Japan's Snow Brand to merge with Nippon Milk

TOKYO (Reuters) - Snow Brand Milk Products 2262.T, Japan's No. 3 dairy firm, plans to merge with fourth-ranked Nippon Milk Community Co in the latest consolidation in the country's struggling dairy sector.

Top dairy products makers have embarked on a series of alliances to cope with high raw materials prices and sluggish demand as the number of children in Japan declines.

Industry leader Meiji Dairies Corp 2261.T has said it plans to merge with top confectionery maker Meiji Seika Kaisha 2202.T in April, while second-ranked Morinaga Milk Industry (2264.T) is reportedly in merger talks with another confectionery producer, Morinaga & Co (2201.T).

"We estimate that the domestic milk market, in which Nippon Milk Community operates, will continue to experience a downturn in consumption," said Mizuho Securities analyst Hiroshi Saji following earlier media reports of the Snow Brand deal.

"We believe there is a possibility of further reorganization within the industry," he said.

Snow Brand and Nippon Milk Community would have combined annual sales of 534 billion yen ($6 billion), giving it a similar scale to Morinaga Milk, which posted 587 billion yen in revenue in the financial year that ended last March.

The two companies said on Tuesday they plan to merge their operations under a newly created entity on October 1.

Under the merger ratio, Snow Brand shareholders will get 0.2 share in the new entity for each of their shares, while Nippon Milk Community shareholders will receive 0.48 shares for each of their shares.

Snow Brand did not give an estimate of what its stake in the new company would be or the value of the transaction for its shareholders.

Snow Brand span off its milk operations in 2003 and merged them with agricultural cooperatives to create Nippon Milk as part of its efforts to rebuild its business in the wake of food scandals that damaged its earnings.

Snow Brand holds a 30 percent stake in Nippon Milk, which sells products under the Megmilk brand.

Prior to the announcement, shares of Snow Brand ended up 2.7 percent at 307 yen, underperforming a 4.9 percent gain in the benchmark Nikkei average .N225.

($1=89.64 Yen)

(Reporting by Taiga Uranaka, Sachi Izumi; Editing by Chris Gallagher)