Winchester Capital Research

Mergers & Acquisitions Global Insight THE SPIRITS INDUSTRY 2015

The spirits industry achieved a record year in 2014 with M&A transaction value rising +1,944% to US$18.5 billion from US$907 million in 2013. Following considerable increases in valuations during 2013, the US$16bn acquisition of Beam Inc. by Suntory of Japan represents one of the largest spirits and drinks transactions in history. We anticipate an accelerated pace of M&A transactions throughout the industry in 2015 for the following reasons: m Continuing

strength in global demand for spirits m Strong cash positions and balance sheets of primary acquirers m Increased availability of low-cost debt to drive acquisitions m Growing consolidation amongst the largest players m Continuing opportunities to acquire fast growing brands, especially in emerging markets

CONTENTS

I. Continued Global Growth in 2014 II. European Activity III. North American Activity IV. Spirits Companies Poised for Increased Acquisition Activity V. Increase in Global M&A Transactions VI. Winchester Insights 2015

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THE SPIRITS INDUSTRY 2015

Winchester Capital Research

I. CONTINUED GLOBAL GROWTH IN 2014 The spirits industry continues to exhibit strong demand growth, especially in the United States and Asia. Global spirits sales were forecasted to achieve over $230bn in sales by the end of 2014, representing a +46% increase in value since 2005. Analysts estimate that the global spirits market will increase in volume and value by 1.5% and 3.16%, respectively, until 2018. Premiumization is a major factor in value growth and continues to drive top line revenues. Within the overall spirits industry, vodka and whisky are the largest drivers of both new volume and increased value. According to Euromonitor International, vodka sales are expected to increase by +.08% CAGR until 2018 to 381m cases, followed by whisky, which is a large spirit category and is expected to grow at +17.1% CAGR until 2018 to 387m cases. Specifically within the whisky segment, flavoured whiskies have seen substantial growth, with individual brands experiencing annual sales increases in excess of +30%.

$250.00

2.80

$200.00

2.70

$150.00

2.60

$100.00

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$50.00

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$

2.30

2005

2009

2010

2014P

n Value n Volume

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Sales Volume (Bns of 9 L. Cases

Sales in USD (Bns)

Chart 1: Global Spirits Market Volume and Value

II. EUROPEAN ACTIVITY The European spirits market, with over 300 Graphic Indications, is filled with iconic brands which evoke sensations of creativity, elegance and grandeur. According to policy review EU, European spirits bottled for export stood at €8.6 billion and total spirits sales amounted to just over €10 billion in 2013. The top export markets for Europe in 2013 included: n Exports

to the USA totalled €3.345 billion, an increase of +49% from 2003

n Exports

to Singapore amounted to €1.04 billion, respresenting a +641% increase from 2003

n Exports

to Russia totalled €725 million, a +562% growth over 2003

n Exports

to China amounted to €456 million, an increase of +728% from 2003

United Kingdom

The U.K. achieved sales of 31 million 9L cases in 2013, up +0.7% YoY. Spirits sales at on-trade locations grew +5.1% for the year ending April 2014 and accounted for 18% of the total sales at on-trade locations. The best-selling brands by volume in the on-trade were Smirnoff Red Label vodka, Jack Daniel’s whisky, Jägermeister liqueur, Gordon’s gin and Bacardi rum. In the off-trade, sales grew by +3.6%, helped by the premium and above segments (i.e., products priced over £23 for a 700ml bottle) which grew 6.4%. While overall performance in the U.K. was strong, one of its top exports, Scotch whisky, faced some interesting headwinds in 2014. Strong competition from brown spirits, especially bourbon, negatively impacted scotch sales as follows:

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THE SPIRITS INDUSTRY 2015

n

Exports to the U.S. declined -10% YoY to £571 million

n

n

Exports to Singapore, the main distribution hub to China, declined -41.1%

Exports to China fell -17.4% in volume and -21.6% in value

n

Exports to Europe declined -8.2% by volume and -21.4% in value, as only 39.5 million cases were sold

n

Exports to Taiwan and the United Arab Emirates declined -45% and -27% respectively

