Acquisition

On November 11, 2015, Anheuser-Busch InBev SA/NV (“ABI”) announced it had entered into a definitive agreement to acquire SABMiller plc (“ABI/SABMiller transaction”) and concurrently, on November 11, 2015, we entered into the Purchase Agreement with ABI to acquire, contingent upon the closing of the ABI/SABMiller transaction, all of SABMiller’s 58% economic interest and 50% voting interest in MillerCoors and all trademarks, contracts and other assets primarily related to the Miller brand portfolio outside of the U.S. and Puerto Rico for $12.0 billion in cash, subject to downward adjustment as described in the Purchase Agreement. On October 11, 2016, following the satisfaction of all pre-closing conditions including ABI and SABMiller shareholder approval, the $12.0 billion of cash consideration was transferred and the Acquisition was completed. The Acquisition was funded through cash on hand, including proceeds received from our February 3, 2016, equity issuance, our 2016 Notes issuance on July 7, 2016, as well as borrowings on our term loan, which occurred concurrent with the close of the Acquisition.

Prior to the Acquisition, MCBC owned a 50% voting and 42% economic interest in MillerCoors, and MillerCoors was accounted for under the equity method of accounting. Following the completion of the Acquisition, MillerCoors, which was previously a joint venture between MCBC and SABMiller, became a wholly-owned subsidiary of MCBC and its results will be fully consolidated by MCBC prospectively beginning on October 11, 2016. Headquartered in Chicago, Illinois, MillerCoors brews, markets and sells the MillerCoors portfolio of brands in the United States and Puerto Rico. Its major brands include Coors Light, Miller Lite, Blue Moon, Coors Banquet, Keystone Light, Leinenkugel's, Miller Genuine Draft and Miller High Life. In addition, MillerCoors brews for third parties under contract brewing arrangements and operates one company-owned distributor. As a result of the Acquisition, we will strengthen our presence in the highly attractive U.S. beer market, further improve our global scale and agility, benefit from significantly enhanced cash flows from operations and capture substantial operational synergies. Furthermore, we expect the acquisition of the Miller brand rights globally to help accelerate MCBC’s growth strategy by strengthening our international beer portfolio with another powerful and authentic American brand, as well as expand our presence in high-growth markets. The operating results of MillerCoors will be reported in our U.S. segment and the operating results of the international Miller brand portfolio will be reported in our Canada segment, Europe segment and MCI segment. Additionally, effective January 1, 2017, the results of the MillerCoors Puerto Rico business, which was previously included as part of the U.S. segment, will be reported within the MCI segment. See Note 3, "Segment Reporting" for more information.

We have elected to treat the Acquisition as an asset acquisition for U.S. tax purposes and accordingly expect to receive substantial tax benefits for the first 15 years following the close of the Acquisition. The assets and liabilities acquired in connection with the Acquisition related to the remaining 58% ownership will be stepped up to fair value for tax purposes and thus, the book value of these assets and liabilities related to the purchase price for the 58% interest primarily will equal the tax basis. Additionally, as a result of the Acquisition, specifically, MCBC obtaining 100% ownership, MillerCoors was required to change to a calendar year end for U.S. federal and state income tax purposes, which has accelerated taxable income to MCBC that was previously deferred. We began making cash tax prepayments during the first nine months of 2016 in anticipation of this accelerated taxable income.

The total cash paid to ABI in October 2016 to complete the Acquisition, net of cash acquired, will be presented as a cash outflow within investing activities during the fourth quarter of 2016. Additionally, cash flows provided by operating activities during the nine months ended September 30, 2016, include outflows of $70.6 million primarily related to transaction and other acquisition costs.

See Note 9, "Earnings Per Share" for details related to our February 3, 2016, equity offering completed in relation to the Acquisition and Note 11, "Debt" and Note 13, "Derivative Instruments and Hedging Activities" for details related to the financing and hedging strategies completed in relation to the Acquisition.

Unaudited Pro Forma Financial Information

Prior to October 11, 2016, MCBC’s 42% share of MillerCoors results of operations were reported as Equity Income in MillerCoors in the consolidated statements of operations and reported as the U.S. segment. See Note 3, "Segment Reporting" and Note 4, "Investments" for further information. As a result of the completion of the Acquisition, beginning October 11, 2016, MillerCoors results of operations will be prospectively consolidated into MCBC’s consolidated financial statements and included in the U.S. segment.

The following unaudited pro forma information does not reflect the impact of the acquisition of the Miller global brand portfolio as MCBC is not able to estimate the results of operations from this business and has concluded, based on the limited information available to MCBC, it is insignificant to the overall Acquisition and to MCBC post-acquisition. The preliminary opening balance sheet reflects the estimated consideration related to the Miller global brand portfolio entirely within goodwill as we are not yet able to estimate the allocation of fair value to the net assets because we currently have very limited information regarding such business. The allocation related to the Miller global brand portfolio is expected to result in value allocated to identifiable intangible assets subject to amortization.

