Japan's Asahi under pressure as rivals brew up merger

By Taiga Uranaka - Analysis

TOKYO (Reuters) - With two rivals set to merge, pressure is mounting on Japan's Asahi Breweries (2502.T) to be more aggressive on acquisitions and map out a clear growth path as its home market shrinks.

Kirin Holdings (2503.T) and privately held Suntory Holdings are discussing a combination which would create not only Japan's dominant beer firm but also a soft drinks maker rivaling market leader Coca-Cola (KO.N).

Japan's beer market has shrunk 15 percent in volume terms in the past decade as the nation's population rapidly ages -- a demographic shift that has prompted Kirin to aggressively diversify out of Japan and also away from beer.

Investors have been praising Kirin's moves to snap up assets around the Asia-Pacific region, and urging Asahi to follow suit.

"The market sees Kirin has taken the right direction by expanding overseas and business portfolio. In the light of these actions taken by Kirin, the impression of Asahi is not good," Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management.

Asahi shares have dipped about 1 percent this year, while Kirin shares have risen about 16 percent. Reflecting its lower growth prospects, Asahi shares trade at around 14 times this year's forecast earnings, while Kirin trades at around 22 times.

"Unless Asahi can show how it can achieve growth beyond beer business, the market is unlikely to see the firm favorably. Mergers and acquisitions are definitely the way to do it," Sugawara said.

MORE DEALS

Asahi has made a few international acquisitions and said it is looking at more overseas deals.

It has not set a specific limit on spending, saying with its debt-to-equity ratio standing at about 0.6, it does not see any difficulty in borrowing money to finance deals.

"We are not thinking about mergers or alliances in the domestic alcohol business. Our growth strategy is to invest globally, particularly in soft drinks operations," Asahi Managing Director Akiyoshi Koji told an earnings briefing last month.

One investment option for Asahi is Foster's Group Ltd (FGL.AX), Australia's largest brewer, which Asahi bought into in the 1990s, but sold later that decade.

Asahi is also expected to expand its presence in South Korea, where it partners retail giant Lotte Group, fund managers and analysts say.

Industry watchers say the huge success of Asahi's "Super Dry" beer, introduced in 1987 and now the country's best-selling beer, has given it little incentive to reduce its dependence on its domestic beer. The business accounts for more than half of its sales, compared with Kirin's 32 percent.

Kirin, the maker of "Lager Beer" has been most aggressive among Japanese breweries in overseas acquisitions, spending $1.5 billion in the past two years to buy Australia's National Foods and Dairy Farmers. It also bought a majority stake in Japanese drugmaker Kyowa Hakko (4151.T) in 2007.