Anheuser-Busch Inbev’s Withdrawn Asian IPO

Anheuser-Busch Inbev planned an IPO for its Asian subsidiary, Budweiser Brewing Co. APAC Ltd., that was shelved by Anheuser-Busch’s management team after it appeared that the company would be unable to fetch a high enough price for its IPO. 

There are two reasons why the initial public offering did not come to fruition and had to get tabled. 

First, Anheuser-Busch priced the IPO at a lofty valuation. It wanted to price its IPO between 40 and 47 Hong Kong dollars (which is about $5 or $6 in US dollars) and sell about 1.5 billion shares for an IPO in the range of $8.3 billion to $9.8 billion. This was ambitious pricing, to say the least, because Budweiser’s Asian units only generate $323 million in net profit so the valuation was approximately 30x earnings. Based upon investor presentations, the five-year growth rate for Budweiser’s Asian brewing arm is 5.5% annual earnings per share growth. This is steady, but not worthy of a 30x price valuation.

In addition, Anheuser-Busch left out what are called “cornerstone investors”, or institutional investors in Hong Kong that agree to purchase a fixed amount of an initial public offering. In these types of arrangement, the company conducting the IPO benefits from cornerstone investors because a fixed supply of the IPO is already allotted, and with a smaller remaining supply of shares available, investor demand on the day of the IPO may appear to have increased because a smaller proportion of shares are available. In return, the cornerstone investor benefits because it usually secures rock-bottom pricing, i.e. it would have the guarantee to only pay 40 Hong Kong dollars for its shares, so it would capture the full benefit of any success coming out of the offering. 

In this particular case, Anheuser-Busch declined to use cornerstone investors on the basis that it did not want to commit to such a high fixed percentage of the shares only selling for 40 Hong Kong dollars. Unfortunately, without any portion of the share demand absorbed by institutional resources with vast supplies of ready cash, the demand heading into the IPO proved weak and it became clear that Anheuser-Busch would not be able to sell as many shares as it intended to sell, even at the price of 40 Hong Kong dollars per share.

Usually, when a company withdraws its IPO, it is often described as a “failure.” While it is true that withdrawn IPOs do involve unmet initial expectations, I think it misrepresents the nature of a business to the extent that there is an inference or suggestion that the company pursuing the IPO is damaged goods.

Anheuser-Busch’s IPO of its Asian subsidiary could have occurred if it involved cornerstone investors at 40 Hong Kong dollars per share or if priced the IPO at 20x earnings without cornerstone investors. The withdrawal is the result of Anheuser-Busch’s insistence on a P/E ratio valuation of 30x earnings for its IPO and its corresponding refusal to waive that valuation for any prospective institutional purchaser of the stock. 

Personally, I had been watching this IPO ever since its announcement, and as I followed stories about Anheuser-Busch’s management’s refusal to participate in granting the typical price concessions to institutional investors, I put this subsidiary IPO on the top of my watch list because I thought that there was a realistic possibility the Asian subsidiary would fall in price quickly and provide a good entry point for investors to pick up shares in a unique asset. 

Unfortunately, the crystal ball became too clear, and Anheuser-Busch pulled the IPO. But the real story is a function of lofty pricing, a failure to woo institutional investors, all amid the backdrop of Anheuser-Busch carrying on too much debt such that these types of IPOs are even necessary in the first place. But the underlying Asian brewing facilities and collection of AB Inbev brands operating in the region are better than the superficial conclusions about the withdrawal of the IPO suggest. 

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