AB Inbev Pushes Its Luck with $64 Billion IPO

(Bloomberg Opinion) -- Anheuser-Busch InBev NV is pushing its luck as it prepares to sell shares of its Asian business in what may be the region's biggest initial public offering this year. At as much as $64 billion, the brewer's valuation of the operation will certainly test investors' thirst for a taste of the Chinese brewing market.

Carving out Budweiser Brewing Co. APAC Ltd., as the business is known, makes sense. Analysts reckon AB InBev's market capitalization doesn't reflect the division's full value. A listing should attract a dedicated following and, hopefully, a higher valuation from investors. Above all, selling a stake on the stock market would raise cash: the brewer needs to cut net debt – which stands at almost five times Ebitda – following its 2016 takeover of rival SABMiller.

It looks likely that BBC APAC would go public with negligible borrowings. Net debt fell from $1.5 billion to $819 million last year. In that case, the valuation at the top end of the mooted range would equate to 22 times the business's Ebitda for 2019 as estimated by analysts at Jefferies. A strong performance this year, would change matters. But as things stand, the valuation looks punchy.

BBC APAC runs at two speeds: A sparkling west Asian side, which includes China, and a less bubbly east Asian business comprising Australia, Japan and South Korea. Each arm contributed roughly equal amounts of Ebitda last year.

Valuing the more mature eastern side, whose Ebitda is increasing organically at 3% annually, is relatively easy. Jefferies puts the figure at about 10 times Ebitda, implying a valuation of roughly $15 billion, which feels about right. Asahi Group Holdings, Kirin Holdings Co. Ltd. and Sapporo Holdings Ltd. trade on an average of 11 times.

The argument will be over the right number for the faster-growing piece. There, organic Ebitda growth was 23% last year. To justify the highest price AB Inbev is putting on the whole business would mean valuing that bit at about $49 billion – or almost 30 times estimated Ebitda.

Only a handful of brewers in emerging markets command such a steep valuation – think of India's United Breweries Ltd. Pricing comparably looks ambitious.

The political turmoil in Hong Kong adds uncertainty. That said, Asian IPOs have performed relatively well in 2019, which tends to fuel further demand.

The saving grace is that the company will offer singular exposure to the expansion of the Chinese brewing market in a very liquid stock. By the same token, BBC APAC will have both the paper currency and the balance sheet to attempt M&A in the region. Even so, investors should be wary of pricing in those benefits before they have been realized.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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