Anheuser-Busch InBev's (BUD 3.58%) acquisition strategy has not produced the results management had been hoping for, a fact that has weighed heavily on more recent decisions, and clouded the megabrewer's thinking in regards to the true value of its beer portfolio. On Friday, it cancelled the planned initial public offering of its Asian unit, and though executives cited unfavorable market conditions as the reason, the problems really stem from Anheuser-Busch's earlier moves to buy up the competition.
A heavy debt load
The brewer's 2016 acquisition of SABMiller boosted its debt load to over $100 billion, a figure it has struggled to knock down ever since. Last year, it slashed its dividend in half to save $4 billion that it could apply to its debt; the now-cancelled IPO of Budweiser Brewing Company APAC was supposed to raise $9.8 billion, at least a portion of which would have likewise gone to debt service.
Image source: Anheuser-Busch InBev.
The megabrewer says that under its optimal capital structure, it would have net debt of around twice its earnings before interest, taxes, depreciation, and amortization (EBITDA), but it doesn't foresee getting that figure below four times EBITDA until the end of 2020. Moreover, although the IPO would have helped accelerate the deleveraging, it says it wouldn't have made an appreciable difference in its efforts to lighten the load.
This all creates additional risk for the brewer. Bond credit rating service Moody's cut Anheuser-Busch's rating to just above junk status last December. If its net debt isn't reduced below 4.5 times EBITDA within two years, Moody's will consider dumping Anheuser-Busch's credit into junk territory, which would raise its costs and possibly create problems with other covenants it has.
Misreading the market
The listing of AB-InBev's Asian unit would have been the world's largest IPO this year. Management had hoped to sell 1.6 billion shares at an offering price of between 40 Hong Kong dollars and 47 Hong Kong dollars (between $5 and $6) each, a transaction that would have valued Budweiser Brewing at nearly $64 billion.
But large investors didn't want to pony up for the IPO, and only offered to buy in at prices well below that range. Because Anheuser-Busch was apparently overconfident, it didn't bother to disclose that key buyers might not agree the stock was worth a valuation in the range of 30 times the unit's consensus 2020 earnings.
Unfortunately, listings in Hong Kong are required to warn investors of such a possibility, otherwise the company may not accept any offers more than 10% below the listing price. As a result, Anheuser-Busch was forced to stick with its original price range, and found few takers, causing it to withdraw the listing.
Many options, few good
Although the megabrewer is the largest foreign brewer in China (a fact that might have contributed to its delusions of grandeur), other brewers like Heineken, which has partnered with government-owned China Resources Beer, have better growth prospects in Asia than Budweiser Brewing.
Just as in the U.S., consumer drinking preferences in China are changing, with a shift toward craft brews and cocktails, and away from mass-produced beer. Yet overall beer consumption is also falling: Analysts expect it to account for just 26% of total alcohol consumption in China by 2023, down from 30% today.
So Anheuser-Busch must now come up with a new way to kick-start its debt reduction strategy, and the options open to it aren't necessarily attractive.
While the brewer could make another IPO attempt, having failed once, it would be hard-pressed to command the sort of premium it was hoping for this time. Cutting costs further is an option, but that might inhibit its ability to grow just as it is trying to expand in Asia.
Analysts also think it possible the AB-InBev could sell off assets, including parts of the Asian unit, but that would have the same effect of limiting its growth potential. A second dividend cut could save it billions more, though that would undoubtedly cause the stock to plunge, especially coming so soon after the last cut.
Resilient, but for how long?
Anheuser-Busch badly misjudged the market's desire for a chance to invest in its portfolio of beer in Asia. Now, it finds itself in the difficult position of needing to come up with other ways to whittle down its debt. Investors, though, don't seem particularly worried, perhaps because it has exhibited earnings strength this year after a terrible 2018.
However, acquiring the competition was supposed to fuel the brewer's growth. Instead, that strategy may have proven too aggressive, leaving AB-InBev today facing some unappealing choices.
