Japan's Suntory considering merger with Kirin

By Mayumi Negishi and Nathan Layne

TOKYO (Reuters) - Japanese brewer Suntory Holdings Ltd said on Monday it was considering a merger with larger rival Kirin Holdings Co (2503.T) in a deal that would create one of the world's largest beverage and food firms.

The news sent shares of Kirin soaring 7.8 percent to a nine-month high and lifted shares of other brewers amid speculation that a deal would trigger consolidation in the sector.

A merger would put Kirin and unlisted Suntory on par in revenue terms with U.S.-based Kraft Foods (KFT.N) and Pepsico Inc (PEP.N), and give the two more pricing power in Japan's mature market.

"If a merger is realized, that would give them the market share to take leadership in pricing and help their soft drinks businesses -- a chronic weak spot in an ultra-competitive market" in Japan, said JP Morgan analyst Naomi Takagi.

"It's a huge positive if they can do it."

Suntory spokeswoman Naoko Tsuda said that the company was considering various options including a merger with Kirin but that nothing had been decided.

Kirin spokesman Mitsutake Matano declined comment on the possibility of a merger, repeating a statement that Kirin is working with Suntory on procurement, distribution and other business activities.

Kirin and Suntory are in talks to merge under a holding company, and aim to agree on the deal this year, the Nikkei business daily said, citing unidentified sources.

The merged firm would be the largest player in the Japanese beer and soft drink markets and one of the largest worldwide, with combined annual sales of 3.8 trillion yen ($41 billion), giving it more resources to seek acquisitions abroad.

Some analysts cautioned that a deal was by no means a sure thing, citing potential regulatory resistance to a merged entity that would command about half of Japan's beer market.

"It is not at all certain that a deal is really going to happen. The hurdles ahead are by no means small," said Mizuho Securities analyst Hiroshi Saji.

Shares of Kirin rose 7.8 percent to 1,392 yen while the Nikkei benchmark average .N225 fell 2.6 percent. Sapporo Holdings (2501.T) surged 6.1 percent to 536 yen and Asahi Breweries (2502.T) climbed 2.5 percent to 1,395 yen.

If the deal does get regulatory approval, Kirin would comfortably nudge out Asahi Breweries's 37 percent market share. It would also capture Suntory's health and soft drink businesses in southeast Asia and in China, Mizuho's Saji said.

"I don't think Asahi or Sapporo are going to stand idly by," he said.

The Nikkei said Kirin Holdings President Kazuyasu Kato and Suntory Holdings President Nobutada Saji met at the end of last year to initiate talks and they had informed some of their executives of the merger plan by early July.