Additionally, the following unaudited pro forma information gives effect to the Acquisition and the completed financing as if they were completed on January 1, 2015, the first day of our 2015 fiscal year and the pro forma adjustments are based on items that are factually supportable, are directly attributable to the Acquisition, and are expected to have a continuing impact on MCBC's results of operations. The unaudited pro forma information has been calculated after applying MCBC’s accounting policies and adjusting the results of MillerCoors to reflect the additional depreciation and amortization that would have been charged assuming the preliminary fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2015, together with the consequential tax effects. Pro forma adjustments have also been made to remove non-recurring transaction-related costs included in historical results as well as to reflect the incremental interest expense to be prospectively incurred on the 2016 Notes issued to finance the Acquisition, in addition to other pro forma adjustments. See below table for significant non-recurring costs. Also see Note 7, "Other Income and Expense" and Note 11, "Debt" for details related to financing-related expenses incurred.

The unaudited pro forma information below does not reflect the realization of any expected ongoing synergies relating to the integration of the two companies. Further, the pro forma information should not be considered indicative of the results that would have occurred if the Acquisition and related financing had been consummated on January 1, 2015, nor are they indicative of future results.



	Three Months Ended				Nine Months Ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
	(In millions)
Net sales	$	2,944.6	$	3,003.0	$	8,515.2	$	8,660.7
Net income from continuing operations attributable to MCBC	$	314.3	$	74.5	$	918.9	$	594.1
Net income attributable to MCBC	$	314.3	$	77.4	$	916.6	$	598.6
Net income from continuing operations attributable to MCBC per share:
Basic	$	1.46	$	0.35	$	4.28	$	2.76
Diluted	$	1.45	$	0.35	$	4.25	$	2.74

For the three and nine months ended September 30, 2016, the following non-recurring charges (benefits) pro forma adjustments were recorded in our pro forma results within the below noted line items to remove the impact from our historical operating results of these non-recurring items directly attributable to the Acquisition. Specifically, in connection with the Acquisition, we incurred financing costs related to our bridge loan which are considered non-recurring as these fees were recorded in addition to the interest expense on our permanent financing. We also incurred fees on our term loan agreement to have the funds available prior to us drawing on the loan which are also therefore considered non-recurring. Further, we incurred losses on the fair value of our swaptions and gains on our foreign currency forwards, both of which were entered into in relation to our anticipated permanent financing and therefore are not considered ongoing costs. Additionally, we recorded interest income and other transaction-related costs that are considered non-recurring.



	Three Months Ended			Nine Months Ended
	September 30, 2016
	(In millions)
Non-recurring charges (benefits)							Location
Other transaction-related costs	$	17.2		$	51.7		Marketing, general and administrative expenses
Bridge loan - amortization of financing costs	$	24.8		$	63.4		Other income (expense)
Foreign currency forwards and transactional foreign currency - net gain	$	(13.8	)	$	(2.2	)	Other income (expense)
Term loan - commitment fee	$	1.9		$	5.6		Interest expense, net
Swaption - realized loss	$	—		$	36.4		Interest expense, net
Interest income earned on money market and fixed rate deposit accounts	$	(10.6	)	$	(17.0	)	Interest income, net

Fair Value of Consideration Transferred

The purchase consideration was comprised of the following (in millions):



Total cash consideration	$	12,000.0
Replacement share-based awards issued in conjunction with Acquisition⁽¹⁾	50.9
Elimination of MCBC net payable to MillerCoors⁽²⁾	(8.2		)
Total consideration	$	12,042.7
Previously held equity interest in MillerCoors⁽³⁾	6,130.0
Total consideration and value to be allocated to net assets	$	18,172.7


(1)	In connection with the Acquisition, MCBC issued replacement share-based compensation awards to various MillerCoors employees who had awards outstanding under the historical MillerCoors share-based compensation plan. This amount is based on a preliminary valuation estimate and will be updated during the fourth quarter of 2016 upon finalization of fair valuation procedures.


(2)	Represents the estimated net payable owed by MCBC to MillerCoors as of the closing date which became an intercompany payable upon the close of the Acquisition.

(3)

As noted below, the Acquisition is considered a step acquisition, and accordingly, we remeasured the fair value of our pre-existing 42% equity interest in MillerCoors immediately prior to the close as approximately $6.1 billion. This valuation is preliminary, and upon completion of the detailed valuation analyses, there could be a material adjustment to the estimated fair value of our historical 42% interest in MillerCoors. As a result of the remeasurement, we expect to record a gain of approximately $3.5 billion within special items, net during the fourth quarter of 2016, representing the excess of the approximate $6.1 billion estimated fair value of our pre-existing 42% equity interest over its estimated transaction date carrying value of approximately $2.6 billion. Additionally, related to this step-up gain, we expect to record income tax expense and a corresponding deferred tax liability of approximately $1.1 billion during the fourth quarter of 2016. The tax effects of the step-up gain are preliminary and subject to change as the fair valuation procedures on our historical 42% interest are finalized.

