The global beer sec—tor has been rife with mergers, acquisitions and partnership agreements in the past few years as companies search for ways to cope with modest consumption growth in the industrialized world, to take advantage of fast growth in emerging markets and to deal with the shift to premium and light beers from traditional domestic brands.

Beer consumption increased only 0.5% a year globally between 2000 and 2005, while wine and spirits had annual gains of 3.4% and 2.7%, respectively, during that time, according to a report from UBS Securities LLC in New York. UBS expects beer growth to continue to trail, but by less of a margin — increasing 1.4% annually vs 2.3% for both wine and spirits.

At the same time, some consumers have been shifting to premium and light beers. European imports are generally considered premium in the U.S., even though they may not be considered premium in their home markets.

As a result, “everyone’s searching for partners,” says Stephane Champagne, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto.

Belgium-based In-Bev NV and SABMiller PLC of Britain have been the most active and are reaping the rewards. The two have enviable brand portfolios and high exposure to the fast-growing emerging markets.

InBev is now the world’s biggest beer company, overtaking Anheuser-Busch Cos. Inc. when it was formed through the merger of Belgium-based Interbrew and Brazil-based AmBev in 2004. Interbrew had made many acquisitions in the 1990s, including Canada’s John Labatt Ltd. in 1995. InBev is trying to get into the U.S. market, which accounts for just 2% of its sales, through an agreement with Anheuser-Busch to distribute its European brands.

SABMiller is the result of British SAB PLC’s 2002 acquisition of Milwaukee-based Miller Brewing Co., the second-largest U.S. brewery. Since then, SABMiller, its subsidiaries and partners have made a number of acquisitions in emerging markets.

Global money managers aren’t very enthusiastic about the sector because of its slow growth and the challenges involved in penetrating emerging markets, but they say there are some opportunities.

Generally, they prefer InBev because of the quality of its portfolio, which includes Stella Artois, Beck’s and Brahma. However, some money managers also like SABMiller because of its greater exposure to emerging markets; it has more than 85% of its profits coming from those regions, vs about 67% for InBev.

There’s little enthusiasm for St. Louis-based Anheuser-Busch or Netherlands-based Heineken NV. Both are predominantly single-brand companies. Anheuser-Busch’s Budweiser and Bud Light are not premium brands, and Heineken is considered premium only in North America.

Anheuser-Busch is pretty much retaining its huge 50% market share in the U.S., but it has had to cut prices to do so, says Charles Burbeck, head of global equities at HSBC Halbis Partners in London. Meanwhile, Heineken is going through restructuring to cut 360 million euros off its annual costs by 2008. (Its annual expenses were 9.5 billion euros in fiscal 2005, which ended Dec. 31, 2005, the last fiscal year for which figures are available.)

Burbeck warns investors to be cautious about companies on the acquisition trail: “Companies often overpay as a result of bidding up prices. It’s a capital-intensive industry. You have to own enormous plants. The product is of relatively low value but high in weight, so it’s costly to distribute.”

Nor is it easy to compete in emerging markets, he explains: “For every brand bought in China, there might be another 30. Barriers to entry aren’t that high.”

The other issue that has been affecting beer companies is the cost of cans, which has gone up with aluminum prices.

Here’s a closer look at the four companies:

> Anheuser-Busch COS. Inc. Bernstein Investment Research and Management in New York upgraded the company to “market perform” from “underperform” on Jan. 11, with a 12-month target of US$54 vs the US$51 at which it was recently trading on the New York Stock Exchange.

The upgrade was the result of a strong rally in Mexico-based Grupo Modelo SA de CV’s share price, which is 50% owned by Anheuser-Busch and has added US$4 to the latter’s valuation in the past four months alone. In addition, Anheuser-Busch’s valuation has also benefited from the decision to increase its financial leverage target, Bernstein says.

Anheuser-Busch bought its interest in Grupo Modelo — which produces Corona and has a 56% market share in Mexico — in 1993 and increased its stake to 50% by 1998.

@page_break@Also in 1993, Anheuser-Busch took a 5% share in Tsingtao Brewery Group, China’s largest brewery — a stake that it increased to 27% in 2005.

In 2004, it purchased Harbin Brewery Group Ltd., China’s fourth largest brewer, which SABMiller also had bid for.

UBS Ltd. of London has a “neutral one” rating on Anheuser-Busch, with a 12-month target price of US$51. UBS believes the beer company is on the right strategic path in “aggressively pursing high-growth categories.” This includes the new InBev import agreement, which UBS says demonstrates the wil-lingness of August Busch IV, who took over as president and CEO on Dec. 1, 2006, to “go where the growth is.”

Anheuser-Busch signed agreements in 2006 to import Grolsch from the Netherlands, Tiger from Singapore and Kirin from Japan, and in January it signed an agreement to import Czechvar Premium Czech Lager.

As well, it bought the Rolling Rock brand, which is also from St. Louis, from InBev in 2006.

Anheuser-Busch made US$1.8 billion in the first nine months of 2006, vs US$1.6 billion the year prior. Revenue was US$14 billion, up from US$13.4 billion.

