other Current As sets 200.0 29.0 31.7 34.6 37.9 41.4 45.3 Total Current Ass ets 1,959.0 2,467.0 2,137.8 2,337.9 2,556.7 2,795.9 3,057.6 Property , Plant, & Equipment 3,292.5 3,447.6 3,797.6 4,147.6 4,497.6 4,847.6 5,197.6 Accumulated Depreciation 1,396.6 1,705.0 2,027.5 2,367.5 2,725.0 3,100.0 3,492.5 Net Property, Plant, & Equipment 1,895.9 1,742.6 1,770.1 1,780.1 1,772.6 1,747.6 1,705.1 Other Long-Term As sets 812.2 1,024.2 1,118.4 1,223.1 1,337.5 1,462.7 1,599.6 Total Ass ets 4,667.1 5,233.8 5,026.3 5,341.1 5,666.8 6,006.3 6,362.3

Accounts Payable 255.0 293.0 320.0 349.9 382.6 418.4 457.6 Other Current Liabilities (excl. S/T Debt) 419.0 391.0 427.0 466.9 510.6 558.4 610.7 Total Current Liabilities 674.0 684.0 746.9 816.8 893.3 976.9 1,068.3 Total Debt (plug) 1,880.0 1,983.0 1,518.1 1,527.0 1,505.1 1,448.6 1,353.7 Minority Interes t 50.0 57.5 57.5 57.5 57.5 57.5 57.5 Other Long-Term Liabilities 637.0 903.0 986.1 1,078.3 1,179.3 1,289.6 1,410.3 Total Liabilities 3,241.0 3,627.5 3,308.6 3,479.7 3,635.1 3,772.6 3,889.8 Com mon Stock (Par + APIC+ Other Equity) 975.0 990.3 990.3 990.3 990.3 990.3 990.3 Retained Earnings 451.1 616.0 727.4 871.1 1,041.4 1,243.4 1,482.2 Total Liabilities & Stockholders ' Equity 4,667.1 5,233.8 5,026.3 5,341.1 5,666.8 6,006.3 6,362.3

Source: Casewriter’s analysis.

For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

UV0277

-26-

Exhibit 14

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Brahma’s Forecast of Free Cash Flows

(in millions of Brazilian reais)

Forecast of Free Cash Flows Projected 1998 1999 2000 2001 2002 2003 2004

Net Operating Profit after Tax 433.8 404.6 432.6 484.0 541.6 606.0 677.9 Add: Depreciation 305.0 305.0 322.5 340.0 357.5 375.0 392.5 (Increas e) / Decreas e in NWC (125.0) (498.0) 392.1 (130.2) (142.3) (155.7) (170.2) Cash Flow from Operations 613.8 211.6 1,147.2 693.8 756.8 825.4 900.1 Les s : Capital Expenditures 325.0 350.0 350.0 350.0 350.0 350.0 350.0 Free Cas h Flow 288.8 (138.4) 797.2 343.8 406.8 475.4 550.1

Source: Casewriter’s analysis.

For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

U V

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This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

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This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.

UV0277

-29-

Exhibit 17

BRAZILIAN BEER MERGER NEGOTIATIONS: COMPANHIA CERVEJARIA BRAHMA, S.A.

Credit-Market Information as of

May 31, 1999

“Brazil’s Central Bank will continue its policy of reducing interest rates—they have dropped 21.5 percent since March—after weathering the economic turmoil generated by the downturn in Argentina and the recent losses on Wall Street, the Jornal do Comercio reported Thursday. In the newspaper report, Central Bank President Arminio Fraga reassured investors that the policy would not be subject to change. Since Fraga took over, the prime interest rate has dropped from 45 percent to 23.5 percent per year. According to the Jornal do Comercio, Fraga may lower the prime rate from 23.5 percent to 21.3 percent. . . . The possible devaluation of the Argentine peso, setbacks on Wall Street, and the possibility of higher interest rates in the United States prompted Brazilian investors to question whether the country’s interest rates would continue to fall. . . . According to the Central Bank, foreign capital has begun to make its way back into Brazil and interest rates will continue to drop as long as inflation remains low. —“Central Bank to Continue Lower Interest Rate Policy,” EFE News Service, May 27, 1999.

Annualized Yield

Government Obligations Short Term 7.3% 30-Days 23.4% 60-Days 27.1% 90-Days 37.8% One Year 25.0% Five Year 12.0%

Yield on Bank Savings Deposits 13.8%

High Quality Corporate Obligations One Year 28.0% Five Year 15.0%

Source: Central Bank of Brazil, Annual Report, 1999; casewriter estimates.

For the exclusive use of L. Zhang, 2017.

This document is authorized for use only by Luyao Zhang in FINANCIAL ANALYSIS AND MANAGEMENT-Spring 17 taught by Babak Lotfaliei, San Diego State University from January 2017 to July 2017.