How Investors Can Make Money from Companies' Global Shopping Spree

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Companies are going on a global shopping spree and investors stand to benefit. When St. Louis-based coal company Peabody Energy (BTU) made an unsolicited $3 billion bid for Australia's Macarthur Coal on Wednesday, my first question was, why? What is it about Australian coal that would lead it to spend so much money on a company that's half way across the globe? Tom Taulli's DailyFinance story about the Peabody-Macarthur deal gave me a clear answer: to target the huge China market.

While China has a lot of its own coal, its hunger for energy to support its 8% annual growth is nearly limitless. And while it's expensive to ship coal to China from the U.S., it costs much less to ship it from Australia. Macarthur has already rejected the Peabody offer, saying the price doesn't "fully value" Macarthur's growth prospects. Still, it's an example of a type of global deal that companies could turn to international capital markets to finance. And that opens up opportunities for investors.

Another example of such a global deal is India-based telecom company Bharti Airtel's plan -- announced March 30 -- to buy the African assets of Kuwait's Zain, a mobile telecom group, for $9 billion in cash. According to Bloomberg, Bharti Airtel will attempt to recoup the cost of the deal by trying to increase its African customers and the amount of time they spend using the network.

But to begin with, 90% of the deal will be financed through loans. Bharti Airtel will take on more than $10 billion in new debt, including $1.7 billion from its new African unit. And despite a 23% hit to its earnings because of the transaction, at least 11 global banks are helping to finance the purchase.

Where Will MergersStrike Next?

The investment opportunity in these global deals is one of the themes in my forthcoming book, co-authored with Srini Rangan, Capital Rising: How Capital Flows Are Changing Business Ecosystems All Over the World. The challenge is to figure out where global M&A will strike next. To do so, investors will have to identify markets poised for growth and anticipate how firms will seek to tap the rising demand in those markets via acquisitions.

Here are two possible deals to consider:

  • America Movil (AMX) Buys MetroPCS (PCS): American Movil is a Mexico City-based wireless carrier with $82 billion in market capitalization and 182.7 million subscribers in 17 countries. It might consider expanding its subscriber base by acquiring MetroPCS, a U.S. wireless carrier with $3.5 billion in sales and $177 million in net income. MetroPCS has 6.6 million subscribers, a price-earnings ratio of 14.3, and its earnings are expected to grow 38.6% by the end of 2011, making it a strong acquisition target.

  • Massey Energy (MEE) Buys Aquila Resources Ltd.: Massey Energy is a Richmond, Va.-based coal company that operates 56 U.S. mines and has a market capitalization of $4.5 billion. I could see it buying Aquila Resources, a coal company in Como, Australia, with $84 million in sales and a net loss of $23.9 million. The acquisition could help Massey Energy keep up with Peabody Energy in Australia.
Of course, investors shouldn't bet on potential target companies unless they think the companies are appropriately valued on their own, in case they aren't acquired after all. If they're cheap, they may be a good stock purchase even if a buyout fails to materialize. But if their prices already appear to have grown based on takeover speculation, then you'll need to judge the odds of an acquisition actually closing before putting down your money.

All things considered, MetroPCS looks like the safest bet. It boasts a 0.4 price/earnings-to-growth (PEG) ratio, which compares a stock's price to its growth by dividing its price-earnings ratio by its per-share-earnings growth. I think a stock with a PEG of less than 1 is reasonably priced. So, even if nobody ever acquires MetroPCS, its stock currently counts as a bargain. If American Movil buys it, the stock will spike.

But that's only one example. I predict more global mergers -- and related investor opportunities -- are on the way.
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