Who Wants to Pick Up a $50 Billion Beer Giant’s Bar Tab?

(Bloomberg Opinion) -- This year’s biggest initial public offering since Uber is back on. Anheuser-Busch InBev NV is reviving plans for an IPO of Asian subsidiary Budweiser Brewing Company after the embarrassment of pulling the sale in July. The possible $5 billion listing has a better chance of success than last time, but investors still have a strong hand to push back on price.

The deal failed last time for two reasons. Its sheer size – seeking to sell almost $10 billion of stock – fell foul of basic laws of supply and demand. If AB InBev had to find a lot of buyers, it didn’t make its life easy by attempting to sell the stock at an expensive multiple of expected earnings.

The business is today smaller and more attractive. AB InBev wisely agreed to sell its low-growth Australian assets shortly before scrapping the listing. A clear majority of the Asian unit’s assets are now in fast-growing emerging markets, which makes a growth valuation is easier to justify. Meanwhile, the share prices of its listed peers have gone up. Moreover, AB InBev is cutting the offer size down. The supply-demand equation looks much easier to balance.

This doesn’t change the fact that AB InBev needs this deal to happen, and has a vested interest in the shares performing well after they list. The Australian sale helps alleviate AB InBev’s very high debt burden, expected to fall to 3.5 times Ebitda by the end of next year from 4.8 times Ebitda at the last assessment. That also gives the company a bit of headroom to raise debt for acquisitions. Even so, the main advantage of an Asian listing remains the creation of a currency for doing deals. Its performance after listing will be crucial to that currency being acceptable, or a useful way of printing money.

Shorn of Australia, the remaining business could deliver roughly $2.5 billion of Ebitda in 2020, according estimates from Bernstein research. Put that on 19 times, in line with Hong Kong-listed China Resources Beer Holdings Co. Ltd, and it suggests a trading value of around $50 billion, assuming negligible net debt.

Investors need to be aware that the company’s growth ambitions are likely to involve more deal-making in region, which brings with it the risk of overpaying for already expensive assets, and botched integrations. On the long view, AB InBev’s acquisition strategy has delivered good returns for investors – twice those of the Stoxx Europe 600 index over the last decade. Even so, caution – and a reasonable discount – is warranted.

To contact the editor responsible for this story: Stephanie Baker at stebaker@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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