By Geoffrey Smith
Investing.com -- If you believe that the IPO market is a decent indicator of overall market health, then you are probably a little worried this morning.
Anheuser Busch Inbev (BR:ABI), the world’s biggest brewer, scrapped what would have been the year’s biggest initial public offering to date over the weekend, the $8 billion partial spin-off of its Asian business, citing “adverse market conditions.”
It’s the second big deal in a matter of days to be pulled, after insurance giant Swiss Re (SIX:SRENH) pulled the listing of its U.K. business ReAssure, which was supposed to raise over $3.5 billion. Like the multinational brewer, Swiss Re also blamed “heightened caution and weak underlying demand.”
The two businesses have little in common, whether sectorally, cyclically or geographically. One is a mature U.K.-focused business – arguably a declining one - that revolves around interest rates and longevity, and the other is a punt on the Chinese middle class’s developing taste for beer. So to see them using near-identical language for their decisions should raise an eyebrow or two.
AB Inbev looks likely to face more scrutiny in the near term, as the failure is another negative judgment by the market on the merger, agreed in 2015, of AB InBev and SAB Miller. That deal, which saddled the merged company with one of the world’s biggest debt loads, has failed to generate the rewards it promised: the stock is down nearly 30% from when it was agreed, a period in which rivals such as Carlsberg (CSE:CARLa), Constellation Brands (NYSE:STZ) and Heineken (AS:HEIN) have risen by between a third and a half.
AB Inbev fell 1.6% in early trading on Monday in Europe, a morning when almost all European and Asian markets were higher, profiting from some better-than-expected Chinese data on industrial production and retail sales. The Stoxx 600 was flat at 386.12, while Germany’s Dax was up 0.2% and the FTSE 100 was largely unchanged.
It isn’t unusual for buyers and sellers to vary in their opinion of what a business is worth, of course, but it’s always more difficult when the seller’s idea of the right price is colored by the price of a previous deal which looks, in retrospect, unrealistic.
That said, AB Inbev’s management may yet have the last laugh. The company’s profitability depends a lot on the exchange rate, given that most of its $110 billion debt load is denominated in dollars, and the bulk of its sales come from emerging markets. With the Federal Reserve now in easing mode and emerging market currencies strengthening (South Africa, one of the group’s most important emerging markets, saw its currency test a five-month high on the back of the Chinese data), that debt burden will be easier to shoulder.
But while that would vindicate AB Inbev’s management on the narrower question of timing, it still leaves them with a mountain to climb in delivering their long-term promises.