AB Inbev: The plan B money raiser

The market applauded ABI’s Australian divestment ($11.3bn), and rightly so. AB Inbev reacted quickly after it failed to IPO its Asian unit as a way to contract its immense debt ($106bn). It may well be that this shift (i.e. keeping Asia) means potential investments in emerging markets to offset the lacklustre US.

AB Inbev announced on Friday, 19 July, the surprise divestment of its Australian unit for $11.3bn, i.e. $2-3bn higher than what it expected for its failing Asian IPO. We now understand better why the Belgian group proved so picky about the IPO’s price range…

The deal concerns the Australian assets and also allows the distribution and commercialisation of AB Inbev’s global and international brands in Australia. The finalisation, including regulatory approvals, is expected by the first quarter next year.

The stock’s reaction was strong (+5.54%), a measure of the market’s surprise at discovering a well prepared plan B. According to the company, the sale of Carton & United Breweries to the Japanese Asahi Group Holdings represents an implied multiple of 14.9× 2018 normalised EBITDA, higher than our estimations for the entire ABI Group (14.7x for FY18 and 13.3x for FY19) and for our brewers coverage (13.1x for FY19).

One word: deleveraging

CUBE’s sale will clearly help AB Inbev to chip away at its $106bn debt mountain. The company’s adjusted net debt/EBITDA stood at 5.03x in FY18, while we expected an improvement to 4.57x in FY19. Following the divestment, management reaffirmed its target of less than 4x by the end of 2020, while reiterating that reaching it does not depend on the completion of the Australian divestiture nor a possible partial IPO of its Asia-Pacific business.

Through this operation, we also see a likely preservation of its credit rating (BBB at AlphaValue), putting it in a better position to make small-scale acquisitions.

On the macro side, the pressure to deleverage had recently come down with the US Federal Reserve expected to lower interest rates. ABI could still benefit if the dollar begins to weaken.

Divest mature business to focus on growth

Australia actually made up the more mature side of Budweiser APAC, with higher margins but lower growth than the Chinese operation, consisting of the more highly valued growth business. The high valuation and divestment may be regarded as a strategic pivot for ABI with now a focus on growth markets rather than on immediate cash generation.

This observation, combined with the fact that ABI is sticking to its de-leverage targets, may imply confidence in near-term FCF generation. Further divestments should also be part of the strategy. We wouldn’t be surprised if the company considers the sale of its South Korea assets, as suggested by the FT.

Interestingly, the group has also affirmed that it continues to believe in the strategic rationale of a potential IPO for its minority stakes in Budweiser APAC, excluding Australia. A proper valuation may be reached eventually, which would be impressive.