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Morningstar | ABI Pulls Asia IPO as Investors Balk at Rich Valuation

AB InBev pulled its planned IPO of its Asia business, blaming "prevailing market conditions" for its decision. This is clearly a setback for shareholders, hoping the company would accelerate its balance sheet deleveraging, but we applaud management for holding out for a value-creating price. As we had not adjusted our valuation for the potential IPO, we reiterate our $126 fair value estimate for the ADRs.

It seems unlikely AB InBev will revisit the planned IPO soon because it is difficult to see what would change investors' minds on the valuation. In our initial valuation estimate, we estimated  a potential value of the Asia business at $45 billion to $50 billion, or 14 times to 15 times our estimate of regional 2019 EBITDA. AB InBev's targeted range was about 20% above that estimate, in spite of the recent slowdown in the Chinese economy. Management was within its right to try take advantage of market highs to realize a value-creative price, but in the absence of a surge in IPO demand, we think investors are unlikely to succumb to this rich valuation.

Nevertheless, the cancellation of the issue will be disappointing to shareholders. We estimate it would have allowed the parent company to lower its mammoth debt position, which was over $100 billion at the end of the last fiscal year, representing net debt/EBITDA of 4.8 times, and would have provided the company with a currency to make acquisitions in Asia. With markets in Southeast Asia growing in the mid-single-digit range, and others such as China continuing to premiumize, we think the region offers AB InBev with its next phase of growth, and we expect the firm to be acquisitive in the medium term. Even in the absence of an Asia IPO, we believe management's target of lowering net debt to EBITDA to below 4 times by the end of 2020 is achievable without a further dividend cut, assuming no significant new headwinds in core markets in the meantime.