Japan's cash-rich food and drink companies are no strangers to
building a presence outside their shrinking home market, having
lashed out the best part of $20 billion on overseas deals in the
past five years.
But with government calls on companies to capitalize on the yen
rising to 15-year highs ringing in their ears, and attempts at
domestic consolidation falling spectacularly flat, executives are
scoping out new opportunities in overseas markets with a new
urgency.
Take the country's three big drinks makers, Kirin Holdings Co.
(2503.TO), privately-held Suntory Holdings Ltd. and Asahi Breweries
Ltd. (2502.TO). With total overseas mergers and acquisition
activity by Japan's food and drink operators running at $19.6
billion since 2005, according to data provider Dealogic, the big
three are increasingly viewed as potential buyers when assets come
into play in Asia--and elsewhere.
According to people familiar with the matter, all three are
circling with intent to jump on French dairy giant Danone S.A.'s
(DANOY) possible sale of part or all of its bottled water business.
With Kirin said to be holding early-stage discussions, the
operation, including the iconic Evian brand, could fetch between $5
billion and $7 billion if sold in its entirety.
Spokespeople at all the companies involved declined to
comment.
Stifled by a shrinking population and a weak economy, the trio
have made little secret of their plans to grow overseas--nor of
their willingness to splash cash to do so.
Kirin's overseas sales made up 25% of its overall revenue in
2009, and it aims to raise that to 30% by 2015. Suntory booked 14%
of its total sales overseas, but plans to double that in the next
three years. Asahi has lagged behind with its sales abroad in 2009
accounting for a mere 5.3% of its total.
"They will go ahead with M&As if the timing is right," said
Yoshiaki Yamaguchi, an analyst at SMBC Friend Research Center,
referring to all three players. "Given only limited growth
(prospects) in Japan, the sector needs to seek (M&As outside
Japan) while it's still making a profit," said Yamaguchi. "I think
there'll be no change in this direction," he said.
On top of the strength of the yen and the slow shrinkage of the
domestic market, there is one other major trigger for a renewed
overseas expansion drive: The sector missed out on much-needed
domestic consolidation and more efficient business structures when
Kirin and Suntory in February scrapped ambitious plans to
merge.
The deal would have created a global drinks giant with annual
revenue of about Y3.8 trillion, or $47 billion, rivaling brewer
Anheuser-Busch Inbev N.V. (AHBIY) in terms of sales. But it
collapsed due to a rift over differences about exactly who would
manage the future entity--Kirin managers or Suntory family
executives.
Kirin has a market value of Y1.127 trillion, or just under $14
billion. Having already spent about Y640 billion on M&As
outside Japan in the past few years, including buying a 48% stake
in San Miguel Brewery Inc. (SMB.PH) of the Philippines, it bounced
back from the collapse of the Suntory deal in July by buying close
to 15% of Singapore's Fraser & Neave Ltd. (F99.SG) in a deal
valued at another Y84.6 billion, or $970 million at the time of
purchase.
Suntory, even as it was talking to Kirin, was stalking
acquisitions elsewhere. Last year it completed the $3.3 billion
purchase of privately held European soft drinks company Orangina
Schweppes Group.
Also, Suntory has said it can generate cash flow of Y400 billion
to Y500 billion over five years--which it considers sufficient to
drive its growth strategy for now, including possible M&A
deals.
Asahi has the smallest overseas exposure of the three, but
boasts a market capitalization of close to $10 billion. And it has
big plans to grow fast: earlier this year it said it is ready to
spend up to Y800 billion--or $9.9 billion--on merger and
acquisition operations by 2015.
"We are studying a variety of (M&A) cases," company
president Naoki Izumiya told reporters in August, though he
declined to go into detail. "It's true that the yen's strength will
make it easier to buy" companies outside Japan, he added.
Asahi's future M&A interest comes on top of over $2 billion
in purchases in the past two years, including a 20% stake in
Tsingtao Brewery Co. (0168.HK) and its $774 million purchase of
Schweppes' Australian operations from Cadbury PLC (CDSCY).
Moreover, it is considered by market participants to be a
potential buyer of Foster's Group (FGL.AU) beer operations, partly
because of an existing tie-up with Australia's largest brewer that
allows marketing of Asahi's flagship beer "Asahi Super Dry" in
Australia.
Foster's said in May that it would split its beer and wine
operations, though it doesn't expect the demerger to happen until
the first half of next year at the earliest. Asahi's Izumiya has
declined to comment on interest in Foster's, describing it as a
rumor.
Of course, a clear imperative to buy as well as full war chests
raise the prospect of the Japanese drinks companies ending up
paying high prices for their deals.
"With the sector so aggressive on buying, coupled with the yen's
strength, we can continue to expect extremely high needs" for
M&As, said Hiroshi Saji, a senior analyst at Mizuho Securities
Co.
Japanese food and beverage companies "probably are eager to
speed M&As given the yen's strength, but there not so many big
targets are up for sale," he said. With international peers also on
the hunt in Asia, that may send asset price tags much higher.
-By Hiroyuki Kachi, Dow Jones Newswires; 813-6269-2789;
Hiroyuki.Kachi@dowjones.com
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