Something is very, very broken in the market.
On the day, the S&P levitated above 3,000 and hits a new all time high, with Dow 30,000 now within shouting distance, on Friday afternoon, the world’s largest brewer, Anheuser-Busch InBev, scrapped plans to sell up to $9.8bn in shares in its Asian business - in what would have been the year's biggest IPO - as a result of, wait for it, weak investor appetite at the stated price range.
In a statement from AB InBev - which had been seeking to sell a minority stake in Budweiser APAC which markets 50 brands including Budweiser and Stella Artois in China, Australia, South Korea and Vietnam - the company said that, "at this time" it was "not proceeding with this transaction" primarily due to "prevailing market conditions."
It was unclear just what those conditions were - the S&P500 hitting the highest level in the history of mankind perhaps? What is even more bizarre is that as far back as Monday, Reuters reported that the IPO was already “very well” oversubscribed. It appears someone was lying.
The deal was expected to surpass Uber as the biggest IPO of 2019, and bizarrely follows the decision this week by Swiss Re to pull the £3bn IPO of ReAssure, its UK life insurance business, which also blamed weak investor demand; that deal would have been the biggest IPO in the UK this year.
As the FT explains, "the listing was crucial to AB InBev’s effort to repair its balance sheet after an acquisition spree that saw its debt rise to more than $100bn. By listing its Asian business, the brewer hoped it could entice investors with the faster growing side of its business and use the listed company as a vehicle to acquire regional rivals."
Alas it was not meant to be.
“The Budweiser offering came at a time when the interbank interest rate had risen to the highest in a decade. This has made many investors reluctant to borrow money from stockbrokers to subscribe to the stocks. Many investors are only using cash to subscribe to the Budweiser IPO, which has cut down the leverage,” said Louis Tse Ming-kwong, VC Asset Management’s managing director.
AB InBev was seeking to sell 1.6 BN primary shares in a deal that would have valued the business at between $54.2bn and $63.7bn. The co-sponsors for the IPO were JPMorgan Chase and Morgan Stanley. Yet not even they could convince enough buyers. Which, of course with stocks at all time highs, is beyond bizarre, as one would imagine that if there is buyer froth, it is now... and if that's not the case, then the question of just who is buying stocks here looms more than just a humorous placeholder: if it is not investors, and if investors have no appetite for stocks, then who keeps on buying the market to ever recorder highs?
“Investors are getting more cautious,” said Jim Paulsen, chief investment strategist of The Leuthold Group. “Investors are exhibiting risk-off behaviour, buying defensive stocks and starting to reduce equity allocations — IPOs don’t fit into that.”
Just don't tell that to the talking heads on CNBC... or the president, of course.
“Given the high valuations and growing concerns about recession risk, companies are thinking if we don’t list now it might be too late,” Paulsen said. “But for investors there is more caution in the market now.”
Ahead of the IPO deal, at least some analysts - certainly not the underwriters - had questioned whether the company was seeking too rich a price for its shares. Jefferies and Bernstein Research, which are not involved, said it was only worth $45bn to $55bn.
Bernstein analysts wrote last week that they saw “limited value upside even at the bottom of the range” that AB InBev had set, implying that the initial pricing was a stretch. In a poll Bernstein conducted among investors, it found “peak appetite” from respondents came in at HK$38 to HK$40 per share, 2 per cent below the bottom end of the proposed pricing range.
Carlos Brito, AB InBev’s chief executive, told the Financial Times in an interview in late June that he would only move ahead with the share sale if the terms were good for the company.
When asked the $6.4 billion question - why he would want to sell a chunk of business in what has been the company’s fastest-growing region, he responded: “We’re not giving away anything. If we do it, we are only going to do it if the price is right and if the market prevailing conditions are right.”
And as it turned out, the company ultimately decided to wait for even better market conditions, although how one can beat "conditions" where the market is hitting all time highs on a daily basis, we can't even guess. Unless, of course, the market levitation observed in the past few weeks is just as fake and artificial as virtually everything else in the "new abnormal."