Interbrew case report

Q1: What does going public involve? Why do it? When?

 

An IPO (initial public offering) is the process of selling shares that were formerly privately held to new investors for the first time.

 

There are multiple parties involved in an IPO before, during and after the IPO, e.g.

• Existing shareholders and senior management team
• Financial advisors
• Banks as coordinators
• Underwriters and bookrunners
• Lawyers
• Auditors
• Advertising agencies

 

Going public or issuing an IPO involves meticulous planning and coordination and can take, from 3 to12 months. Some of the key activities that are integral part of IPO

• Appointment of management team responsible for IPO
• Appointment of coordinators and underwriters
• Due diligence by underwriters
• Deciding the amount to be raised, Share price, number of shares
• Prospectus preparation (offering circular), marketing of the offer
• Timing decision
• Roadshows
• Allocation of shares

                                                          

Why do it?

An IPO can provide the firm with cheap capital to finance the current investment opportunities it has and simultaneously allows to finance future growth plans – acquisitions using these shares. An IPO makes the valuation of the firm easier and hence it is more valuable than a privately held similar firm.

Through an IPO, and subsequent funds raising to pay its debt, a firm may be able to receive sound credit rating from rating agencies and can have further and cheap access to the capital market. In a nutshell following are the potential pros and cons associated with an IPO

Pro                                                                   

• Access to a liquid market for raising equity or selling shares       
• “Blue” stamp of the company
• Share as currency in acquisitions and more interesting as a merger partner
• Option program to employees
• Unlock of values for existing shareholders
• Lower cost of external financing

 

Cons

• Costs associated with an IPO are substantial. These include commissions of Banks, fees of institutions, lawyers, auditors etc.
• Investment of time and resources in the IPO process
• Obligations as a public company
• Dilution of existing shareholders
• More vulnerable to hostile take-overs
• Public exposure

 

When?

Firms should consider several issues before deciding about the timing of the IPO, such as

• Market conditions - Industry is in favor
• Prevalent regulatory situations are not hindrance
• Investor sentiment is high, investor risk preference
• After periods of higher/sustained returns

 

 

Q2: Was going to public the right thing for Interbrew to do? Why or why not?

 

Yes, as

1. The firm needed funds and its debt/equity was already very high 337%. Company’s ability finance its growth through additional debt was hampered. The industry was consolidating and Interbrew needed to grow through acquisitions that it could finance with its stock after IPO.
2. Industry was stable and sentiment was strong. Market was expected to grow in value and volume, albeit slow and consolidation was not likely to slow down.
3. Interbrew needed to obtain a strong credit rating by paying some its debt.
4. Interbrew could also align its shareholders’ and management’ and employees’ interest through granting of stock options and a world wide offering

 

Q3: What do you think of the timing of Interbrew’s IPO? Should it have waited until after the UK Secretary for Trade and Industries’ decision?

 

The following factors made it imperative for Interbrew to raise additional capital through IPO:

 

1. Interbrew acquired Bass Plc for an unconditional cash offer of €3.68bn. It financed the acquisition by raising a €6bn loan (divided into a €3.1bn 364-day bridge loan and five-year tranches bearing interest of 70 basis points over Euribor). In the process, Interbrew breached some debt covenants and needed to refinance these debts.
2. With a high D/E ratio of 337%, Interbrew’s ability to finance further growth through leverage was limited.
3. Rapid pace of consolidation in the industry also favored a rapid floatation

 

Interbrew was in a hurry and could not have waited for Secretary’s decision which was due in January 2001. Also, alongwith the decision, if it was in favor, Interbrew would have been forced to issue full year’s financials and this would have delayed the IPO even further. If the decision was against and Interbrew asked for a judicial review then it would have taken more time and IPO would have been delayed even further.

We believe it was a right decision to go for IPO even if there was risk of receiving an adverse decision from UK Secretary for Trade and Industry.

Q4: Was the IPO price of €33 right?

 

Before the issue of IPO, we can assume that Interbrew would have taken the probabilities of approval of acquisition of Bass by British authorities and subsequent integration cost synergies.

Hence we have taken three scenarios wherein, we have calculated the share value under

 

1. Business as usual : €5.71
2. Successful integration of Bass : €38.11
3. Disposal of Bass  €21.10

 

Please refer to the appendix for more information on EBITDA Margins and revenue growths.

 

The risk of non-approval from British authorities was a public knowledge and its probabilities must have been incorporated in the share price. However as we see that ultimate share price was €33 this indicated the over-optimism of Interbrew to get an approval.

 

All these calculations are mentioned in the appendices.