Heineken NV (HINKY.PK) has entered into talks with Carlsberg A/S (CABHF.PK) regarding a joint takeover bid for Scottish & Newcastle PLC. The two companies have not made any formal approach, but have said any takeover offer would be in cash. The unexpected announcement came in a joint statement released Wednesday, according to the AFP news service.

"Carlsberg and Heineken confirm that they are in discussions regarding the formation of a consortium to make an offer for the entire issued share capital of Scottish & Newcastle," the statement said.

Scottish and Newcastle, whose brands include Fosters lager and Strongbow cider, said it was confident in its future as an independent group. S&N officials are reportedly "furious" over the reported takeover bid, which would result in the company being split up between the two suitors, and said in response that "the proposed break-up bid from Heineken and Carlsberg, the company’s joint venture partner in BBH (Baltic Beverages Holding), is unsolicited and unwelcome."

Scottish and Newcastle has been the subject of takeover speculation all year long.

Carlsberg, the largest Nordic brewer, and Scottish and Newcastle are currently partners in the BBH joint venture.  Baltic Beverages owns Russia’s largest brewer with a 38% market share, and other interests based in France and Greece. Its revenue grew 36% in the first half to $856 million, while operating profit soared 48%.

If the takeover is successful Carlsberg will take complete control of BBH, and the French and Greek operations, while Heineken would get the U.K. and European brands. The statement didn’t specify who would get S&N’s Asian assets.

Analyst Richard Withagen at SNS Securities told the AFP news service that the Heineken-Carlsberg takeover was a smart move.
"I think from a strategic point of view it’s obviously a good deal for Heineken and Carlsberg," Withagen said, "Heineken would gain market leadership in the UK and become the number two in Belgium and Portugal, and a leading market player in Finland."

In addition to advancing in Belgium and Portugal, a successful deal would give Heineken the top spot in the U.K. where it currently commands less than 1% of the  market.

The takeover would also help the two companies to keep pace with SABMiller and Molson Coors (TAP) who recently joined forces. That brewery union could save as much as $500 million a year in manufacturing and shipping costs and provide the combined entity with 30% of the U.S. beer market.

News and Related Story Links:

• Money Morning Investment Analysis:
  Thirsty for Profits? Ten Ways to Play the Worldwide Beer Market.

• AFP:
  Scottish and Newcastle snubs possible bid from Carlsberg, Heineken.

• Bloomberg:
  Carlsberg, Heineken in Talks for Scottish & Newcastle.

• The Financial Times:
  Carlsberg, Heineken Poised For S&N Bid.

• The Physics Factbook:
  Volume of World Beer Consumption.

The Challenger Wine Trust  has agreed to lease two vineyards at Griffith, New South Wales, to global beverages firm Foster’s Group Ltd. (FBRWY.PK), the leading alcohol company in both Australia and the Pacific region.

The Cocoparra and Woods Vineyards had previously been leased to Cranswick Estates, a fully-owned subsidiary of West Australian-based winemaker Evans & Tate Ltd, which is now under receivership.

CWT said the Foster’s lease closely followed the remaining balance of the prior Evans and Tate lease, including the initial term expiring in 2013, as well as the subsequent dual  five-year options to renew. Once the lease was executed, Foster’s occupies nearly 4% of CWT’s portfolio.

"This is a fantastic outcome for CWT. Not only have we negotiated a new lease to a high-quality tenant in FGL, we have been able to secure a rental income in fiscal 2008 that ensures no lost income for CWT on these properties," CWT fund manager Nick Gill told The Brisbane Times newspaper.                                  
                                                                                                                                                                
The Gnangarra vineyard at Manjimup, Western Australia, is the only vineyard previously leased to Evans & Tate in the CWT portfolio that has yet to be leased anew. CWT said talks were continuing with a number of parties to either lease or purchase the vineyard.

Foster’s Group Ltd. (FBRWY.PK) is only quoted on the U.S. Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.

With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.

