Investment in SABMiller/AB InBev

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Investment in SABMiller/AB InBev

Investment in SABMiller/AB InBev:

At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller. Altria Group, Inc. accounted for its investment in SABMiller under the equity method of accounting.

AB InBev and SABMiller Business Combination

On October 10, 2016, Legacy AB InBev completed the Transaction, and AB InBev has become the holding company for the combined SABMiller and Legacy AB InBev businesses. Under the terms of the Transaction, SABMiller shareholders received 45 British pounds (“GBP”) in cash for each SABMiller share held, with a partial share alternative (“PSA”), which was subject to proration, available for approximately 41% of the SABMiller shares.

Pursuant to the terms and conditions of an Irrevocable Undertaking, previously delivered by Altria Group, Inc. in November 2015, Altria Group, Inc. voted its 430,000,000 SABMiller shares in favor of the Transaction and elected the PSA.

Upon completion of the Transaction and taking into account proration, Altria Group, Inc. received, in respect of its 430,000,000 SABMiller shares, (i) an interest that was converted into 185,115,417 restricted shares of AB InBev (the “Restricted Shares”), representing a 9.6% ownership of AB InBev at October 10, 2016 based on AB InBev’s shares outstanding, and (ii) approximately $4.8 billion in pre-tax cash as the cash component of the PSA. Additionally, Altria Group, Inc. received pre-tax cash proceeds of approximately $0.5 billion from exercising the derivative financial instruments (discussed below), which together with the pre-tax cash from the Transaction totaled approximately $5.3 billion in pre-tax cash. Following completion of the Transaction, Altria Group, Inc. purchased 12,341,937 ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership to approximately 10.2% at October 24, 2016.

The Restricted Shares:

▪ are unlisted and not admitted to trading on any stock exchange;

▪ are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;

▪ are convertible into ordinary shares of AB InBev on a one-for-one basis after the end of this five-year lock-up period;

▪ rank equally with ordinary shares of AB InBev with regards to dividends and voting rights; and

▪ have director nomination rights with respect to AB InBev.

As a result of the Transaction, Altria Group, Inc. expects to record a total estimated pre-tax gain in its reported earnings of approximately $13.7 billion, or $8.9 billion after-tax, which is based on the following:

▪ the Legacy AB InBev share price and GBP-to-United States dollar (“USD”) exchange rate as of October 10, 2016;

▪ the book value of Altria Group, Inc.’s investment in SABMiller at September 30, 2016; and

▪ the impact of AB InBev’s expected divestitures of certain SABMiller assets and businesses in connection with Legacy AB InBev obtaining necessary regulatory clearances for the Transaction.

Substantially all of the gain will be recorded in the fourth quarter of 2016. Altria Group, Inc. expects that its gain on the Transaction will be deferred for United States corporate income tax purposes, except to the extent of the cash consideration received.

Altria Group, Inc. will account for its investment in AB InBev under the equity method of accounting because Altria Group, Inc. will have the ability to exercise significant influence over the operating and financial policies of AB InBev. This conclusion is based on the fact that Altria Group, Inc. will have active representation on AB InBev’s Board of Directors (“AB InBev Board”) and certain of its Committees. Through its AB InBev Board and Committee representation, Altria Group, Inc. will participate in AB InBev policy making processes. Altria Group, Inc. will report its share of AB InBev’s results using a one-quarter lag because AB InBev’s results will not be available in time to record them in the concurrent period.

Derivative Financial Instruments

In November 2015 and August 2016, Altria Group, Inc. entered into a derivative financial instrument, each in the form of a put option (together the “options”) to hedge Altria Group, Inc.’s exposure to foreign currency exchange rate movements in the GBP to the USD, in relation to the pre-tax cash consideration that Altria Group, Inc. expected to receive under the PSA pursuant to the revised and final offer announced by Legacy AB InBev on July 26, 2016. The notional amounts of the November 2015 and August 2016 options were $2,467 million (1,625 million GBP) and $480 million (378 million GBP), respectively. The options did not qualify for hedge accounting; therefore, changes in the fair values of the options were recorded as gain on derivative financial instruments in Altria Group, Inc.’s consolidated statements of earnings in the periods in which the changes occurred. For the nine and three months ended September 30,2016, Altria Group, Inc. recorded pre-tax gains of $205 million and $48 million, respectively, for the changes in the fair values of the options. Exercising the options in October 2016 resulted in approximately $0.5 billion in pre-tax cash proceeds. In the fourth quarter of 2016, Altria Group, Inc. will record a pre-tax gain of approximately $145 million for the changes in the fair values of the options.

The fair values of the options were determined using binomial option pricing models, which reflect the contractual terms of the options and other observable market-based inputs, and are classified in Level 2 of the fair value hierarchy. At September 30, 2016 and December 31, 2015, the fair values of the options totaling $360 million and $152 million, respectively, were recorded in other current assets on Altria Group, Inc.’s condensed consolidated balance sheets.