> Heineken NV. As of Jan. 19, the stock had reached Bernstein’s 12-month target price of 39 euros and exceeded UBS’s target of 38 euros. Both firms have a “market perform” or “neutral” rating on the company.

UBS believes the U.S. is key to Heineken’s prospects. Heineken Premium Light, which started selling nationally there in mid-2006, has had early success and, even more important, is taking market share from U.S. light beers rather than “cannibalizing” existing consumers of Heineken’s core brand and other imports. Indeed, the core Heineken brand has benefited from the halo effect as a result of the advertising and media coverage given to the light version, UBS says.

UBS considers the risks for Heineken to be a weaker U.S. dollar and the possibility that restructuring benefits are absorbed by pricing, input cost and increased competition in Europe. Bernstein also says that inflation costs will cut into margins and it is concerned by “the weight of Heineken’s exposure to slow-growth western Europe.”

Heineken made 433 million euros from April through September of 2006, the first six months of its fiscal 2007, vs 345 million euros for the same period a year earlier. Revenue was 5.7 billion euros, up from 5.1 billion. Beer volume shares by region were 40% for central and eastern Europe, 25% for western Europe, 13% for the Americas, 13% for Africa and the Middle East, and 9% for Asia/Pacific.

Heineken also makes the Amstel beers and has also been distributing the brands of Mexico-based Fomento Economico Mexicano SA de CV in the U.S.

Heineken Holding NV owns 50% of the brewery’s 490 million shares. In turn, Heineken Holding is 50% owned by L’Arche Holding SA, a Switzerland-based company that is 50% owned by the Heineken family.

> Inbev NV. The company is the largest brewer in the world, with an estimated 15% share of the global market. InBev is Burbeck’s and Champagne’s top pick. Pat-ricia Fee, money manager at I.G. International Management Ltd. in Dublin, prefers SABMiller, but calls InBev “a good company in the right markets.”

Bernstein is overweighted in InBev, with a 12-month target price of 60 euros vs the 50 euros at which it was recently trading on Euronext Brussels. UBS, which has a “buy” on InBev, expects the company’s shares to be trading at 55 euros in 12 months.

InBev’s biggest weakness is its small U.S. market share. But it hopes to improve on that, given it now has a deal with Anheuser-Busch to distribute InBev’s brands, except for Brahma and Labatt, in that market. UBS views this as positive. It expects Anheuser-Busch to increase the U.S. marketing spending behind InBev brands, as it did when it took on distribution of the brands of Netherlands-based Royal Grolsch NV in April 2006.

Champagne calls InBev “the Ferrari of the beer world” because of its diversified high-quality portfolio of brands. “The more premium beers you have, the better it is,” he says, noting that most of InBev’s brands are premium.

In an effort to take further advantage of the interest in premium beers, InBev is trying to position its Leffe brand — which, with an alcohol content of more than 6%, has a higher alcohol content than most other beers — as an alternative to white wine in restaurants.

Champagne says InBev generates good free cash flow and he expects earnings per share to rise 10% annually in the next few years.

InBev made 3.5 billion euros in the first nine months of 2006 vs 3 billion euros for the same period a year prior. Revenue was 9.7 billion euros, vs 8.4 billion.

The public share float consists of only a third of InBev’s 613.4 million outstanding shares. The rest are in the hands of companies that represent those who were Interbrew and AmBev shareholders prior to their merger to form InBev.

> Sabmiller PLC. This is Fee’s No. 1 pick in the sector because she believes the company has more upside then InBev, given its higher emerging markets exposure and its strength in Poland, a market that is just developing. She expects the company’s EPS growth to be in the mid- to high teens.

Bernstein has an “outperform” rating on the company, with a 12-month target of £14.25 per share, vs the £12 at which it was recently trading on the London Stock Exchange: “SABMiller offers top of class profit growth and returns on capital.”

Bernstein believes the stock has largely recovered from currency worries concerning the South African rand (South Africa accounts for 19% of SABMiller’s sales) and “believes investors will increasingly focus on the forecast of 16.6% annual compound growth rate for EPS in 2006-11.”

This strong EPS growth is driven by exposure to emerging markets and the synergies expected from the acquisition of Colombia-based Bavaria SA in late 2005, says Bernstein.

However, on Nov. 20, 2006, UBS changed its rating to “reduce” from “neutral,” based on expectations of slower than expected growth in South Africa and continued sluggish growth in the U.S. UBS’s 12-month target price is £10.80.

Nevertheless, UBS is impressed with SABMiller’s ability to develop brands in competition with other international brewers and to manage the transition to a more modern retail channel. It recently produced a report on SABMiller’s Polish operations, which UBS believes is representative of SAB-Miller’s approach in many markets. SABMiller has also significantly increased market share in the country, in which Heineken and Carlsberg A/S already have a significant presence and in which InBev is looking to build.

SABMiller, which reports in US$, made US$908 million in the first six months of fiscal 2006, ended Sept. 30, 2006 vs US$749 million a year earlier. Revenue was US$9.3 billion, up from US$7.1 billion.

The company has 1.5 million widely held ordinary shares that are traded on the London Stock Exchange and the South African exchange. There are also ADRs available in the U.S. IE