News and Related Story Links:

• The Brisbane (Australia) Times:
  Challenger leases vineyards to Foster’s.

• Money Morning Investment Report:
  Thirsty for Profits? Ten Ways to Play the Worldwide Beer Market.

SAB Miller PLC (SBMRY) and Molson Coors Brewing Co. (TAP) agreed on Tuesday to merge their U.S. brewing operations, creating a worthy rival for Anheuser-Busch Cos. Inc. (BUD). The deal also highlights the fact that – pretty well throughout the world (well, may be not in Moslem countries) – beer is one whale of a business: After all, SAB got to be big enough to merge with Miller from a base in South Africa, not one of the world’s wealthier markets.

I thought it might be interesting to look at the eight foreign beer companies that have ADRs outstanding, which a U.S. investor might buy, perhaps making a pick or two as to which has the thirstiest and fastest growing base of consumers, and that’s also selling at a reasonable price.

Generally, once the plant itself has been paid for, a brewery that has a dominant position in a local market is essentially a license to print money – indeed, several breweries have been used as the nexus for major local conglomerates, because of their reliable cash flow. On the other hand, there are limits to economies of scale – there are no brewing equivalents of General Motors Corp. (GM) or Microsoft Corp. (MSFT).

To get revenue and earnings growth, population growth is important. But so is “emergence:” While beer sales increase slowly in a wealthy market like the United States or Holland, they may grow much more rapidly in countries like India and China, in which a new middle class is emerging.

The first of the foreign brewers, alphabetically, is Compania Cervecerias Unidas SA (CU) of Chile. CU produces and distributes beer in Chile and Argentina, having its own flagship brand, Cristal, as well as distributing Heineken and several other international brands. However, with sales of $1.1 billion it appears limited to those two markets, which have a combined population of only 56 million people. If I was more bullish on the economic and political prospects of Argentina and Chile, I would be more bullish on CU, but with a Price/Earnings ratio of 20 and a PEG (Price/Earnings to Growth Rate) ratio of 2.1, it seems fully valued.

Companhia de Bebidas das Americas (AMBEV) (ABV), is Brazil’s largest brewer, operating in 14 Latin American countries. It’s also active in soft drinks, bottling and distributing Pepsi Cola outside the U.S. market. It’s a much larger company than CU – as you’d expect, since Brazil has a population of 190 million – has sales of $10.3 billion, and has more room to grow given its presence in Latin America’s middle-income emerging markets. Unfortunately, it’s very high-priced, with a P/E of 32 and a PEG of 2.4. A pity – beer companies do especially well in countries with hot climates!

Foster’s Group Ltd. (FBRWY.PK) is the leading alcohol company in Australia and the Pacific region, alas only quoted on the Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.

With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.

Heineken NV (HINKY.PK) of the Netherlands is a gigantic company, so why it’s too cheap to list itself properly – and not just on “Pink Sheets” – I don’t know. It claims to be the world’s most valuable beer brand, and is distributed worldwide. Heineken has a market capitalization of $14 billion and a P/E ratio of 18, but is only growing at about 6%, albeit in euros, which gives you an additional kicker when the dollar is weak, as it is now. Since its home EU market is huge, but relatively slow growing, I would generally recommend Foster’s instead.

Kirin Holdings Co. Ltd. (KNBWY.PK) is the largest brewer in Japan, again listed only on the Pink Sheets. It has operations across East Asia, but is growing relatively slowly at about 6%, since its home market has slow population growth and is already rich. It has a market capitalization of $13 billion, and a P/E ratio of 27 – relatively high, as is typical of Japanese companies. However, since the yen looks likely to be strong and it does not export heavily from Japan, it may be worthwhile as a currency play.

SABMiller PLC (SBMRY.PK) is listed only on the pink sheets, in spite of owning Miller Brewing Co. It’s now a British company, with important operations in the United States, Eastern Europe, and all across Africa, particularly in South Africa. At $45 billion, its market capitalization is much larger than its competitors, but its P/E ratio is at a nose-bleed-high of 27. While there are prospects for long-term growth in Eastern Europe and Africa, the U.S. beer market looks pretty mature, so you’re paying 27 times earnings for its ability to do merger and acquisition deals. Maybe not.

