Feb. 9 (Bloomberg) -- Kirin Holdings Co., Japan's biggest brewer, plans to accelerate overseas expansion after talks to take over Suntory Holdings Ltd. failed over the merger ratio.
"Kirin will keep looking for mergers as part of its growth strategy," President Kazuyasu Kato told reporters yesterday, after Kirin ditched a $10 billion bid for Suntory, the nation's third-largest brewer, because it wanted management control of the combined company.
Kirin, based in Tokyo, has spent about $7 billion on overseas acquisitions such as Lion Nathan Ltd. in the past three years to offset sagging domestic sales. The abandoned bid for closely held Suntory may spur Kirin to find partners to help it compete globally and to lower costs in Japan, where a shrinking population is sapping demand.
"The Japanese market at best will grow only slowly, which means Kirin must expand overseas," said Edwin Merner, president of Atlantis Investment in Tokyo, which manages about $3 billion in assets. "The best way to do this is mergers and acquisitions, and I would expect Kirin to look for possible candidates and be more aggressive in looking for possible companies to buy."
Kirin may look for partners in China and other Asian countries where domestic demand is strong, said Mitsushige Akino, who oversees about $450 million at Tokyo-based Ichiyoshi Investment Management Co.
Price Competition
For now, Japanese beverage companies including Kirin's smaller rivals Asahi Breweries Ltd. and Sapporo Holdings Ltd., may keep cutting prices for a bigger market share until another takeover bid emerges, said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Securities Co.
"Consolidation in the industry is essential amid cutthroat competition," Tsunoyama, who has a "neutral" rating on Kirin shares. "Japanese foodmakers can't win the right to control prices without consolidation. It's not positive in the mid- to long-term" for the industry, he said.
Kirin and other beermakers shares slumped after Kirin and Suntory said they terminated the merger talks. Kirin shares fell the most in 15 months. Kirin shares slid 7.4 percent, the most since October 2008, to close at 1,337 yen on the Tokyo Stock Exchange. The benchmark Topix index fell 1 percent.
Asahi, Japan's second-largest brewer, plunged the most in 13 months, falling 5.5 percent to 1,654 yen. Sapporo, the country's fourth-biggest, fell 2.1 percent to 464 yen.
"We will try to improve industrywide profitability and stability" even after the talks between Kirin and Suntory ended, Asahi Breweries Ltd. President Hitoshi Ogita said at a press conference yesterday in Tokyo. "We won't go into a bloody fight again."
Veto Power
The Kirin takeover of Suntory would have created the world's fifth-biggest foodmaker. The founding family of closely held Suntory had been seeking a stake of at least 33.4 percent in the merged company, which would have given it veto power over takeovers and other major decisions. Kirin wasn't able to gain "appropriate management independence," according to its statement yesterday.
Kirin announced the talks in July as it sought to eliminate its main domestic rival, and create a company with higher gross margins and own the Suntory whiskey, Malt's beer and Boss canned coffee brands.
"The merged company would have had more scale to pursue its expansion in the rest of Asia, where domestic demand is stronger," said Ichiyoshi Investment's Akino. "Kirin needs to strengthen its foundations through acquisitions."
Merger Ratio
Suntory wanted about 0.9 percent of each Kirin share in the proposed new holding company formed after the merger, according to a Suntory executive, who declined to provide his name. That would have valued Suntory at 892 billion yen ($10 billion) based on Kirin's closing price last week.
"It would have been difficult to create a new company as there were differences in opinions, including the merger ratio," Suntory said in a faxed statement after the failed talks were announced.
Uniting the century-old beverage makers would have created a company with sales of $42.7 billion, surpassing Coca-Cola Co.'s $31.9 billion and placing it behind Nestle SA, Unilever PLC, Kraft Foods Inc. and PepsiCo Inc.
"The merger would have created a company that can compete globally," said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc. in Tokyo. "The domestic market is bogged down with a low birthrate and aging population."
Kirin won't pay any termination fee after ending the talks, Kato told reporters in Tokyo.
Japanese food and beverage makers have been expanding overseas to reduce their reliance on a population that's forecast to shrink 10 percent by 2030.
Overseas Push
Kirin last year agreed to pay A$3.5 billion ($3 billion) to take full ownership of Lion Nathan Ltd., Australia's second- largest brewer. It also bought almost half of San Miguel Brewery Inc., partly funded by the sale of its holding in the Philippine brewer's parent San Miguel Corp.
Suntory purchased European drinkmaker Orangina Schweppes from Blackstone Group LP and Lion Capital LLP in November for an undisclosed sum, and Groupe Danone SA's Australia and New Zealand drinks business Frucor for more than 600 million euros ($819 million) in 2008.
Kirin's domestic beer sales dropped 0.9 percent by volume last year and Japan soft-drink sales plunged 7 percent. The brewer of Ichiban Shibori and Kirin Lager overtook Asahi Breweries Ltd. last year in Japanese beer sales for the first time in nine years.
Suntory sells Brand's health food and is the Japanese partner of Haagen-Dazs ice cream.
President Nobutada Saji and members of the founding family own about 89 percent of Suntory. Saji's grandfather, Shinjiro Torii, started the company in 1899 and began building Japan's first whiskey distillery in Osaka prefecture in 1923.
To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Shunichi Ozasa in Tokyo at sozasa@bloomberg.net.