On November 11, 2015, AB InBev announced the acquisition of the world’s second largest brewery SABMiller based in London, UK which included brands such as Coors and Miller, for £71.4 billion (€101 billion). The merger would be finalised on October 10, 2016. On November 11, 2015, the pound sterling was trading at €1.4141. The Brexit referendum which occurred on June 23, 2016 and the uncertainty over the subsequent negotiations significantly affected the value of the pound sterling which dropped to €1.1079 by October 10, 2016. What was AB InBev’s transaction gain/loss?

Question

BlackTom AI · Accepted Answer

Because the deal was denominated in pounds (GBP) but the company reports in euros (EUR), the change in the EUR per GBP exchange rate determines the transaction gain or loss. Key concepts: currency conversion (EUR/GBP × GBP = EUR) and that a decrease in EUR/GBP reduces the euro value of a fixed-pound liability, producing a loss in euro terms for a purchaser who measures in euros.

Step-by-step reasoning and calculations:
1. Identify the exchange rates and transaction size:
   - Initial rate (Nov 11, 2015): 1.4141 EUR per GBP
   - Later rate (Oct 10, 2016): 1.1079 EUR per GBP
   - Deal size: 71.4 billion GBP
2. Compute the change in the exchange rate (new − old):
   - 1.1079 − 1.4141 = −0.3062 EUR per GBP
   The negative sign indicates the euro price per pound fell (pound weakened versus the euro).
3. Multiply the rate change by the pound amount to get the euro gain/loss:
   - −0.3062 EUR/GBP × 71.4 billion GBP
   - Intermediate multiplication: 0.3062 × 71.4 = 21.863 (approx)
   - Therefore: −21.863 billion EUR ≈ −€21.86 billion
4. Interpretation: the negative value is a transaction loss of €21.86 billion — the euro value of the GBP-denominated acquisition decreased by that amount.

Why the correct option is correct:
- It uses the pound amount (71.4) and the correct sign/direction of rate change (1.1079 − 1.4141) yielding a loss of €21.86 billion, matching the economic effect of a weaker pound in EUR terms.

Why the other options are incorrect:
- Option "(1.4141 − 1.1079) × 71.4 = €21.86 billion gain" flips the sign: it would imply a gain, but the euro value actually fell, so it is a loss.
- Options using 101 multiply the rate difference by €101 billion (an already converted euro amount) which mixes units incorrectly; you must multiply the rate change (EUR/GBP) by the GBP amount, not by an EUR figure.
- The last option also has formatting/sign errors and misuses 101.

Conclusion: The transaction resulted in a €21.86 billion loss, matching the provided correct answer "(1.1079 – 1.4141) x 71.4 = €21.86 billion loss."

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