San Miguel Corp (SMGBY.PK) is the largest brewer in the Philippines (population 91 million, growing at 1.8%, emerging market, hot climate) and also has beverage and packaging businesses, with operations throughout Southeast Asia. Beer represents 25% of sales and 49% of operating income. It has a market capitalization of only $4 billion, so with only a pink-sheet listing, it may be somewhat illiquid. However, with sales of $5.7 billion and a P/E ratio of about 16, it seems to be quite a good value, provided you’re prepared to live with the Philippine country risk and the dangers of its two-tier share structure, which might produce a conflict of interest between its controlling shareholders and outside investors.

Tsingtao Brewery Ltd., (TSGTY.PK) is China’s largest domestic brewer, and the best known internationally. It has sales of $800 million and a market capitalization of $5 billion on Hong Kong (its A shares in Shanghai are quoted at double the price of its Hong Kong H shares). Regrettably, even the H shares have a P/E ratio of 60. Despite the allure of 1.3 billion thirsty Chinese, and even though the share price is up 178% in the last year, the stock seems a bit rich.

However, Anheuser-Busch (BUD) owns 27% of Tsingtao and is on a P/E ratio of 20, so you may prefer to invest in it by that means.

In summary, beer companies are generally highly valued in today’s market. That’s not surprising: Their steady cash flow and recession-proof operations make them valuable properties, especially if their market has reasonable growth prospects. However at multiples of 25, 32 or even 60, they are overpriced. I would recommend the two companies with reasonable multiples and good growth prospects: Fosters and (more hesitantly, because of its home) San Miguel.

PepsiCo Inc. (PEP) ended its third quarter with big numbers – a 17% gain in net income, a 19% increase in earnings per share, and an 11% gain in revenue – largely because of its continually growing international presence.

The global beverage-and-food company has been ramping up operations in China, where Pepsi’s risky color change is gaining ground in its Olympic-sized cola war with Coca-Cola (KO).

Pepsi’s four main divisions all posted net revenue growth: Frito-Lay North America was up 6%, PepsiCo Beverages North America up 3%, Quaker Foods North America up 2%, and PepsiCo International up 22%, an impressive increase fueled by double-digit growth in China, Russia, Pakistan and the Middle East.

Overall, Pepsi reported net income for the quarter ended Sept. 8 of $1.74 billion, or $1.06 cents a share. That compares with net income of $1.49 billion, or 89 cents a share, for the comparable quarter a year ago.

And all this was accomplished even though the price of corn – a major ingredient of its soda and snacks – soared 21% this year on the Chicago Board of Exchange.

"Our third quarter performance was very strong, with double-digit revenue and operating profit growth," PepsiCo Chairman and CEO Indra Nooyi told the Wall Street Journal. "All of the company’s operating divisions successfully navigated through an environment of higher input costs in order to deliver balanced top- and bottom-line performance."

The Upside of the Falling Dollar

But underneath the numbers, the currency shift and diminishing value of the dollar has given Pepsi – and many other globally focused U.S. companies – a strong and steady tailwind. The dollar’s fall against currencies around the world is driving down the overseas prices of U.S. exports, and driving up export sales. That’s helped stabilize the U.S. manufacturing job base.

For Pepsi, "favorable foreign currency upsides allowed us to reinvest in several international markets in the quarter," Nooyi said in a company statement.

And the falling dollar opens many other doors for U.S. investors to profit. Not just riding the coattails of internationally moving American companies like Pepsi, Yum! Brands Inc. (YUM) and Exxon Mobil Corp. (XOM), but by investing in exchange traded funds (ETFs) and in foreign currencies gaining on the dollar.

News and Related Story Links:

• Money Morning Investment Analysis:
  Pepsi ‘Goes Red’ in China.

