Yum! Brands, Inc. (YUM), Diageo plc (DEO), PepsiCo, Inc. (PEP): The Next Asian Bubble?

Diageo plc (ADR) (NYSE:DEO), meanwhile, is moving into India, the other big Asian country that most people don’t realize is even a part of the region. It is buying a majority stake in United Spirits for more than $2 billion. Although the deal is facing some troubles on the regulatory front in India, most expect it to be cleared. The Financial Times described the price as “high for deals in the sector, but not out of kilter with multiples paid in India…”

Too Expensive

Despite the prospects for growth and, to some extent, increased efficiency savings, it is disturbing to see companies paying at the high end of any range for acquisitions. It may sound obvious, but the more you pay, the harder it is to make money.

It’s also interesting to see that beer giant Anheuser-Busch InBev NV (ADR) (NYSE:BUD) actually sold a Korean brewery several years ago in an effort to reduce debt. Kohlberg Kravis Roberts & Co. bought South Korea’s Oriental Brewery from the beer giant in what now looks like a prescient move. Using some of the multiples being thrown at other companies, KKR & Co. L.P. (NYSE:KKR) is set to make a nice profit on the deal.

Interestingly, however, the sale includes a safety valve of sorts for Anheuser-Bush InBev, which has the right of first refusal to buy back the company. That option helps protect InBev from allowing others to buy a brewer it helped to build up. Still, stopping its competitors could prove costly, since KKR has no particular reason to settle on a cheap price. Debt, then, could be a bigger issue for InBev if it buys the brewer back.

Still, the simple fact that this was the operation that the beer giant choose to sell could be telling. Perhaps management thought the market had less compelling growth prospects and, thus, the brewer was a less desirable asset. The company’s hands on knowledge of the business is a notable part of this equation. KKR, meanwhile, may have just seen an asset that the Asian investment momentum would benefit.

Watch What You Pay

Investors often say that you should buy a stock with the mindset that you are buying the entire company. So, in some ways, investing can be very similar to mergers and acquisitions. How much would you pay to get into the Asian beer and alcohol market? If a company you own is paying what you think is an inflated price, watch out, it very well might be.

Yours,

The article The Next Asian Bubble? originally appeared on Fool.com and is written by Reuben Gregg Brewer.

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