Reluctance to accept AB InBev's high valuations doomed Budweiser APAC's IPO of up to $9.8 billion - poised to be the world's biggest this year - investors and bankers said, putting would-be floats on notice that careful pricing remains key to deal success.
Anheuser Busch InBev NV (AB InBev), the world's largest brewer, dramatically shelved the initial public offering (IPO) of its Asian business on Friday, citing market conditions among other factors. After a week-long global roadshow, the shares had been due to price in New York on Thursday evening and to begin trading in Hong Kong later this week.
The deal was expected to raise $8.3 billion to $9.8 billion for AB InBev, helping the heavily indebted brewer reduce its leverage, and giving Budweiser APAC a market capitalisation of $54 billion to $64 billion.
Sources involved in the deal said investors were unwilling to accept AB InBev's valuations for Budweiser APAC. Another source added that the reluctance led to weak orders from top-class U.S. "long only" fund managers - prized as long-term investors - who had been expected to place big orders.
"The Company and banks all counted on long-onlys to make big orders," said one source involved in the deal, who was not authorised to speak publicly on the matter and so declined to be identified. "Many long-onlys got cold feet and didn't show up on the last day as expected."
Representatives for Budweiser APAC declined to comment. Brussels-based AB InBev did not immediately respond to a request for comment. Morgan Stanley and JPMorgan, the two lead banks on the deal, declined to comment.
Observers noted however that markets are currently buoyant. Last week the S&P 500 closed above 3,000 for the first time - up 20% this year - while in Hong Kong the blue-chip Hang Seng Index has gained 10% this year.
"This is likely a case of valuation push-back, not market conditions," said Kathleen Smith, founding principal at Renaissance Capital, a U.S.-based research firm and manager of IPO-focused exchange-traded funds, who noted that returns from IPOs had generally been strong this year.
"If these returns were negative, that would be a sign that market conditions are an issue in getting IPOs done. For now I would say we have an operating IPO market with cautious investors - that's a good balance: not too hot, not too cold," she added.
With the notable exceptions of ride-hailing companies Uber Technologies Inc and Lyft Inc, which are trading below their issue prices, more than three-quarters of big IPOs in New York have produced gains for investors, according to data from Dealogic.
In Hong Kong, eight of the top 20 deals are trading higher including the city's biggest this year, Hansoh Pharmaceutical Group Co Ltd which is up 68%.
The failed float came just a day after Swiss Re AG pulled the $4.1 billion IPO in London of British life insurer ReAssure, citing weak demand from institutional investors.
"If investors are being disciplined on a deal, it often doesn't bode well for the after-market performance," said one London-based equity capital markets banker not involved in the Budweiser APAC deal. "It's a really tricky market at the moment and you'll notice that almost all the deals that priced at the bottom of the range this year have traded down."
AB InBev's pricing valued its Asian business at 16 to 18 times its expected enterprise value (EV) relative to its expected EBITDA - earnings before interest, tax, depreciation and amortisation - in 2020, according to sources involved in the deal.
EV/EBITDA is used to help investors compare companies' operating performance by stripping out the effects of different financing costs.
While ratios are also affected by a company's location, Budweiser APAC's range compared with a ratio of 11 for both parent AB InBev and for Japan's Kirin Holdings Co Ltd, another Asia-centric beverage group, according to Refinitiv Eikon data. Chinese brewers are rated more highly, with Tsingtao Brewery Co Ltd trading at 14 times and China Resources Beer Holdings Co Ltd at 19 times EV/EBITDA.
Analysts at Bernstein last week described the company as a "high-quality asset", but estimated the shares only offered 6% upside to IPO investors, even at the low end of its price range.
Hong Kong Blow
The shelved Budweiser APAC deal is also a blow to Hong Kong Exchanges & Clearing Ltd, the city's bourse operator, which is lagging behind its New York rivals in the annual battle to be the leading global listings venue.
Last month, logistics real estate developer ESR Cayman Ltd shelved a Hong Kong IPO of up to $1.24 billion - then the city's largest this year. That too was due to weak investor interest because of its aggressive valuation, according to two sources involved.
The failed deal also comes as the exchange has been working to align its IPO rules more closely with its global rivals.
The city last year allowed biotech companies without revenue float in an overhaul that also for the first time accepted companies with weighted voting rights.
It is also seeking to shorten the five days currently needed between pricing and trading an IPO - in New York, the two happen within 24 hours - which has long been a source of concern for bankers and investors worried about market moves in the intervening period.
Also, unlike New York, where companies can raise or lower their guided price range for IPOs, in Hong Kong they can only lower the range by as much as 10% - and only with notice that was not given in the Budweiser APAC case.
Sources involved in the deal said AB InBev decided not to make use of that option.