Market Overview

According to the Bureau of Labor Statistics, consumer prices advanced 0.6% in May on a seasonally adjusted basis, following a 0.2% increase in April.  This large uptick was led by a 4.4% increase in energy for May, primarily driven by the skyrocketing price of oil.  Core CPI increased 0.2%, up from an increase of 0.1% in April.  The food index decelerated in May, increasing only 0.3% as opposed to a 0.9% increase in April.  While these results show an accelerating energy index, overall inflation fell within the range of expectations and tamed some inflation fears, resulting in stocks rallying on hopes that the Fed would not be increasing interest rates when it meets later in the month.

Further, wholesale prices surged 4.9% in May as opposed to a 0.2% decrease in April, also driven by energy prices.  However, Core PPI increased in line with expectations at 0.2% in May, compared to 0.4% in April and in line with May of 2007.  The results in Core PPI were enough to tame inflation fears for now, though the increase in energy prices shows the continued danger of energy inflation seeping into the rest of the economy.

The real estate market continues to wane, as U.S. housing starts slid 3.3% in May to their lowest level since 1991.  At 975,000 units, May housing starts fell below the expected 980,000 units and April numbers were also revised downward from 1.032 million units to 1.008 million.  Regional results were mixed, showing some strength in the Northeast (as May starts rose 61.5% from April) while the rest of the country showed losses of 25%, 10.3% and 4.4% in the Midwest, West and South, respectively – all regions that have experienced heavy downturns in real estate since the beginning of the credit crisis.

Across the pond, worries about rising prices plagued the U.K., as inflation rose to an annual rate of 3.3% in May, the highest level in 11 years.  These global results continue to keep central banks and stock markets on edge, as inflation may cause a near-term increase in interest rates.  While modest U.S. inflation may have calmed some recent fears, the markets will pay close attention to any indications of rising interest rates over the coming weeks.

Deal Overview

While overall M&A activity has been slowing down somewhat, international activity continues to attract attention, as strategic buyers with strong balance sheets continue to see opportunities.  For example, perhaps spurred on by the overall decline in the US dollar, international brewing giant InBev took actions to acquire Anheuser Busch, valuing the target’s stock at $65, a whopping 35% premium over the 30-day average stock price prior to the first week of May, when options activity and news reports hinted at an impending acquisition at well above the stock’s then record high of $54.97.

Further complicating the matter, there are rumors that Anheuser Busch is looking to acquire the remaining 50% of Grupo Modelo.  If true, this would drive up the price of the resulting Anheuser Busch entity, though the rumors spurred a second letter from InBev pointing toward a cold reception of the possible combination of Modelo and Bud.  A successful acquisition of Anheuser Busch by InBev would create the world’s largest brewer, with over $30 billion in combined trailing twelve months sales as of March, 31, 2008.