Ab InBev [ABI:BB] – Market Cap as of 04/10/2019: €170.061bn
Budweiser Brewing Company APAC Ltd [HKG: 1876] – Market Cap as of 04/10/2019: HK$403.92bn
Introduction
On September 30th, the brewer behemoth Anheuser-Busch InBev listed the shares of its Asian Pacific subsidiary, Budweiser Brewing company APAC limited, in the Hong Kong Stock Exchange. The shares closed at HK$28.20 ($3.60), around 4.4% higher than the initial IPO price of HK$27 a share, raising $5bn and giving the business a market capitalization of roughly $47bn. The public debut of the Asian Pacific Subsidiary is the second-biggest IPO of the year, behind Uber’s $8.1bn valuation raised in May.
This is the second attempt from Anheuser-Bush InBev (AB InBev) to list Budweiser APAC. It comes after an initial shot, at which investors baulked at the intended $9.8bn IPO. After the sale of its more mature Australian business to the Japanese competitor Asahi Breweries for $11.3bn, AB InBev might be able to better attract investors. After several years of acquisition sprees, AB InBev has accumulated massive levels of debt, which the company has been attempting to reduce. Indeed, the listing of the Asian division, as well as the sale of the Australian business, are examples of the company’s efforts to repair its balance sheet by reducing its $102bn of long-term debt while also using the capital to expand in the Asian market by acquiring regional rivals.
About AB Inbev
AB InBev is a Belgian-Brazilian multinational brewing holding company based in the Flemish city of Leuven, Belgium, although it is mainly directed from New York. AB Inbev is by far the largest player in the brewer industry selling around three Olympic-sized swimming pools of beer per hour, or equivalently about 7m litres, which is more than the sum of its three nearest rivals. AB InBev’s portfolio of brands includes well-known beer and soft-drink brands such as Budweiser, Corona, Stella Artois, Beck’s, Leff, and Hoegaarden, as well as another circa 400 beer brands. Concerning the APAC division, it produces, imports and sells more than 50 beer brands in the region including Budweiser and Stella Artois. AB InBev is publicly listed with its primary listing on the Euronext Brussels and secondary listings on Mexico City Stock Exchange, Johannesburg Stock Exchange and New York Stock Exchange.
The origins of AB Inbev date back to 2004 with the $11.5bn merger of the Brazilian Ambev and the Belgium Inbev. The deal created the world’s largest brewer in the early 2000s, from the 3rd and the 5th largest brewers in the world at the time, respectively. In 2008, InBev acquired Anheuser-Busch, by that time the 3rd largest brewer in the world, creating Anheuser–Busch InBev and thus expanding on InBev’s previous title as the world’s largest brewer. Shares of Anheuser-Busch were acquired for $70 each in cash, for a grand total of $52bn. The combined company subsequently became one of the top five consumer products companies in the world. InBev is controlled by the Belgian families Vandamme, De Mévius and de Spoelberch, who as of 2015 owned a combined 28.6% of the company, and billionaire Brazilian investors Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles, who owned 22.7% per cent through their private investment firm 3G Capital.
AB InBev employs around 180 thousand people, more than twice the number of employees of Heineken N.V., the second-largest brewer in the world. AB InBev has $237.3bn in total assets and generated $54.1bn in revenues over the last twelve months, ending June 30th 2019. Its gross operating profits were of $33.8bn for the twelve months ending June 30th 2019, two times the average of its listed rivals. AB InBev presented a $22bn EBITDA in 2017 and 2018 and a solid EBITDA margin of around 40% in both years. However, AB InBev has a crippling debt and states a 1.30 Debt-to-Equity Ratio much higher than the industry average of 0.11.
Ab InBev’s Business Model
Three decades of successive acquisitions, accompanied by exceptional spending discipline, turned AB InBev into the world’s largest and most profitable brewer. Facing a slow-paced beer market growth, as consumer tastes are slowly shifting towards craft beer, and an excessive pile of debt, AB InBev is aiming to come up with capital to reduce its debt while also ratcheting up marketing spending to sell more beer.
In spite of the slow market growth and the high debt, AB InBev has been performing reasonably well during the last few years even if profitability indicators have been slightly decreasing for the past two years after a phenomenal 2017. Indeed, during the last two years, revenues and gross profits have been decreasing at around 4% and 3% per year respectively, after a phenomenal increase on revenues and gross profit of 24% and 26.5% respectively in 2017. The increase in every indicator of profitability in 2017 was due to the growth of its core global brands, the cost savings from synergies from the SABMiller integration, and the good results from Brazil. Notwithstanding the good results, the company is seeking to reduce its debt by selling off some of its units or by making some of its business go public as it is the case for Budweiser’s APC division. The ultimate goal is to reduce the outstanding debt and, at the same time, enable the company to increase marketing expenses and invest in new opportunities, especially in the fast-growing Asian market.
The focus has been shifted from pursuing further acquisitions to expanding the market for beer. Following the merger with SABMiller in 2016, AB InBev implemented the Category Expansion Framework (CEF), a business model that aims to grow the global beer category by spotting new occasions and consumption opportunities. This strategy targets new kinds of customers by pitching low-calorie beer to gym-goers or non-alcoholic beer to lunchtime diners. Additionally, the firm has acquired several craft brewers in a bid to acquire more human capital with an entrepreneurial onlook. It has also spent more on technology, including research on cannabis-infused beverages.
