Comment - Suntory/Kirin - Enter Godzilla

By breakingviews.com | 13 July 2009

The US has Budweiser, the so-called King of Beers. Soon Japan may have a Godzilla. Kirin, the country's biggest maker of suds, is mulling a merger with family-owned drinks maker Suntory, according to the local press. The resulting monster would have a dominant position in the Japanese beer market, could create lashings of synergies and might even do some damage overseas.

Kirin and Suntory already share one thing: an over-reliance on Japan. Along with rivals Asahi and Sapporo they're chasing a revenue pool set to decline by at least 3% this year. High taxes contribute to low operating profit margins - 5.4% at the unquoted Suntory, according to Moody's. That's a quarter of the level at AB Inbev, which owns Bud.

Crunching together Kirin and Suntory wouldn't make the Japanese drink more beer, but a more concentrated market should be more profitable. The idea of shutting down any of Suntory's four plants might not play well with Japan's unemployment at a six-year high, but the prospect leaves savings for a rainy day.

Far jucier would be the synergies from being Japan's dominant brewer, with a combined market share of more than 50%. In particular, the Godzilla of Beers could expect to splash less cash on promotion and marketing.

Suppose it cut this spending from the whopping 17% of revenue Japanese brewers currently lay out, according to Credit Suisse, to the 11% AB Inbev spends in North America. On the two companies' combined drinks revenues of around $34bn, they would save just over $2bn a year - which taxed at Kirin's effective 40% rate and capitalised is worth $12bn today. A chunk of that should help convince Suntory's owners, the Saji family, to relinquish their grip on the company.

The real prize for both brewers, though, would be to create a beverage monster with a balance sheet big enough to snap up tasty morsels overseas. Both Kirin and Suntory have nibbled already. Kirin owns Australia's Nathan Lion and a stake in San Miguel of the Philippines while Suntory has bought Danone's Australian drinks business. Time to chomp through some even bigger prey.

By John Foley

Breakingviews.com is the world's leading source of agenda-setting financial insight. Breakingviews.com has 22 correspondents and columnists based in London, New York, Hong Kong, Paris, Washington, San Francisco and Madrid. Its aim is to become the lingua franca for the global financial community.

For more financial analysis from breakingviews.com, click here .

breaking views

Sectors: Beer & cider

Companies: Suntory, Kirin, Asahi, Sapporo, Danone

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Suntory and Kirin

The confirmation on Monday (13 July) that Japan's two largest drinks companies - Kirin and Suntory - are in discussions on merging their operations may have caught the industry by surprise, but the reasons for the move have quickly become apparent. The implications for the global drinks business are equally clear. Julian Ryall reports from Tokyo.

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