$100 Billion of Debt, and Still AB InBev Wants More Deals

(Bloomberg Opinion) -- Anheuser-Busch InBev NV is in danger of getting distracted by swashbuckling deals.

The brewer said on Tuesday that it was considering listing a minority stake in its Asia Pacific business on the Hong Kong stock exchange. It wants the process to create a regional champion, and a platform for consolidation. This language suggests a return to striking the big deals that turned it into the world's most powerful brewer.

It's not hard to see why AB InBev would want to move forward in Asia. It is growing fast, with a large population of consumers who are willing to trade up to premium brands. Rivals are also forging ahead. The whole of the company's division there could be worth between $45 billion and $70 billion, my colleague Chris Hughes has noted, and the share sale could raise $5 billion.

It had better make sure that this does not come at the expense of deleveraging. 

AB InBev is still lumbering under about $100 billion of net debt after its purchase of SABMiller in 2016. The company said Tuesday it “appreciates” that a listing could reduce borrowings faster – this shows that its high level of indebtedness is on its mind, but is not the main driver of the IPO. 

Though it has already cut its dividend, the burden is shrinking only slowly. The company says it can pare leverage to less than four times by the end of 2020 even without the potential listing, but that is still a long way above the its target of borrowings at a level of twice earnings.

While smart deals in Asia would benefit growth, anything that drives borrowings higher would be unwelcome. 

Operationally, AB InBev is going in the right direction. Organic volume growth of 1.3 percent in the first quarter was better than analysts had forecast. Its U.S. business seems to be finding a more-stable footing. The shares have nearly recovered last year's 38 percent decline.

But on a forward price earnings basis the company trades at a discount to both Heineken and Carlsberg. AB InBev's scale and superior operating margins mean it should be trading at a significant premium to rivals.

Greater progress on deleveraging is crucial to narrowing the gap. If the brewer can do this while consolidating in Asia, even better. But if not, it had better be prepared to let its glittering prize slip from its grasp.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2019 Bloomberg L.P.