One positive development in the Scotch whisky industry is the rise of Single-Malt whiskies, which experienced a +17% growth in export volume by Q3 2014 over the first three quarters in 2013. Exports to France, the top export market for Scotch whiskey by volume, grew +2.2% in the first three quarters of 2014. One vast improvement for the Scotch whiskey industry in 2014 was the +20% growth in volume in the Indian market, which is one of the most prized spirits markets in the world. Despite these short-term headwinds, Scotch volumes are expected to grow +8.8% to 96.8 million 9L cases by 2018.

Germany

German exports of liqueurs, brown and clear spirits rose to 275 million bottles in 2013 for a total value of €115 million. Total value of the German spirits industry reached €16.7 billion in 2013, representing a CAGR of +0.2% from 2009 to 2013. Total value is expected to increase to €17.2 billion by 2018, a +3% increase over 2013.

France - Cognac

Over the last decade, Cognac has been one of France’s top luxury exports, as consumers from the U.S., Africa, and Asia have enjoyed the category’s broad array of offerings and its associated status symbol. Unfortunately, the level of growth achieved in the last decade was not sustained in 2014 and witnessed the following results: n

Cognac sales declined to €2.1 billion in 2014 from €2.4 billion the year earlier

n

Volume declined -3.6% to 155.6 million bottles

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Outside of these few negative results, there were also many bright spots for the Cognac industry, including: n

Exports to North America grew +12.2% in volume and +7.9% in value

n

Exports to the U.S. reached 59.9 million bottles

n

From August 2014 to December 2014, volume figures were in line with the year earlier, signaling that the Cognac market may be ready for another uplift in volume and value in 2015

n

Cognac and Armagnac are expected to grow +12.7% to 12.2 million 9L cases by 2018

Scandinavia

The total value of the Scandinavian spirits industry in 2013 reached US$3.4 billion. Denmark achieved a CAGR of +2.6% from 2009 – 2013, the highest growth rate for the Scandinavian region, as value reached US$797.6 million. Total value in Sweden and Norway reached US$1.54 billion and US$1.08 billion respectively in 2013. Forecasts to 2018 for these three countries are as follows: n Total

value for Sweden is expected to reach $1.7 billion, representing a +10.3% over the period

n Total

value for Norway is forecast to achieve $1.26 billion, a +16.7% increase over the period

n Total

value for Denmark is expected to reach $941.8 million, a +18.1% growth for the period9

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THE SPIRITS INDUSTRY 2015

III. NORTH AMERICA ACTIVITY

By the end of 2013, consumers in the U.S. were importing 198 million proof gallons of spirits, an increase from 147 million proof gallons in 2009. This represents a CAGR of 7.71% over the period. The value of U.S. imports in 2013 was US$6.4 billion, up from US$4.8 billion in 2009. This represents a CAGR of +7.53% over the period. By September 2014, the U.S. had imported US$4.5 billion in spirits, a +3.1% increase over the same period in 2013. As in the past, the U.S. spirits market continues to be dominated by foreign multinationals such as Pernod Ricard, Diageo and Campari. However, certain U.S companies including Beam Inc. and Brown-Forman have continued to preserve their market position through premium U.S.-made spirits, following their development of the export market. In 2013, the US exported 98.8 million proof gallons of spirits, up from 54 million proof gallons in 2009. This represents a CAGR of +16.33% over the period. In 2013, the value of U.S. spirits exports was US$1.5 billion, up from US$1.04 billion in 2009, representing a CAGR of +9.77% over the period. By September 2014, the U.S. had exported US$1.17 billion in spirits, a +6.9% increase over the same period in 2013.