• Wall Street Journal:
  PepsiCo’s Net Climbs 16%.

• Money Morning Investment Analysis:
  Eleven Ways to Profit from the Falling U.S. Dollar.

Let me tell you the flip side to that one-liner.

When Gannett Newspapers (GCI) sent me to China on special assignment in 1996, my photographer and I were "hosted" by several journalists from the state-run Xinhua News Agency. They were great guides, taking us to the Great Wall, the Forbidden City, a Chinese "opera," and even on a work-related tour of the state-run China Lucky Film Co., later bought out by Eastman Kodak Co.

They also treated us to the very best Chinese cuisine. There were fine-dining restaurants, including one where they brought the fish our guides had chosen to our table – still swimming in a bucket, so that our hosts could "approve" it. Even better were the hidden neighborhood "joints" (here in American we’d refer to them as either a "greasy spoon," or a "diner"), where the food was sublime, and the prices laughably low.

We wanted to return the favor. I offered to take our two guides anyplace they wanted to go. Being working journalists, like us, I figured they’d choose some globally known five-star place that they couldn’t afford and had never tried.

No way. They chose Sunday brunch at McDonald’s in Beijing.

The new McDonald’s in China’s capital city was this multi-decked affair with multiple counters on every single level – and our two Xinhua friends who weren’t from that part of the country really wanted to pay Mickey-D’s a visit. Indeed, they viewed this visit as a real "treat," they told me.

Let me say this: McDonald’s franchises in this country would be jealous as all get out to see a mall-sized fast-food joint with patient patrons lined up and waiting 12 deep at every single register. There was almost no place to sit down. Yonghong, a promising young journalist and our lead guide, ordered two Big Macs, double fries, a quarter pounder, and a quart or so of soda. I was so enthralled watching him demolish these burgers that I almost forgot to eat my own "brunch."

A few enlightening hours later, we’re walking back to our hotel rooms in Beijing, and I see Yonghong holding his stomach. That’ll learn him, I thought to myself (as I mentally held my own stomach).

But, as usual, I was wrong.

As we walked by Beijing’s Tiananmen Square, Yonhong turned to me – still holding his stomach – and said: "Those Big Macs are really quite a delicacy. But they just don’t stay with you all that long." Only he wasn’t joking.

Touche.

I learned many things during that month or so in Asia, growing a great deal as a journalist, but even more as an investor. I saw, and have never forgotten, how China’s consumers loved virtually all things American.

To the Chinese consumer, McDonald’s in synonymous with "hamburger." When you speak of fried chicken, well, there’s only KFC. Pizza? That means Pizza Hut. Mexican? You can only be speaking of Taco Bell.

Well, McDonald’s is just that – a straight play on McDonald’s Corp. (MCD). But KFC, Pizza Hut and Taco Bell are all in the fast-food stable of Yum Brands Inc. (YUM). And as that company’s profit report demonstrated yesterday, Yum Brands also means China.

Our Formula for Global Profits

In Money Morning yesterday (Monday), we told you that the pathway to stock-market profits during this newest quarter would have everything to do with earnings performance, global growth and companies that were free and clear of the subprime mortgage crisis.

Yesterday, global restaurant operator Yum Brands proved us right on all three counts. And China provided much of the fuel.

As investments go, companies such as Yum Brands combine the safety of the U.S. financial system (with its transparency, regulatory oversight and detailed financial reporting), with the growth of the promising overseas markets of Asia, where it’s a very strong player. For that reason, we’re going to look at this earnings report as a kind of case study on how to look at such a "best of both worlds" investment.

The owner of those three worldwide brands yesterday reported a higher-than-expected 17% jump in quarterly profits. And it boosted its forward-looking financial outlook.

The company’s shares rose to an all-time high of $36.48 in regular trading yesterday, closing at $36.29. That represented a gain of $1.94 – or 5.65% – per share. The stock soared an additional $1.44, or 3.97%, to $37.73 in after-hours trading, according to Google Finance.

