Japanese brewers Kirin, Suntory end merger talks

TOKYO (Reuters) - Japanese brewers Kirin Holdings (2503.T) and Suntory SUNTH.UL dropped plans to create a combined food and drinks group with $43 billion in annual sales after disagreeing over levels of control in a merged firm.

The two brewers began talks eight months ago with the aim of building the scale needed to keep pace with global consolidation sweeping across the industry and grow outside the Japanese market, which is shrinking along with the population.

The deal was complicated by the two companies' different corporate cultures. While Kirin is listed and based in Tokyo, unlisted Suntory calls the western city of Osaka its home and is 90 percent owned by its founding family.

The collapse of the merger talks, which would have created a group on a par with Pepsico Inc (PEP.N) and Kraft Foods Inc (KFT.N) in revenue, pushed Kirin's stock down 7.4 percent on Monday. The stock hit its lowest in five months and more than 18 million Kirin shares traded, their most active day in 23 years.

Shares of rival Asahi Breweries (2502.T) tumbled as well, falling 5.5 percent as investors viewed the news as a setback in the consolidation of Japan's overcrowded beverage sector.

"I think the market overacted to the news today since the possibility of the breakup had already been somewhat factored in to Kirin's share price," said Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management.

"But this is negative for Kirin. Suntory was the only and the biggest merger partner for it in Japan. So to grow it now needs to pursue opportunities overseas or in other business areas like pharmaceuticals," he said.

Kirin President Kazuyasu Kato told reporters the two were not able to agree on how to control the merged company. "We determined we would not be able to gain understanding from stakeholders for management independence and transparency of the merged company as a listed entity," he said.

Separately, Suntory President Nobutada Saji told reporters the talks fell through over the merger ratio.

Some analysts said the breakdown in talks may be better for Kirin than delays which could have arisen from thrashing out differences in strategy with Suntory, which was started by Saji's grandfather as a wine maker in 1899.

GROWTH STRATEGY

"The risks that come with a merger ... have been weighing on Kirin's share price," said Tomonobu Tsunoyama, analyst at Tokai Tokyo Research Center. "But this will likely slow consolidation in a hyper-competitive sector that is still grappling with price falls."

Kirin is the maker of "Ichibanshibori" beer and "Afternoon Tea" bottled drinks, while Suntory is known for its "Premium Malt's" beer and "Boss" canned coffee.

Faced with a shrinking market at home amid a rapidly aging population, Japanese brewers have been looking abroad for growth. Kirin, which runs neck-and-neck with "Super Dry" maker Asahi Breweries (2502.T) for the No. 1 slot in Japan's beer market, has been the most aggressive in overseas expansion.

It spent $1.5 billion in the past two years to buy Australia's National Foods and Dairy Farmers and another $2.8 billion to take full ownership of brewer Lion Nathan.

Kirin President Kato said his company would continue to seek acquisition opportunities. "We are seeing M&A and finding good partners are very critical for our growth strategy and they are our growth drivers," he said. "We are not going to do business just based on organic growth."

Suntory, which lags far behind from Kirin and Asahi in the Japanese beer market, runs a substantial non-alcohol beverage business, including making Pepsi in Japan.

It has also stepped up its efforts to expand overseas, including through its $3.9 billion acquisition of European soft drinks maker Orangina last year.

Kirin's financial advisers were Morgan Stanley (MS.N) and Mitsubishi UFJ Securities, while Suntory was advised by Goldman Sachs (GS.N) and Nomura (8604.T).

(Additional reporting by Ritsuko Shimizu; Editing by Valerie Lee and David Holmes)