Jeremy Warner's Outlook: Europe's protected species tilt at S&N</i>

China beckons for Vod's Arun Sarin; India's stock market takes a tumble
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The cheek of it. The partnership of Carlsberg and Heineken planning to bid for Scottish & Newcastle says we are in the end game of consolidation of the global brewing industry; S&N is portrayed as one of those ripe for consolidation, unlike themselves, who are depicted as consolidators.

Yet Carlsberg is actually a smaller company than S&N, and, whereas Heineken is bigger, it might also be thought of as a consolidatee were it not for the fact that it is family-controlled and therefore impossible to buy. The same is true of Carlsberg, which is controlled by a charitable foundation.

One of the reasons why S&N has been so much the object of takeover speculation over the past six months is that it is the only brewer of such size with an open share register which is not in some shape or form part of a protected species. That makes it a uniquely attractive target. Any bidder is therefore going to have to pay up.

The crown jewels in the S&N portfolio are generally considered to be the 50 per cent interest in BBH, the Russian brewer. The Russian idea of cutting down on "hazardous drinking" is to swap vodka for beer, making the former Soviet powerhouse one of the fastest-growing markets for the golden fizz in the world.

The owner of the other 50 per cent is Carlsberg, for whom Russia is also the main growth story. Bizarrely, the terms of their partnership include a "shotgun" clause, which allows either party to buy the other one out at any stage. The drawback of this Texan shootout arrangement is that, once the price is put on the table, the other party can reverse the tables by bettering his partner's price. The original bidder has no option but to accept. High-risk stuff, then. If either party tries to buy out the other, they may lose the lot.

The risk for Carlsberg has long been that S&N would be acquired by a much bigger rival, such as SABMiller or Anheuser Busch, who would then exercise the shotgun clause. As can readily be seen, the S&N tilt is for Carlsberg as much defensive as aggressive. A baptism of fire is promised for John Dunsmore, S&N's head of Europe. He moves up to the chief executive's suite on the first of next month.

He'll be desperate not to go down as the shortest-lived CEO in the company's history. He's got some great and unique assets to defend, but at anything more than £8 a share, he'll struggle to resist. The question is, are the continentals prepared to pay it, or is this just the start of a Russian bear hug?

China beckons for Vod's Arun Sarin

It's hardly back to the heady days of the dotcom boom, but one large-cap stock which has performed well right through the summer debt crisis is that of Vodafone, the mobile phones giant. At times of uncertainty, the cash-cow attributes of stable utility stocks such as Vodafone come into their own. Yet Vodafone is a utility stock with a twist. Its high exposure to emerging markets has re-established its credentials as a growth company.

Arun Sarin, Vodafone's chief executive, was criticised in some quarters for overpaying when earlier this year he forked out an enterprise value of $18bn (£8.8bn) for Hutchison Essar, the Indian mobile phone company. Since then, the valuation of emerging-market mobile phone assets has risen nearly 50 per cent and the acquisition now looks like a steal.

Performance is outstripping the company's very best expectations, with the subscriber base growing at the rate of 1.5 million a month (yes, that's a month) and revenue growing at an annualised rate of 50 per cent.

Can Mr Sarin repeat the trick in China, the other big emerging market growth opportunity to die for? For the time being, he's hidebound by an existing 3.27 per cent stake in the country's largest operator, China Mobile. It's been a great investment, but the company is 75 per cent-owned by the state and, as a consequence, the investment is ultimately going nowhere.

For choice, Vodafone would trade in this stake for a more powerful minority or joint-venture position in one of China Mobile's three rivals, all again for the time being state-controlled. The root-and-branch changing of the guard that occurs after the Communist Party's five-year congress, which concluded this week, may provide just such an opportunity.

More competition in the telecoms market is one of the possible structural changes being examined under the new five-year plan. Having already served its time before the mast with China Mobile, Vodafone is uniquely well placed to fulfil this purpose.

The national Chinese characteristic is inscrutability, so who knows what will happen. One potential fly in the ointment is China's apparent determination to have its own, unique, invented-in-China technology standard for mobile telephony. Yet one thing is certain. These are exciting times for Vodafone.

India's stock market takes a tumble

One of the surprise beneficiaries of the Western credit crisis has been the Indian stock market. It's a funny old world that makes high-risk emerging market securities seem a safer bet than once triple-A rated Western debt instruments, but in recent months that's been the way of it. The disturbance in credit markets has created a surplus of capital seeking new homes.

Some of this capital has found its way into the Bombay stock market. It hasn't required much of an uptick in these inflows of hot, Western, money to send the market soaring into bubble territory.

Now regulators in India have acted, prompting a predictable mini-crash in the stock market. At one point yesterday, India's benchmark stock index was down 9 per cent, though it later recovered much of its fall after the Securities & Exchange Board of India said it wasn't against foreign investment as such, but only the unregistered kind which has been investing in the market through so-called participatory notes.

This indirect method of buying into the market is the one most favoured by hedge funds and possibly accounts for as much as a half the record $17.6bn of foreign portfolio investment that has flowed into Indian securities so far this year. It was only natural that the authorities would want to restrict these inflows of hot money. They've also put a rocket under the rupee, creating the potential for quite serious market and economic dislocation.

While the bubble in the Indian stock market has been caused largely by inflows of foreign money, in China it is domestic savings which have fuelled the mischief. The Chinese are big savers, despite their relative lack of wealth.The absence of a social safety net in combination with the one-child policy, making it harder to rely on children for support in old age, has made them so.

Most of these savings go into deposit accounts, whose rate of interest is capped by regulators at a level which, for the moment, is below the rate of inflation. This negative real rate of interest has prompted savers to seek out higher-yielding alternatives.

The options are limited. For most Chinese, real estate and the stock market are the only viable ones. Both demonstrate consequent bubble-like characteristics. The cap on deposit accounts has, meanwhile, given the banks an exceptionally cheap source of capital, which in turn has undermined normal lending disciplines.

The upshot is a likely vast misallocation of capital which cannot help but eventually end badly. The Chinese authorities are well aware of the problem, but, with development imperatives to answer to, seem unclear on what to do about it. The fashionable view about the Chinese development story is that it will grind to a halt, at least temporarily, after the Beijing Olympics, when after all the sprinting forward of recent years everyone will metaphorically collapse with exhaustion.

Perhaps so, but if there is an economic correction after the Olympics, the two events will be entirely coincidental. The Olympics are but a drop in the ocean of Chinese development spending as a whole. Rather, it is capital misallocation which is the more likely future cause of economic setback. With America drifting towards recession, we can only hope that the eventual dénouement in fast-growing emerging markets isn't any time soon.

j.warner@independent.co.uk

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