The world’s biggest brewer may be calling time on a long-established practice in Hong Kong’s stock market.
The Asian unit of Anheuser-Busch InBev NV is aiming to raise as much as $9.8 billion in what’s poised to be the world’s biggest initial public offering so far this year. Unusually for a deal of this size, the company doesn’t plan to reserve a block of stock for so-called cornerstone investors. That’s good news for potential subscribers concerned that the business may lose its fizz after listing.
Cornerstone investors are companies, institutions or wealthy individuals that commit to buying a chunk of stock at the IPO price and holding it for a minimum period, typically six months. The presence of such heavyweights helps to ensure the success of a sale by signaling confidence in the issuer’s prospects and enticing the wider investing public to climb on board.
Associated mostly with Chinese state-owned firms in recent years, cornerstones have a long pedigree in Hong Kong, with billionaire tycoons such as Li Ka-shing, the city’s richest man, and Lee Shau-kee frequently called on to provide a seal of approval for key IPOs.
The trouble with cornerstones is that they drain liquidity by tying up so much stock after listing. They’re disliked by bankers, lawyers, and some investors. It’s debatable whether they even serve companies, beyond the immediate objective getting their offerings through the gate. If trading proves moribund once they’ve joined the market, the end-game can be a withdrawal of the listing.
So market participants are watching Budweiser Brewing Company APAC Ltd. closely. The absence of cornerstones means there will be a battle of wills between believers who see the IPO as a chance to buy into a company in a high-growth region with a lock on China’s taste for premium beer, and skeptics who view the offering as overpriced. The valuation looks punchy, at 22 times estimated Ebitda for 2019 at the top of the mooted range, as my colleague Chris Hughes observed last week.
The distorting effect of cornerstone investors has arguably grown bigger as Hong Kong tycoons have taken a back seat and Chinese state-owned enterprises, which may have a less commercial rationale for such purchases, have increased their presence.
Out of 36 IPOs in the past five years that raised more than $1 billion, 33 had a cornerstone tranche, according to data compiled by Bloomberg. Postal Savings Bank of China Co., which raised $7.62 billion in 2016, sold almost 77% of its offering to cornerstones including China Great Wall Asset Management, China State Grid Corp. of China, and conglomerate HNA Group Co.
All the top 10 biggest cornerstone tranches in that group were for Chinese government companies. In April, state-backed brokerage Shenwan Hongyuan Group Co. raised $1.15 billion, with 71% of the deal locked up. The company’s shares have fallen 27% since they started trading. Postal Savings has lost 1.5% since listing, versus a 22% gain for the benchmark Hang Seng Index.
Private companies also use cornerstones, though they tend to allocate lower percentages. Smartphone maker Xiaomi Corp. earmarked 24% of its $5.4 billion IPO last year to 10 investors including Hillhouse Capital and Alibaba Group Holding Ltd. Xiaomi shares slumped on the day the six-month holding period ended, accelerating a decline that began when they started trading.
Lack of liquidity may be an even bigger concern, and it isn’t confined to Chinese companies. Glencore International Plc, the world’s largest listed commodity trader, sold stock to cornerstone investors including BlackRock Inc. and Abu Dhabi’s Aabar Investments PJSC when it listed in London and Hong Kong in 2011. The company delisted from Hong Kong six years later, saying trading in the stock was a fraction of the U.K. equivalent.
Singapore-based video-gaming firm Razer Inc. sold almost 30% of its 2018 offering to cornerstone investors. But other non-Chinese companies including Prada SpA, L’Occitane International SA and Samsonite International SA have eschewed the practice.
A successful Budweiser sale would deal a further blow to the cornerstone custom. AB InBev executives and bankers said Thursday that they had enough investor demand just two days into the IPO roadshow. That should rouse a chorus of cheers from many in the Hong Kong market.