Hong Kong suffered yet another blow in its attempt to attract big-ticket listings on its stock exchange this year after Anheuser-Busch InBev last week decided to pull the plug on the spinoff of its Asian business.
Similar to many withdrawn initial public offerings, the Belgian brewing giant released a statement claiming that the decision to cancel Budweiser APAC’s HK$76.4 billion ($9.8 billion) IPO, which could have been the world’s largest this year, was partly due to prevailing market conditions.
However, while market conditions may be partially to blame, the situation may have been avoided by better managing investor demand and pricing expectations.
In fact, the company has exaggerated the impact of market sentiment because the city’s benchmark index only retreated 1.5% during its book building exercise between July 2 and July 11.
After gauging investor interest for a week, AB InBev and its financial advisors genuinely believed there should have been sufficient demand to cover the IPO, sources familiar with the situation told FinanceAsia.
However, they also realise the fact that the offering was unlikely to be massively oversubscribed due to the sheer size of the deal and its aggressive pricing relative to other global brewers or food and beverage stocks.
Simply put, demand was seen to be marginally over the supply of shares at the current valuation level.
Budweiser APAC’s implied market cap of $56 billion to $65 billion equated to 28.5 times to 33.5 times its projected earnings next year, putting it at a premium to most top-tier breweries in the region.
On a price-to-earnings basis it was valued at a 130% premium to Japanese beer maker Asahi Group, 58% to Dutch beer giant Heineken and 43% to global brewer, Carlsberg. Valuation of the Asian business was also 73% richer than AB InBev itself, which was trading at about 19.4 times P/E on a rolling 12-month basis.
AB InBev’s deal advisors would have attracted more backup demand if it had adopted a less aggressive valuation and left more on the table for prospective investors. By pushing the limit, they risked failing on even the slightest reduction in investor demand, which unfortunately, became a reality.
It is worth noting that the advisors also appeared to be over-confident by launching the mega deal without any cornerstone investor, which would have given some indications to public investors as to how large institutions value the company.
The withdrawal of Budweiser APAC’s IPO is the second time this year that a billion-dollar listing was pulled in Hong Kong. Last month, Warburg Pincus-backed logistics giant ESR halted its $1.24 billion IPO after receiving a less than satisfactory response from public investors.
Underwriters of both ESR and Budweiser APAC sent out messages claiming that they had received sufficient demand before their deals were ultimately pulled. This move suggests a lack of quality investors, instead of insufficient orders, was the main reason behind both decisions to hold off on these deals.
Budweiser APAC’s flop is a timely reminder to deal advisors that they need to collect more orders instead of just filing the order book. That is particularly needed for mega deals because underwriters would find it hard to replace large orders that were being withdrawn, at the last minute.
For many years, valuations of Hong Kong IPOs have been distorted by large cornerstone investors investing for personal, and business relationships, instead of capital gains.
While the practice of filling IPOs with cornerstone investors is now becoming less common, the aggressiveness of issuers and advisors should be kept in check.
After all, they might not only risk their own deals, but also Hong Kong’s reputation as a top listing destination for global firms as well.