Glenboden M & A Originations

Suntory purchase of Frucor reinforces acquisition drive by big Japanese groups

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Origination Status seller announcement of signed agreement, October 2008
Asset Frucor (New Zealand), leading fruit juice and energy drinks producer in Australasia
Buyer Suntory Ltd (Japan), domestic diversified food and beverages producer
Seller Groupe Danone (France), multinational food & beverages group
Buyer Rationale overseas expansion strategy, cash absorption
Seller Rationale debt reduction, good return on investment, focus on healthy waters business
NBs Danone acquired Frucor from public shareholders for € 140 mln in 2002
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As the valuation suggests, there was a keen bidding race for Frucor, apparently between three big Japanese beverages groups, namely Suntory, Asahi and Kirin. Expect more acquisition rivalry between these players, especially in soft beverages and beer in the Asia and Oceania regions. All of them have strong cash generative domestic businesses, but are starved of growth in Japan. That’s great news for sellers in the region; we look at some candidates and potential outcomes.

These three companies are quite similar to one another and share a common heritage. Each of them has total sales of about $ 15 bln; each of them has a top three brewing business in Japan; each of them has diversified into other alcohol drinks, soft beverages and food products, to achieve growth as the Japanese beer market has matured.

However, they also differ in key respects, in terms of strategy and financial condition; these differences we believe will determine which of them will succeed in the acquisition battles to come, in the next year or two.

Asahi is the clear market leader in beer in Japan, with about 40% share, and alcohol beverages make up about 70% of the group’s total sales, with the remainder being mostly soft beverages. Generally, Asahi’s focus now is on re-engineering and streamlining its existing businesses, to increase profitability, and not on growth. This is bearing fruit, with 15% growth in operating profit reported for Q3 2008, in spite of flat sales.

Although the group talks about acquisitions going forward, this is quite vague, and most of the focus is on product innovation instead as a growth driver, in areas like new genre low-alcohol beers. Moreover its main foreign ventures, in the beer market in China and fruit juices in South Korea (Haitai Beverages), are underperforming so far.

Unless Asahi makes an acquisition breakthrough soon, as Kirin did with National Foods and now Suntory with Frucor, they will have ‘missed the boat’ and may gradually fall into decline.

Kirin Holdings, no.2 in beer in Japan with 25% share, has much more aggressive growth targets than Asahi. With a cash mountain of about $ 800 mln, as well as room for additional leverage, it has the means to achieve its goal of becoming a diversified, international beverages and food group, with a doubling of its sales revenue, by 2015.

It has targeted its soft drinks business pillar, which already constitutes about 25% of group turnover, as its growth engine in Asia and Oceania. At the same time, its most recent acquisitions, those of Australia’s National Foods and Japan’s Kyowa Hakko, both in 2007, have both been in foods not beverages.

With an acquisitions warchest similar in size to that of Kirin, on a leveraged basis, privately –owned Suntory is set to remain Kirin’s most serious rival in the overseas acquisitions arena. Like Kirin, it has aggressive growth targets that include overseas expansion. Its portfolio is more diversified however, spanning spirits and wine, RTD coffee, foodservice and flowers. It also has a very strong corporate social responsibility mandate.

At the same time, its international profile is broader than that of Kirin. As well as a presence in China and now, with Frucor, in Oceania, the group owns the Bowmore Islay malt whisky distillery in Scotland, as well as Chateau Legrange wine in Bordeaux, France.

In terms of acquisition candidates, going forward, the most imminent appears to be the soft beverages unit of Cadbury Schweppes in Australia, with its no.2 market position and 20% share.

Another upcoming asset is set to be InBev’s Oriental Brewery, the no.2 beer player in South Korea, whose sale is necessitated by InBev’s requirement for cash in the wake of its Anheuser-Bush deal in the US.

There’s also a question mark over who will become United Spirits’ strategic alliance partner, in the Indian market, with a 15% stake rumoured to be for sale. Both Suntory and Diageo have been tipped as acquirers so far. Having strong distribution channels in that market could bring a lot of growth.

Last but not least, there are two big beer brands that might be available soon, in Australasia. San Miguel Corporation, the Philippines conglomerate, is to fund its diversification into utilities by selling a strategic 33% shareholding in its spun –off and separately listed domestic beer business, San Miguel Breweries. Kirin has already been tipped as a leading contender here, as it already co-operates closely with San Miguel in south –east Asia.

The other potential big consolidation play, in that region and globally, is the Foster’s beer business in Australia, although the ballast of that group’s wine division may hold things back for a while.

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THIS LEAD'S VALUATION
Size (€ mln) 600
Sector soft drinks
Asset Quality New Zealand no.1 branded
Seller large plc
Buyer large corporate
P/S 2,5
P/Ebitda 14,0
Type total consideration
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