Having failed to launch an IPO for its Asian brewing business and needing to reduce its mountain of debt quickly, Anheuser-Busch InBev (NYSE:BUD) announced it was selling its Australian subsidiary, Carlton & United Breweries, to Japan's Asahi Group (OTC:ASBRF) for $11.3 billion.
Although asset sales were the less optimal choice for the brewer, it indicates Anheuser-Busch is serious about getting its debt levels under control sooner rather than later.
Resorting to Plan B
Anheuser-Busch accumulated over $100 billion in debt as a result of purchasing SABMiller in 2016, and though it made it even more of a global brewing powerhouse, beer sales are slowing in the U.S. and other prominent markets. Selling the Australian business, which was a slower-growing segment of the Budweiser Brewing Company APAC business it tried to spin out, gives the brewer a good start on reducing its obligations, but also allows it to have a second bite at the IPO apple.
Major investors were reportedly leery about the valuation Anheuser-Busch was assigning the Asian business. At an offering price between 40 and 47 Hong Kong dollars (between $5 and $6), the IPO would have valued Budweiser Brewing at nearly $64 billion, a price too rich for people to pay. By carving out the slow-growing Carlton business, the remaining assets may look more attractive to investors in a subsequent, revalued offering.
In a statement announcing the divestiture, the brewer said, "AB InBev continues to believe in the strategic rationale of a potential offering of a minority stake of Budweiser Brewing Company APAC Limited (Budweiser APAC), excluding Australia, provided that it can be completed at the right valuation."
While Anheuser-Busch viewed Carlton & United Breweries as an anchor dragging on its growth plans, Asahi sees it becoming one of its "core pillars" of opportunity, along with its Japanese and European units. It will receive Carlton's beer and cider business as well as getting a perpetual license to sell A-B InBev's portfolio of brands in Australia.
A known quantity
Anheuser-Busch acquired Carlton & United Breweries when it purchased Miller, an acquisition that was more focused on Miller's access to markets such as South Africa and Latin America. A-B was willing to let other, smaller parts of its business go in an effort to appease regulators' concerns with antitrust issues and the megabrewer's global dominance (it controls one-third of the world's beer production).
Both Anheuser-Busch and Miller made deals with Asahi to get the transaction through. A-B sold to Asahi a collection of Central and Eastern European brands including the Czech beer Pilsner Urquell, Poland's Tyskie and Lecher, and Hungary's Dreier brand, while Miller sold the Japanese brewer its Peroni label from Italy and Grolsch from The Netherlands.
Anheuser-Busch's problem is that many of the markets it was looking to for growth are now experiencing substantial economic upheaval, particularly South Africa, Argentina, and Brazil. Currency exchange rates have also weakened returns from emerging markets, with the brewer reporting its $12.6 billion in first-quarter revenue suffered a $1 billion impact due to currency translation effects in South America.
By all means necessary
Getting its debt load under control is crucial for Anheuser-Busch. Last year, ratings agency Moody's cut the brewer's credit rating to just above junk territory, and it has promised to look at downgrading it further if A-B doesn't improve its debt-to-EBITDA ratio.
Although Anheuser-Busch slashed its dividend in half to raise $4 billion to apply to its debt, and the current asset sale will raise another $11 billion, the brewer's debt levels will still be around four times EBITDA, which is twice what it considers optimal.
This won't be the last transaction Anheuser-Busch makes. The Wall Street Journal previously reported the brewer was looking at selling other business units in South Korea and Central America, and as noted above, it still has its eye on an IPO if it can get the right price.
Anheuser-Busch InBev's debt monster threatens to overwhelm it if not significantly reduced, particularly with beer consumption is falling in many markets. It's clear we won't see any transformational acquisitions in the near future, since asset sales are likely to be the primary transactions the brewer makes.