IPO Structure
Anheuser-Busch InBev (AB InBev) is set to offer a minority stake of its Asia Pacific subsidiary, Budweiser Brewing company APAC Limited, through an initial public offering (IPO) on the Hong Kong stock exchange. The IPO will entail an offering of a total of 1,451,704,000 shares, roughly a 13% increase from the initial offering of 1,262,350,000 shares due to higher than anticipated market demand. AB InBev plans on floating only 72,586,000 of these shares, representing approximately 5% of the total number of shares available under the IPO. The IPO will also carry an overallotment (or greenshoe) option, allowing underwriting banks to purchase a further 15% of Budweiser shares at IPO price within 30 days. The offer price of the IPO was set to be on around HK$27-HK$30 per share and, indeed, on the 24th of September 2019, AB InBev placed the IPO price on the lower bound of this range at around HK$27 ($3.44) per share giving Budweiser APAC a valuation of $45.6bn. AB InBev estimates the net proceeds of the IPO to be HK$38.2bn ($4.9bn) or potentially HK$44bn ($5.6bn) if the upsizing overallotment option is exercised in full. Furthermore, AB InBev will retain majority ownership of Budweiser APAC controlling 88.86% at the end of the exercise period if the overallotment option is not enacted and 87.22% if it is.
Typical of Hong Kong listings, the IPO also includes a cornerstone investor. In AB InBev’s case, the investor is the Singaporean wealth fund GIC Private Limited which is set to invest $1bn in the deal. The fund will acquire 290,344,400 offer shares, representing roughly 20% of the offer shares and 2.23% of the total issued capital. Budweiser APAC commenced dealings on the Hong Kong Stock Exchange at 9:00 am HKT on the 30th of September 2019 under the stock code 1876.
IPO Rationale
In 2008, Anheuser-Busch entered into agreements with Belgian-Brazilian brewer InBev for an acquisition amounting to $52bn. Since then, the AB InBev deal machine has been churning at a record pace, absorbing the likes of SABMiller and Grupo Modelo in deals valuing at $120bn and $20bn respectively. This acquisition spree has led to two big results: the world’s largest brewer and a debt pile north of $100bn. As of June 30th, 2019, AB InBev’s net debt amounted to $109bn, nearly 5 times that of its trailing EBITDA. Over a backdrop of lower net income in 2016 and 2018 and dividend cuts, the brewer is struggling to chip away at its debt mountain and continue its acquisition-driven policy in the more segmented markets of Asia.
AB InBev had already been involved in the sale of its Australian unit, one of the fastest-growing markets in APAC, in a deal amounting to $11.3bn. Following the abandonment of a $54.2bn-$63.7bn listing its Asia Pacific subsidiary in July 2019, Carlton & United Breweries, Ab InBev’s Australian subsidiary, was sold to Japan’s Asahi. The proceeds of that deal, as with Budweiser APAC’s recent IPO, had also been used to pay off AB InBev’s accumulated debt.
AB InBev has been seeking a liquidity injection in order to accelerate its expansion in some of the faster-growing Asian markets. Following Budweiser’s listing, the company will be looking to expand into markets such as Vietnam, India and China, the latter of which is expected to be the fastest-growing market for beer in the following decade. These markets have not seen much penetration by international brands while local brands lack the regional distribution to consolidate the market, something which can be viewed as a strong suit of AB InBev. This comes at a time when young people in the US and UK are drinking less than previous generations, a trend observable even in some emerging markets. AB InBev has long been losing market share in the US with consumers moving away from some of its flagship brands such as Bud Light and Budweiser to more authentic and local craft beers, all the while the global beer market has shrunk by nearly 1% in the last two decades, a trend that is expected to continue. An IPO of Budweiser APAC would arm the brewer with a local currency war-chest to mount further acquisitions in regional Asian markets and cut its debt pile. In essence, following AB InBev’s recent dividend halving and a refinancing of $16.5bn of its debt to push out maturities, Bloomberg cash flow predictions show the company capable of meeting debt obligations. However, with the strategy that is currently being followed, the brewer won’t miss out on growth opportunities available in Asian markets.
Market reaction
AB InBev, the parent company of Budweiser APAC, is listed on four major exchanges: the Euronext, NYSE, JSE and BMV. After the most recent news of the Asia Pacific subsidies IPO, markets showed lukewarm sentiment with the stock price on all four exchanges moving only very slightly if at all. Alternatively, this can also mean that the IPO had already been priced into the market price by investors.
As for Budweiser APAC, the stock debuted on the Hong Kong Stock Exchange on the 30th of September 2019 at an opening price of HK$27.4, nearly 1.5% above its IPO price, and had surged to HK$28.5 by the afternoon, a 4% increase, which is the second largest of 2019 on IPO day. Considering the previous increase in the overall number of stocks issued due to higher than expected demand, heightened investor interest to the stock immediately following its IPO is understandable.
Underwriters
As with the previous IPO attempt of Budweiser APAC, JP Morgan Chase and Morgan Stanley will act as co-sponsors of the flotation while Bank of America Merrill Lynch and Chinese investment bank CICC will be the global coordinators for the offering.
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