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Import Value (US MMs)

$7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

250 200 150 100 50

2009

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0

n Distilled Spirits Imports, Value n Distilled Spirits Imports, Volume

Chart 111: US Spirits Exports Volume and Value 120 Export Value (US MMs)

The U.S. spirits industry continues to drive global growth. According to DISCUS, spirits sales grew +2.2% by volume to 210 million cases in 2014. Sales by value reached US$23.1billion, representing a +4% increase over 2013. Irish whiskey volume grew +9.1% in 2014, with +59.2% growth in the premium and above categories.

Proof Gallons (MMs)

Chart 11: US Spirits Imports Volume and Value

U.S. Spirits Industry Continues to Grow

$1,600 $1,400 $1,200 $1,000 $800 $400 $200 $0

100 80 60 40 20

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2013

Proof Gallons (MMs)

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0

n Distilled Spirits Imports, Value n Distilled Spirits Imports, Volume

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THE SPIRITS INDUSTRY 2015

Canada

Total value of the Canadian spirits industry reached US$5.85 billion in 2013, representing a CAGR of+2% from 2009 – 2013. Volume advanced at CAGR +1.5% over the same period to 160 million liters. The Canadian market is forecast to reach total value of US$6.43 billion by 2018, representing a +10% growth over the period.

Bourbon Whiskeys - Higher Demand

Sales of Bourbon whiskey remains a strong driver of industry demand. Bourbon sales sustained increases in volume and value that outpaced many other types of spirits. Sales of bourbon reached 37.8 million 9L cases in 2014, representing a +22.8% increase over the last five years12. According to IWSR, Bourbon is expected to grow +19.3% over the next five years and reach 45 million 9L cases by 2018, the fastest growth rate for any alcohol category for that period.

Rum - A New Wave of Growth

Rum is one of the key growth engines within the spirits market and an area that is likely to sustain increased attention for M&A activity in 2015. It is projected that the rum market will grow by +7.25% in volume through 2017 to total 169.4m 9-Litre cases, and that rum volumes within Asia will grow by +30.0%, with local brands continuing to dominate these markets. The growth of rum in these emerging economies indicates an opportunity for large players who wish to fill gaps in their product offerings with the purchase of local brands to capture additional growth.

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Chart 1v: US Producer Rum Volume and Value 25,800 26,600 25,400 25,200 25,000 24,800 24,600 24,400 24,200 24,000

$2,450 $2,400 $2,350 $2,300 $2,250 $2,200 $2,150

Value (USD 000s)

The U.S. remains one of the largest spirits markets in the world and a key value driver for many major and new spirits companies. Increased demand in the U.S. will continue to focus spirits companies on expanding their product offerings in order to increase revenue per customer, while maintaining brand loyalty within traditional product lines.

Volume 9-Liter Cases (000s)

Winchester Capital Research

$2,100

2009

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2013

$2,050

n Value n Volume

The U.S. continues to be the second largest market for rum in the world and has sustained growth over the past several years. As Chart IV indicates, U.S. rum volume and value has increased by a CAGR of +1.04% and +2.13% respectively, over the past 5 years. Within rum, the superpremium segment has seen the largest increases, with a CAGR in volume and value of +19.9% and +20.4%, respectively. This high growth indicates that the U.S. consumer is seeking new, high-end rum products and is beginning to consume rum in a similar manner to scotch, bourbon, cognac or other brown spirits products. We anticipate increased appetite for rum acquisitions in India, the world’s largest rum consumer by volume. India’s tariff system, which levies a 150.0% tariff on imported spirits, may drive many industry participants to acquire local rum businesses within India in order to capture market share within this economy and avoid the adverse tariff impact. Clearly, rum demand is on the rise in the East and the West. Rum remains an unexploited segment for many spirits players who may seek to include high-end, super-premium rums within their product offerings in order to capture value from the significant growth in this market segment, and to enhance their current product portfolios.

