Kirin buys control of Brazil's Schincariol for $2.6 billion

TOKYO Tue Aug 2, 2011 7:43am EDT

Kirin's beers are placed in a fridge at a convenient store in Tokyo August 2, 2011. REUTERS/Kim Kyung-Hoon

Kirin's beers are placed in a fridge at a convenient store in Tokyo August 2, 2011.

Credit: Reuters/Kim Kyung-Hoon

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TOKYO (Reuters) - Japan's Kirin Holdings Co (2503.T) is buying a controlling stake in major Brazilian beer and soft drinks maker Schincariol for 3.95 billion reais ($2.6 billion), making its first foray in the fast-growing South American economy.

A highly competitive and shrinking home market has forced Kirin and rival Asahi Group Holdings (2502.T) to look abroad for profit growth, but a lack of targets in consolidating global beer markets has made expansion tough for Japanese brewers.

The maker of Ichiban Shibori beer said on Tuesday it had bought all outstanding shares of Aleadri-Schinni Participacoes e Representacoes S.A., which holds a 50.45 percent stake in Schincariol, Brazil's No.2 beer and No.3 soft drinks maker.

Kirin has increasingly focused on building market share in Asia and Oceania by taking stakes in Singapore's Fraser & Neave (FRNM.SI) and San Miguel Brewery SMB.PS of the Philippines, as well as buying Australia's No.2 brewer Lion Nathan in 2009.

"Since the Australian deal, Kirin has been eyeing further expansion and in the current state of strengthening yen, I think this is an inevitable sequence of events," said Hiroshi Saji, a senior analyst at Mizuho Securities.

But with only a few targets available -- such as Australia's Foster's Group FGL.AX, for which world No.2 SABMiller (SAB.L) has launched a $10.4 billion offer -- as world brewers are scrambling to grow overseas, Kirin made the buy outside its focus region.

"In the beer market there is not such a large number of opportunities available, globally it wouldn't be a long list, so when this very good investment opportunity came up in Brazil, a large market with high growth potential, we decided to invest," Kirin President Senji Miyake told reporters.

Kirin's shares ended down 0.3 percent on Tuesday, outperforming the 1.2 percent drop in the benchmark Nikkei share average .N225. The company's shares are up 0.8 percent so far in 2011 against a 3.8 percent fall for the main index over the same period.

Brazil is the world's third-largest beer market after China and the United States, with beer consumption rising in recent years buoyed by an economic boom and rising wages. The market is dominated by the world's largest brewer Anheuser-Busch InBev (ABI.BR) with a market share of near 70 percent.

JAPAN M&A

Kirin's deal is the third-largest overseas takeover by a Japanese firm this year, trailing the $13.7 billion purchase of Nycomed International by Takeda Pharmaceutical (4502.T) in May and Terumo Corp.'s (4543.T) $2.63 billion deal to buy CaridianBCT in March, according to Thomson Reuters data.

Japanese companies have taken advantage of a strong yen to look for growth opportunities abroad to counter sluggish economic activity in the country. They have spent $39 billion on overseas acquisitions so far this year, up 45 percent from the same period last year.

In recent industry moves, last month, Asahi bought Malaysian soft drinks company Permanis for about $275 million and Sapporo announced a beer production and sales tie-up with Australia's third-largest beer maker Coopers Brewery.

But President Miyake told reporters that the strong yen did not play a role in the purchase.

"Rather than how foreign exchange rates are, timing was the key strategy in this deal. I don't think we moved quicker just because the yen is strong, just like I don't think we would have eased up on it if the yen was weak," Miyake told reporters after the briefing.

OVERSEAS MARKET

Japan's beer market shrank more than 15 percent in terms of shipment volumes during the last decade as the population aged, consumer spending sagged and drinkers opted for cheaper alcoholic beverages, forcing companies to look overseas for profit growth drivers.

To offset this, Kirin has pursued a strategy over the past several years of working to diversify its operations and grow outside its saturated home market, where it vies in beer sales with Asahi, Sapporo Holdings (2501.T) and privately-held Suntory Holdings SUNTH.UL.

"I think Kirin will continue making acquisitions in Asia, but it's hard to see they will continue in the South American direction," said one Tokyo-based fund manager, who declined to be named, adding that the firm would not have enough management capacity for more buys outside its focus region.

The purchase of the maker of Nova Schin and Devassa beer brands was funded via cash on hand and loans and will give Kirin access to Schincariol's nationwide distribution network and 13 production facilities.

Founded in 1939 by the son of Italian immigrants, Schincariol grew from a small-town maker of soft drinks, cocoa liqueur and cognac to a beverage giant that booked 2.9 billion Brazilian real in net revenue in the year ended March 2011.

The company established itself producing the super sweet, tutti-frutti flavored Itubaina soft drink, only venturing into the beer market in 1989 and since then has gone on an acquisition spree, mostly targeting premium brands such as Baden Baden, Eisenbahn and Devassa Bem Loura.

The price was about 15.7 times estimated earnings before interest, tax, depreciation and amortization (EBITDA). That fits into the multiple range of 9.6-26.1 times, observed in previous acquisitions of beverage companies in emerging markets, Kirin wrote in documents explaining the acquisition.

Citigroup is the financial adviser for Kirin and BTG Pactual is advising Schincariol. ($1 = 1.5661 Brazil Reais)

(Additional reporting by Elzio Barreto in HONG KONG and Natalia Konstantinovskaya in; TOKYO; Editing by Nathan Layne, Edmund Klamann and Muralikumar Anantharaman)

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