January 14, 2019 / 5:52 AM / 10 days ago

Breakingviews - AB InBev’s Asia sale needs breathalyser test

A bartender drafts a glass of beer at Plzensky Prazdroj (Pilsner Urquell) brewery in Plzen, Czech Republic, November 12, 2015. Anheuser-Busch InBev, the world's biggest brewer, launched its $100 billion-plus offer for nearest rival SABMiller on Wednesday and agreed to sell the latter's stake in U.S. venture MillerCoors to help win regulatory approval. The merger will combine AB InBev's Budweiser, Stella Artois and Corona brands with SABMiller's Peroni, Grolsch and Pilsner Urquell and brew almost a third of the world's beer. REUTERS/David W Cerny

HONG KONG (Reuters Breakingviews) - Anheuser-Busch InBev executives who hope for a $70 billion valuation for their Asia business deserve to have their breath tested. The Belgian brewer is considering an initial public offering of part of the unit, Reuters reported on Friday. The region is a fast-growing jewel in AB InBev’s crown, but it faces stiff competition in China, and has struggled in India and Southeast Asia. That makes the mooted price tag tough to swallow.

The Budweiser brewer, having run up $100 billion in debt, needs to detox. A multibillion-dollar Hong Kong listing of its Asian operations would help ease the burden, while giving investors a slice of its fastest-growing business after Latin America. The company is the leading premium brewer in China, where consumers drink more Budweiser than those in the United States, according to Rabobank research. As of June 2018 the company boasted a stellar 35 percent EBITDA margin.

The unit is expected to earn $3 billion this year before interest, taxes, depreciation and amortisation, according to Bernstein. One third of that will come from developing markets like China and India, and the rest from mature markets like Australia and South Korea, the research outfit reckons. However, while AB InBev leads in China’s premium segment, it faces stiff competition from China Resources Beer, which took control of Heineken’s China business in August and aspires to become the premium market leader.

AB InBev also lags in Southeast Asia’s two most promising markets. In Thailand, Heineken is the clear market leader in the premium beer segment, with a roughly 4 percent share as of 2017, according to Euromonitor; AB InBev has yet to break into the top 10. Heineken also dominates in Vietnam, with a 22 percent share, versus AB InBev’s 0.5 percent. AB InBev owns roughly 20 percent of the Indian market, but that region poses challenges. Consumers there tend to drink in moderation, and prefer spirits to beer. Brewers are also grappling with a price-fixing probe.

This makes the roughly $70 billion valuation, reported by Bloomberg, hard to justify. The price is equivalent to 23 times expected 2018 EBITDA; CR Beer trades closer to 15 times. Those inclined to pay that much should take off the beer goggles.

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