Further, in association with the close of the Acquisition, during the fourth quarter of 2016, we expect to record a loss of approximately $500 million within special items, net related to the reclassification of MCBC's historical AOCI related to our 42% interest in MillerCoors, thereby removing the historical balance from our balance sheet. The AOCI loss is related to net unrealized losses on derivative positions historically designated by MillerCoors as cash flow hedges and pension and other postretirement benefit actuarial losses. The associated estimated income tax benefit of approximately $200 million related to this AOCI loss will be recorded as a component of the income tax benefit (expense) line item on the consolidated statement of operations.

Allocation of Consideration Transferred

The acquisition of MillerCoors will be reflected in our consolidated financial statements as a step acquisition using the acquisition method of accounting. As such, we remeasured our pre-existing 42% equity interest in MillerCoors to fair value as discussed above. The fair value measurement of our previously held equity interest immediately prior to the close of the Acquisition is based on significant inputs not observable in the market, and thus represents a Level 3 measurement. Specifically, the approach used in determining the fair value of our pre-existing 42% equity interest in MillerCoors, while considering an allocation of the total $12.0 billion purchase price attributable to the Acquisition and the nature of the Acquisition, also incorporated an income valuation approach using inputs including discount rate and terminal growth rate.

Under the acquisition method, MCBC will record all assets acquired and liabilities assumed at their respective acquisition-date fair values. The excess of total consideration, including the fair value of our previously held equity interest in MillerCoors, over the net identifiable assets acquired and liabilities assumed will be recorded as goodwill. We have commenced the detailed valuation analyses necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the Acquisition date. The amounts shown below for certain assets and liabilities, as well as the fair value of our previously held 42% equity interest, are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the Acquisition date. Upon completion of detailed valuation analyses, there may be adjustments to the valuation of our previously held 42% equity interest, as well as to the assigned values of MillerCoors’ assets and liabilities, including but not limited to brands and other intangible assets and property, plant and equipment that may give rise to increases or decreases in the amounts of depreciation and amortization expense. The final determination of the fair values will be completed within the measurement period of up to one year from the Acquisition date as permitted under U.S. GAAP and any adjustments to provisional amounts that are identified during the measurement period will be recorded in the reporting period in which the adjustment is determined. The size and complexity of the Acquisition could necessitate the need to use the full one year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the Acquisition date including contractual and operational factors underlying the intangible assets. Any potential adjustments made could be material in relation to the preliminary values presented in the table below.

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the Acquisition date (in millions):



Total current assets⁽¹⁾	$	1,006.8
Property, plant and equipment	2,834.0
Other intangible assets⁽²⁾	9,905.0
Other assets⁽³⁾	341.7
Total current liabilities	(1,106.0		)
Pension and postretirement benefits	(1,064.0		)
Other non-current liabilities	(186.1		)
Total identifiable net assets acquired	$	11,731.4
Goodwill attributable to MillerCoors acquisition⁽⁴⁾	5,931.3
Goodwill attributable to international Miller brand portfolio⁽⁵⁾	700.0
Fair value of noncontrolling interests⁽⁶⁾	(190.0		)
Total consideration and value to be allocated to net assets	$	18,172.7

(1)

Includes inventory of $485.7 million, trade receivables of $314.5 million and other receivables of $39.8 million. The fair value of inventories was determined based on the estimated selling price of the inventory less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. In the fourth quarter of 2016, the estimated step-up in fair value of inventory of approximately $77 million will increase cost of goods sold over approximately one month as the inventory is sold. For all other current assets acquired, the fair values approximate the carrying values.

(2)

The fair value of identifiable intangible assets was estimated using significant assumptions that are not observable in the market and thus represent a Level 3 measurement. The excess earnings approach was primarily used and significant assumptions included the amount and timing of projected cash flows, a discount rate selected to measure the risk inherent in the future cash flows, and the assessment of the asset’s life cycle, including competitive trends and other factors.


(3)	Includes estimated deferred tax assets of approximately $300 million which will ultimately be presented as non-current deferred tax liabilities upon consolidation by MCBC due to jurisdictional netting.

(4)

The goodwill arising from the Acquisition consists largely of improvements to our global scale and agility, operational synergies and acceleration of the MCBC growth strategy. We expect to allocate the majority of the goodwill generated to the U.S. reporting unit, and will complete our preliminary allocation to our other reporting units during the fourth quarter of 2016. Separately, our calculation of tax basis goodwill related to the Acquisition has not yet been completed. However, all of the tax basis goodwill related to the Acquisition of SABMiller’s 58% economic interest in MillerCoors is expected to be deductible for U.S. federal and state tax purposes.


(5)	The preliminary opening balance sheet reflects the estimated consideration related to the Miller global brand portfolio entirely within goodwill as we are not yet able to estimate the allocation of fair value to the net assets acquired. The allocation related to the Miller global brand portfolio is expected to result in value allocated to identifiable intangible assets subject to amortization.

(6)

MillerCoors has jointly held interests in multiple entities that are fully consolidated. The related fair value of the noncontrolling interest in each entity was estimated by applying the market and income valuation approaches. The fair value of MillerCoors' noncontrolling interest was estimated using significant assumptions that are not observable in the market and thus represent a Level 3 measurement.