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Thursday, Aug. 13, 2009

Kirin-Suntory talks reflect global business realities


Staff writer

News last month that Kirin Holdings Co. and Suntory Holdings Ltd. were discussing a merger shocked the domestic beverage industry for its sheer breadth: The deal would create a company with annual sales of ¥3.8 trillion, making it the world's fifth-largest drink and food conglomerate.

News photo
Pop its cap: Beers from Kirin Brewery Co., Suntory Liquors Ltd. and other companies line shelves at a liquor store in Osaka on July 13. KYODO PHOTO

The deal is still pending, but experts said it indicates Japan's largest and second-largest beverage and food companies — which are particularly strong in beer and soft drinks — are maneuvering to ensure their survival against both domestic and global competition.

With the population likely to continue shrinking over the long run, the domestic beverage industry is expected to face bleak growth.

"I think all food (and beverage) companies share the common view that demand will be declining," said Tokushi Yamazaki, a chief analyst at Daiwa Institute of Research.

Thus, Japanese companies, eager to avoid getting trapped in such a market, are pursuing growth opportunities overseas.

Analysts, however, said neither Kirin nor Suntory is big enough to compete with such global titans as Coca-Cola Co. and Nestle Inc.

Kirin posted a hefty ¥2.3 trillion in sales in 2008, while Suntory reported ¥1.5 trillion. But those figures are dwarfed by, for example, the sales of Swiss-based Nestle, the world's largest food and drinks company. Nestle chalked up the equivalent more than ¥9 trillion in sales in 2008.

In fact, Kirin and Suntory in recent years have pursued the same strategy — expanding business in Asia and Oceania and acquiring companies in those regions. Kirin bought San Miguel Beer Co. of the Philippines in January and Suntory bought New Zealand's Frucor Beverage last year.

According to its management vision for 2015 published in 2006, Kirin plans to increase the ratio of overseas sales to overall sales to 30 percent from 19 percent.

"To compete in the global (market), you need to gain certain size" through integration of business with other companies, Suntory President Nobutada Saji said in a group media interview July 14.

"And it's a cardinal merger and acquisition rule to integrate operations with a company that is growing," Saji said, explaining the reason he chose Kirin to be the merger partner.

A Kirin-Suntory alliance would change the power structure of the domestic beverage industry, especially in the markets for beer and quasi-beer beverages and soft drinks.

In the first half of 2009, Kirin commanded 37.5 percent of the domestic market for beer-type drinks, while Asahi had 36.9 percent and Suntory 12.7 percent.

The combined entity would probably command around 50 percent of the quasi-beer drinks market.

In soft drinks, meanwhile, Coca Cola Japan had 34.5 percent of the market in 2008, while Suntory had 18.3 percent and Kirin 10 percent. The Kirin-Suntory alliance, with 28.3 percent of the market, would be able to compete neck-and-neck with Coca Cola.

"Both of the two companies have maintained considerable shares even in markets (where they are not leading players), such as Kirin's share in the soft drink market and Suntory's share in beer products," said Yoshiaki Yamaguchi, a chief analyst at SMBC Friend Research Center. "The two firms would enjoy synergistic effects there."

However, there are still uncertainties facing the deal.

Since a merger between a listed and an unlisted firm is rare, many are paying attention to the types of conditions the two companies will agree to to make it work.

The two founding families of Suntory own more than 90 percent of its unlisted stock. If the companies merge on an equal footing, the families can expect to get a big share — possibly more than 33.3 percent — which would give them the power to veto key management decisions by the newly combined firm.

Another key issue is whether the Fair Trade Commission will approve the merger.

The combined beverage giant would command a huge share of the domestic market, which would raise obvious monopoly concerns.

But many reports predict that the commission will eventually approve the deal in light of the global competition the Japanese beverage industry will have to face in the future.



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