February 27, 2020 / 5:45 AM / in a month

Breakingviews - Budweiser gets a bitter taste of breakups

A can of Budweiser Prohibition Brew, a non-alcoholic beer, is seen in Toronto, Ontario, Canada June 23, 2016. Picture taken June 23, 2016. REUTERS/Chris Helgren/File Photo

HONG KONG (Reuters Breakingviews) - Anheuser-Busch InBev’s breakup is leaving an unexpectedly bitter aftertaste. The Belgian brewer’s recently separated Asia Pacific business expects the coronavirus to lop $170 million off normalised EBITDA from China in January and February. There’s a price to pay for corporate sprawl, but a narrower focus brings its own risks.

The beer behemoth led by Carlos Brito listed Budweiser Brewing Company APAC in Hong Kong in September at HK$27 a share, giving it an enterprise value of $45 billion. Even before the Covid-19 outbreak, there were lingering concerns about the potential growth from selling Stella Artois and the unfortunately named Corona as upmarket brands to Asia’s emerging middle class. By the end of the year, the stock was trading just below its debut price.

Middling full-year results released on Thursday won’t help. Budweiser Brewing’s revenue increased just 1.8% from 2018, hampered by lower sales in bars and clubs in China and competitive pressure in South Korea. The real concern comes from the coronavirus, though.

Containment efforts on the mainland have prevented people from going out to their regular watering holes and restaurants. Budweiser itself is also the biggest seller in Hubei, where the outbreak began, with 40% of the market, according to Jefferies analysts. Though other factories are finally reopening, one in Wuhan, Hubei’s capital, remains closed.

The lost EBITDA, assuming it isn’t recaptured later in the year in a post-containment recovery, equates to some $3.1 billion of enterprise value, based on the roughly 18 times multiple for 2020 at which it trades. That’s before factoring in the impact on Japan, South Korea and Southeast Asia, where Covid-19 is causing problems, too. And there could yet be more financial damage to come out of China.

Conglomerate discounts exist for good reason. The various parts of a corporate empire don’t often fit together, and sluggish pieces weigh down faster-growing ones. It’s one reason AB InBev carved up the company, and why investors pushed it to shrink even further by offloading the Australian business before supporting the Asia Pacific listing. By creating a standalone regional operator, though, Budweiser’s concentration risk has now been exposed by the outbreak. In time, the benefits should materialise but for now that’s ice-cold comfort.


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