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THE SPIRITS INDUSTRY 2015

IV. SPIRITS COMPANIES POISED FOR INCREASED ACQUISITION ACTIVITY

V. INCREASE IN GLOBAL M&A TRANSACTIONS

Financial data suggests that worldwide spirits companies are poised for an increase in their M&A activity in 2015. By H2 2013, major spirits companies started to amass large cash positions, whilst also capitalizing on lowrate debt financing to build available funds for acquisitions.

There were 42 deals transacted in 2014, up from 31 deals in 2013. The largest transaction completed this year was Suntory’s US$16 billion acquisition of Beam. This transaction will expand Suntory’s exposure to the North American market which has been a safe alternative market to China, currently cracking down on luxury gifting. Diageo made a similar strategic move when it acquired an additional 26% interest in USL for US$1.9 billion. This acquisition will give Diageo direct market access to India, one of the top three spirits markets in the world. USL shareholders have announced that the company would begin distributing Diageo’s branded products in India this year, allowing Diageo to sidestep the large taxes on liquor by the Indian government. Other notable transactions in 2014 include:

As Chart V indicates, the top 12 spirits manufacturers worldwide spent the 2010 – 2013 timeframe deleveraging their balance sheets from previous acquisitions. Following this deleveraging period, from H2 2013 to the present, these major companies have been increasing their debt-to-EBITDA ratios by establishing new credit lines and term loans at lower cost interest rates, which can be utilized to finance new acquisition transactions at potentially higher valuations.

n Davide

Campari acquisition of Forty Creek Distilleries for US$167 million

Chart V: Average Total Debt/EBITDA Top 12 Global Spirits Companies

n Emerador’s

acquisition of Whyte & Mackay for US$725 million

3.00x

n Quintessential

Brands S.A. acquisition of First Ireland Spirits Company Ltd for an undisclosed amount

2.80x 2.60x

n William

Grant & Sons Limited’s acquisition of Drambuie Liqueur Company Limited for an undisclosed sum

2.40x 2.20x 2.00x

2010

2011

2013

2013

LTM

Chart VI: Global Spirits Industry M&A Transaction Volume

n Average Debt/EBITDA

The top 12 spirits companies have a total EBITDA of US$16.9bn and total outstanding debt of US$38.8bn. This increased debt load, combined with $11.5bn in available cash resources, creates a significant pool of capital for executing acquisitions. We fully expect that spirits companies will deploy this cash over the short-term for value-added acquisitions.

50 40

42

44

46

30

42 31

20 10

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2011

2012

2013

2014

n Total Number of Transaction

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THE SPIRITS INDUSTRY 2015

TABLE I: SPIRITS INDUSTRY M&A DEALS BY QUARTER (2012-2014) (USD MMS) Quarter # of Deals Total Value Mean Median

MIN MAX Notable transactions

Q1 2012

6

13

3.3

0.13

0.01

12.9

Chalong Co Ltd acquisition of Rojana Distillery Co. Ltd. for US$12.9 million.

Q2 2012

11

1,14

228

60

0

605

Beam, Inc. acquires Pinnacle French vodka and Calico Jack rum brands, along with related assets, for US$605 million.

Q3 2012

17

312

52

43

1

126

Arcus-Gruppen purchases Aalborg and Brøndums from Pernod Ricard for US$126 million.

Q4 2012 11 678 97 9 0 521

Diageo plc. Announces its plan to take a controlling stake in Indian distiller United Spirits. Campari purchases Wray & Nephew from CL Financial for 15x EBITDA.

Q1 2013 11 145 48 71 0 74

Luxco Corporation purchased Wolfschmidt vodka, Calvert, Bellows, Dark eyes vodka, Canada house Canadian and Tempo Triple Sec, with all related inventories, from Beam Inc. for US$65 million.

Q2 2013

5

286

143

143

4

282

Roust Trading Ltd. acquired Central European Distribution Corporation for $1.68 billion. Sale of Burn Stewart Distillers to Distell for US$244m.

Q3 2013

6

373

124

53

15

304

Diageo acquires Sichuan Chengdu Shuijingfang Group Company Ltd for US$357.83m. Sale of Hine Cognac to Jackyval SAS by CLWB.