The Louisville-based Yum said it now expects profits per share for the year to climb 13%, and not just the 12% it predicted earlier. The company is now forecasting full-year profits of $1.65 per share, instead of the $1.63 forecasted earlier.

Analysts currently expect a profit of $1.64 a share for the year, according to Reuters Estimates.

And we believe this latest boost in outlook is just the start. One good reason: Yum said it would use the flush times to buy back up to $4 billion of its shares over the next two years – reducing its shares outstanding by 20% – and would increase debt.

Research studies have demonstrated time and again that companies that buy back shares, as a group, tend to outperform the broader market. And adding some debt can actually be good for a company, creating what’s known as an "optimal capital structure." That means the company’s mix of stock and debt has enabled the company to achieve the lowest possible average cost of capital needed to fuel growth.

Yum yesterday reported that its net income for the third quarter jumped to $270 million, or 50 cents a share, a total that was 17% ahead of the net income of $230 million, or 42 cents a share.

Wall Street analysts, on average, had been expecting a profit of 45 cents a share, also according to Reuters Estimates. Yum had 2% fewer shares outstanding in the quarter as a result of buybacks, the company said.

When a company buys back stock, its profits are apportioned across fewer shares, meaning its experiences earnings per share growth even if its actual profits don’t increase. But when a company is building profits as Yum Brands is doing through organic growth – and is also buying back shares at the same time – the impact on earnings per share growth can be remarkable and substantial. And that usually bodes very well for the company’s stock price, too.

The China Factor

Yum said strength in China and in other international markets more than made up for softer-than-planned-for results here in the United States.
Total revenue rose 13% to $2.56 billion – $100 million more than the $2.46 billion analysts expected.

Sales at stores open at least a year rose by an average of 4% worldwide. But that overall average consisted of gains of 11% in mainland China, an average of 7% in the international division and 1% in the United States.

In Yum Brand’s China Division – which includes mainland China, Thailand and KFC Taiwan – operating profit rose a stunning 28% to $135 million. But fast-rising food-and-labor costs in mainland China did squeeze profit margins, albeit only slightly for now, the company said.
At the international division, which excludes China, operating profit rose 21% to $127 million.

U.S. operating profit rose 1% to $187 million, but profit margin at company restaurants fell because of higher labor and dairy (cheese) costs.
U.S. operations did improve in the third quarter. But Yum Brands said that domestic sales-and-profit growth remained "below our target level" because of results at Taco Bell, which has struggled since last year, due to an E. coli outbreak in the Northeast that was associated with the chain.
Yum’s board approved the repurchase of as much as $1.25 billion of additional company stock over the next 12 months – part of the afore-mentioned plan to buy back up to $4 billion in shares over the next two years.

The stock trades at about 19.8 times analysts’ average 2008 earnings estimate, compared with a multiple of about 18 for rival McDonald’s. If both stocks were valued like their peer companies, both companies could experience substantial share-price growth during the next several years. Since both are solid plays on China’s growth, that makes sense. Add in PepsiCo Inc. (PEP) and The Coca-Cola Co. (KO) for good measure, and you have a portfolio of four U.S.-based plays on China’s growth.

[To check out our Contributing Editor Keith Fitz-Gerald's analysis of Pepsi and Coke in China, please click here. This report from our resident Asia expert - he and his family live roughly half the year in Kyoto, Japan - are free of charge.]

News and Related Story Links:

• Reuters:
  Yum Brands Posts 17% Profit Rise, Boosts Forecast.

• Money Morning Investment Analysis:
  The Three Pathways to Profit as Investors Make it All About Earnings.

• Money Morning Investment Analysis:
  The Second Quarter Votes are in: Global Gains Trump Domestic Pains.

• Money Morning Investment Analysis:
  Pepsi "Goes Red" in China.

• Money Morning News:
  Wm Wrigley Capitalizing on Innovation, Global Reach.

• Wikipedia:
  Tiananmen Square.

• Wikipedia:
  Great Wall of China.

• Wikipedia:
  The Forbidden City.