Budweiser’s Asian IPO Passes the Taste Test

(Bloomberg Opinion) -- Anheuser-Busch InBev NV’s Asian business has a potent brew to offer investors.

Budweiser Brewing Company APAC Ltd. filed on Friday to sell shares in Hong Kong, in what may be the city’s biggest initial public offering of the year. AB InBev is targeting a July listing for the unit that could raise at least $5 billion, Crystal Tse and Daniela Wei of Bloomberg News reported, citing people familiar with the matter.

Partakers will get a share of a business that has a lock on the most lucrative segment of the world’s biggest beer market, China, as well as ranking first in its next two biggest markets: Australia and South Korea. That’s helped to make Budweiser Brewing the region’s biggest beer seller and a highly profitable operation.

All beers aren’t created equal in China. At one end of the market, some brands are so low-margin that in the recent past they could be cheaper than water. Premium brands, on the other hand, can be big money-spinners — and Budweiser Brewing’s namesake beer is considered a high-end brand in China. AB InBev sells more Budweiser in China than in the U.S. these days.

By volume, the country’s top-selling brand is Snow, made by China Resources Beer Holdings Co. By value, though, Budweiser Brewing leads. In the premium and super-premium segment, the AB InBev unit has 46.6 percent of the market, more than triple the share of its nearest rival, Tsingtao Brewery Co.

Budweiser’s Asian IPO Passes the Taste Test

Super-premium beer in China sells for 11.6 times the price of “value” beer, compared with 6.1 times in India and 1.6 times in Australia, according to Budweiser Brewing’s IPO filing. Rising incomes are spurring demand for expensive foreign brews among China’s urban consumers. Besides the iconic American brand, the company’s stable of premium beers includes Stella Artois, Corona and Hoegaarden.

That’s helped translate into an operating profit margin of 33 percent for 2018, based on normalized earnings before interest, tax, depreciation and amortization. China Resources Beer had an Ebitda margin of 12.5 percent last year and Tsingtao’s was 12.4 percent, according to data compiled by Bloomberg.

A key motivation for the listing is to help AB InBev reduce its $110 billion debt pile. Investors in Budweiser Brewing will hold shares in a less leveraged business that’s in a faster-growing region. The unit had total debt of $2.75 billion as of March 31 and a ratio of net debt to normalized Ebitda of 0.3 at the end of last year, according to the filing. Parent AB InBev had net debt equal to 4.8 times Ebitda as of Dec. 31, Bloomberg-compiled data show.

As a listed company, Budweiser Brewing will also gain an acquisition currency for expansion. It may need it. Competition in China is increasing, after Heineken NV struck a $3.1 billion partnership deal with China Resources Beer in October. Changing consumer tastes are also a perennial threat: The AB InBev unit has been buying up local craft brewers that are gaining popularity among younger drinkers.

Budweiser’s Asian IPO Passes the Taste Test

That’s also a factor in Australia, where lower- and no-alcohol beers may help to combat the trend of “mindful drinking” that’s caused consumption in the U.S. to decline. Australia, where Budweiser Brewing’s brands include Victoria Bitter, is an outsize profit contributor, yielding 20 percent of the company’s 2018 revenue but 31 percent of Ebit, according to research from Sanford C. Bernstein & Co.

The company may want to bulk up in Southeast Asia, where populations are young and consumption is rising. The challenge will be getting its hands on the strongest brands. Take Vietnam, where Budweiser Brewing’s market share is less than 1% and Saigon Beer Alcohol Beverage Corp. is the biggest brewer. Offering Thai tycoon Charoen Sirivadhanabhakdi equity in Budweiser Brewing in exchange for his Sabeco stake may prove more alluring than cash. A similar deal could work for San Miguel Corp.’s beer operations in the Philippines.

The biggest threat to the IPO may be the trade war. Selling America’s most famous beer brand may be less of an asset if relations between China and the U.S. continue to worsen. Any change in U.S. policy that causes partners to limit their trade with the U.S. could have a “material adverse effect on our business,” Budweiser Brewing notes. A cooling global IPO market could also undermine demand for the sale, after Uber Technologies Inc. flopped on its New York trading debut last Friday.

For now, though, AB InBev’s Asian glass is looking half full.

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

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2019 Bloomberg L.P.

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