Q4 2013

9

103

51

51

0

103

HITEJINROHOLDINGS Co., Ltd. acquired in Jinro Soju Ltd. for US$103m.

Q1 2014

11

16,228

3,246

19

0

16,024

Suntory Holdings Limited acquired Beam Inc. for US$16 billion. Davide Campari acquired Forty Creek for US$167 million.

Q2 2014

15

2,235

1,118

1,118

339

1,896

Diageo acquired a 26% in USL for US$1.9 billion. An unknown buyer, acquired 38.7% of Stock Spirits group from Oaktree for US$339 million.

Q3 2014

7

76

25.3

29

0.3

46.6

UAB “Mineraliniai vandenys” acquired Company group ALITA AB for US$46.6 million.

Q4 2014 9 2.63 2.63 2.63 2.63 2.63

As the large distilleries seek further growth through premium brand additions, the number of distilleries in the industry is expected to decline by -2.3% per year over the next five years. We anticipate a surge in M&A activity within the spirits sector in 2015. Major spirits companies deleveraged and focused internally until 2014, when companies utilized low yielding debt and large cash piles for acquisitions to gain market share in both developed and emerging markets.

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Spirit France S.A. acquired Armanac and Cognac company Janneau SA for an undisclosed amount.

We anticipate both large and mid-sized spirits players will seek strategic and opportunistic acquisitions through direct acquisition, joint venture, minority investments and partnering opportunities. The mega deals will hinge on whether leading industry families decide to sell, such as the Beckmann family of Jose Cuervo and the Brown family of Brown-Forman. While certain mega transactions will be a binary function of family decisions, we see an acceleration of new brands being acquired, joint-ventured and/or entering into strategic partnerships for increased distribution in 2015.

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THE SPIRITS INDUSTRY 2015

VI. MARKET INSIGHTS For the past five years, spirits have consistently demonstrated the ability to grow in established and emerging markets while continuing to take market share from wine and beer. We anticipate that the spirits industry will continue to grow in 2015 following the renewed focus on M&A in 2014 and offer the following observations: m Demand growth will continue throughout the world,

especially in the U.S. and emerging economies, with a focus on brown spirits, especially flavored whiskeys, generating an increase in M&A activity as companies large and small seek to expand their product portfolio.

m Key industry conglomerates will continue to acquire

innovative and strong brands in developed and developing markets that can demonstrate price increase absorption. This should continue to drive M&A volume and value and valuations in the foreseeable future.

m Premium brands will continue to be a major factor

within the industry, as consumers continue to perceive beverage alcohol as an affordable luxury and thus seek quality over price.

m Many spirits companies have increased their existing

leverage and assumed new debt capacity in order to effect acquisitions in anticipation of potentially higher interest rates. We anticipate more companies seeking to grow by acquisition prior to a significant increase in interest rates, which may follow an improved worldwide economy.

m Privatizations of government-held spirits companies

in developing countries will become increasingly attractive as acquisitions in new market platforms and also as a means for governments to achieve liquidity and maintain employment and economic stability.

m Spirits are projected to continue to take further

market share from beer and wine as the cocktail culture continues to grow and offers new and exciting beverage options to consumers.

m We expect more companies to use public markets to

achieve liquidity for shareholders following the IPOs of Distil plc and Lucas Bols B.V. in January 2015.

Since 1986, Winchester Capital has focused on our four pillars: Integrity, Heritage, Insight and Perseverance. We offer global research and advisory services for international mergers and acquisition. We are a market leader in crossborder transactions related to the wine and spirits industry and have successfully completed numerous transactions, totaling over US$400 million in this sector. For further information please visit winchestercapital.com or contact our Director of Corporate Communications Mrs. Pippa Smith at [email protected]. This research is not offered as advice or guidance for investment purposes. The research contained herein has been compiled from publicly available sources at the time of publication and may be subject to change without notice.

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