AB InBev: no mugs
IPO of Asian business will help the brewer deal with its bloated balance sheet
Beer drinkers are maligned as overweight guzzlers. In the case of AB InBev, the brewer needs to shed some weight. A balance sheet has been bloated with successive acquisitions. Debt ballooned to €100bn. AB InBev’s market value has waddled downhill ever since the October 2016 SABMiller deal. A change of diet is prescribed, more equity and less debt.
On Friday, reports surfaced that AB InBev could list its Asian business. This region has proven that the brewer’s premiumisation strategy can work well. China has the world’s largest beer market. Introducing SAB brands such as Budweiser and Corona into the Chinese market has meant operating margins for the group in Asia should exceed 27 per cent in 2018, according to Bernstein estimates, double that of three years ago. Chinese beer makers, such as China Resources Beer, Beijing Yanjing and Tsingtao, manage less than a third of that.
As such if AB InBev did list its Asian unit, its valuation should exceed its domestic rivals. Initial reports of a $70bn (€60bn) valuation appear frothy, though. Using analyst estimates of its Asian ebitda (a cash flow proxy), and a multiple of 14 times, comfortably above those of domestic rivals, produces a value of €40bn.
That sounds a big number, a third of its market capitalisation. No wonder its shares jumped after the news. But how much equity is raised matters most to shareholders warily eyeing a net debt to ebitda ratio pushing 5 times. Whatever the amount — perhaps $10bn — that is peanuts compared with its debt load. Moreover, AB InBev will soon have to deal with the entry of Heineken to China this year. The Dutch brewer bought a large minority stake in CR Beer last year.
AB InBev is a heavyweight. Its well-received bond issuance, lengthening maturities not adding to the load, underscores this. Annual free cash flow of over €10bn (before dividends) still means it will need years to trim its balance sheet. An Asian IPO can help accelerate this process.