With cheap money available, Japan Inc. seen to follow Suntory's M&A path

TOKYO, March 27 Thu Mar 27, 2014 6:29am EDT

TOKYO, March 27 (Reuters) - More Japanese companies are expected to follow Suntory Beverage & Food Ltd in acquiring overseas companies to gain a foothold in faster-growing markets even as global economic uncertainty and a weaker yen temper deal-making.

Japan's slow domestic growth and cash-heavy balance sheets, together with declining birth rates and an ageing society, have encouraged outbound acquisitions by companies in a broad range of sectors from consumer and retail to finance and electronics.

The value of announced Japanese acquisitions in the first quarter rose nearly four-fold from a year ago to 2.07 trillion yen ($20.23 billion), Thomson Reuters data show, though that total was heavily weighted by Suntory's huge takeover U.S. bourbon maker Jim Beam.

Still, with Japan's central bank printing money and borrowers awash in cheap loans, takeovers by Japanese companies both large and small are expected to remain steady, according to executives, investment bankers and lawyers interviewed by Reuters.

"The aspiration for growth hasn't gone away," Yuichiro Wakatsuki, head of mergers and acquisitions at Bank of America Merrill Lynch in Japan, told Reuters. "There is ample capital and banks are quite aggressive about lending, so there aren't constraints in terms of capital."

That sentiment was well represented in the takeover agreement by Japanese beverage group Suntory Holdings, which announced the purchase of U.S. spirits company Beam Inc. in January for a total deal of $16 billion, using around $14 billion in borrowed money.

A year ago, the Bank of Japan announced an intense burst of monetary stimulus, pledging to buy assets to accelerate consumer inflation to 2 percent in about two years. The ultra-easy monetary environment, along with hopes of "Abenomics" stimulus spending, helped to drive Tokyo shares up 57 percent in 2013. The BOJ is widely expected to launch further easing later in 2014.

Wakatsuki noted a mixed outlook for global M&A deals due to macroeconomic concerns, but said there was little change in the search for opportunities abroad by Japanese companies. First-quarter M&A data show Japan ranking fourth globally in cross-border M&A, according to Thomson Reuters data.

Outbound mergers and acquisitions by Japanese companies fell 5 percent to 6.17 trillion yen ($61 billion) in the year ending March 31, according to preliminary data by Thomson Reuters.

But that pullback is coming off a 13 percent climb the previous year, when optimism over Prime Minister Shinzo Abe's reflationary policies lifted Japanese stocks and business confidence.

Mark Weeks, managing partner of law firm Orrick, Herrington & Sutcliffe in Tokyo, said there was increasing M&A interest among CEOs of medium-sized companies.

"We are also seeing strong, traditionally domestically focused Japanese companies, in the $150-$300 million size range, that are looking outside of Japan for the first time," he said.

A weekend poll by the Nikkei Shimbun showed around 47 percent of Japan's CEOs were interested in M&A, with 36 percent looking for a partner and 3 percent already in talks.

Of the respondents who indicated interest, 61 percent said they would consider deals with U.S. and European companies, while 52 percent were looking to China and developing economies.

Genichi Tamatsuka, due to take over as CEO of Lawson Inc in May, said the 24-hour convenience store chain was doing well in Hawaii and the company would consider M&A to expand further in the U.S. market.

"The purpose of our expansion in Hawaii was to establish a beachhead into North America. We need to consider M&A with an eye on the North American market," he told reporters this week.

Yuichi Jimbo, head of investment banking at Citigroup Global Markets Japan, said current market conditions presented "a very good window" of opportunity for deals, one that companies don't expect to last much longer.

"Once the inflation target is achieved, interest rates will inevitably rise," he told a recent seminar in Tokyo, calling money, at this stage, "practically free."

($1 = 102.31 Japanese yen)

(Additional reporting by Emi Emoto; Editing by William Mallard and Matt Driskill)