UPDATE 2-Aeon flexes muscles as CFS shareholders reject bid

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By Taro Fuse and Taiga Uranaka

NUMAZU, Japan Jan 22 (Reuters) - Shareholders in drugstore firm CFS Corp (8229.T) on Tuesday blocked a friendly takeover by a pharmacy operator, a rare move that showed the might of retail conglomerate Aeon Co Ltd (8267.T), which had opposed the deal.

It was only the second time in Japan that a takeover approved by the target company's board has been rejected.

Aeon, the top shareholder in CFS with a 15 percent stake, had launched a proxy fight to block the takeover by dispensing-pharmacy operator Ain Pharmaciez Inc 9627.Q, saying the merger ratio was unfair.

"It looks like financial institutions that do business with Aeon were brought round to side with Aeon. But it is a pity because this is the right time for drugstores and dispensing pharmacies to be merging," said Takumi Yamagishi, a CFS shareholder.

The proposed 11.1 billion yen ($105 million) deal was knocked down by 43 percent of votes cast, those at the meeting said, more than the one-third needed.

Seeking growth in the wake of new laws that promote generic drugs and over-the-counter medicines, the two firms agreed late last year to form a holding company in which Ain would have held a 61 percent stake.

Aeon, which has a sprawling retail empire including U.S. clothing store Talbots (TLB.N), was quick to put its foot down, saying not only that the ratio was unfair but that it wanted to take centre stage in any Japan drugstore consolidation.

However, Aeon President Motoya Okada said after the shareholders meeting that the retailer did not have plans at the moment to bid for more control of CFS.

Aeon and CFS entered a capital and business tie-up in 2000. CFS scrapped the alliance in 2004 only to revive it two years later.

Japan's first scuttling of a friendly takeover by shareholders came last February when a small investment fund headed by a former Morgan Stanley trader led shareholders of steel firm Tokyo Kohtetsu Co 5448.Q to block a bid by Osaka Steel Co Ltd (5449.OS).

Trade was suspended in CFS and Ain after the vote. Before the suspensions, CFS was down 4.2 percent at 482 yen and Ain was 3.7 percent lower at 1,488 yen.

Ain, based in Hokkaido, northern Japan, has rapidly expanded its business by acquiring rivals, with sales growing more than three times over in the past five years. CFS runs some 260 drugstores and about 20 grocery stores.

Aeon fell 5.3 percent to 1,261 yen, in line with a broad hammering of stocks on spreading worries about a U.S. recession. (Additional reporting by Edwina Gibbs and Ritsuko Shimizu; Editing by Hugh Lawson)