UPDATE 2-Asahi to buy soft drinks maker Calpis for $1.5 billion

* Biggest deal yet in a slew of acquisitions by Asahi

* Calpis buy makes Asahi Japan’s No.3 soft drinks firm

* Asahi to fund deal with cash, borrowing

TOKYO, May 8 (Reuters) - Japanese brewer Asahi is to buy soft drinks group Calpis for about 120 billion yen ($1.5 billion), the largest of a string of deals by the company to offset a declining domestic beer market with new sources of revenue.

Calpis, known for its milky drinks popular with Japanese children, will make Asahi Japan’s No.3 non-alcoholic beverage maker. The deal highlights the pressures in the country’s crowded beverage sector where players are fighting for pieces of a shrinking market.

Asahi and other Japanese brewers such as Kirin Holdings have been on an acquisition spree overseas to combat Japan’s declining population, uncertain economic prospects and deflation.

The brewer’s plan to purchase Calpis from seasonings maker Ajinomoto Co follows $3.7 billion in deals done over the past five years.

The maker of Japan’s top-selling “Super Dry” beer has taken stakes in China’s Tsingtao Brewery, bought the Australia business of Schweppes and last year spent nearly $1.2 billion for New Zealand beverage group Independent Liquor, its largest deal at that time.

“Calpis is a top dairy product with a bright image as a safe and healthy product and strong brand recognition. We do not have dairy products, so it will be a good compliment to our product portfolio,” Asahi president Naoki Izumiya said at a briefing on Tuesday.

“If you have a brand that is number one, or a strong number two, in its category, the strength of that portfolio will allow for growth, even in a tough market.”

The acquisition - first flagged to the market after reports last month by Reuters and other media - comes at a high price, analysts say.

“On the surface, the (deal) price is negative (for Asahi), since the valuation seems comparatively high from the point of how successful the synergy will be when you taken into account previous results,” said Hiroshi Saji, a senior analyst at Mizuho Securities.

Asahi will fund the purchase of Calpis with cash and by borrowing. It aims to complete the deal by October when it will decide on the final price and the specifics of the deal.

Asahi has long been looking to bolster its domestic soft drinks business, which it expects to account for 22 percent of its forecast for nearly 1.6 trillion yen in sales for the year to December, significantly less than the 62 percent it is looking for from alcoholic beverage sales at home.

With the purchase of Calpis, Asahi will move ahead of rival brewer Kirin Group Holdings and tea maker Ito En in Japan’s soft drinks market, but will still lag bottler Coca-Cola Enterprises and unlisted Suntory Holdings.

Ajinomoto intends to use the proceeds from the sale for future alliances as well as mergers and acquisitions with seasonings, food and biotech firms, president Masatoshi Ito said.

Ajinomoto also said it would buy back up to 7.39 percent of its outstanding shares, worth 50 billion yen.

Prior to the announcement on Tuesday, shares of Asahi ended 0.3 percent higher, against a 0.7 percent gain in the Nikkei 225.

In the year to date, Asahi shares have risen 4.3 percent, underperforming an 8.6 percent gain in the Nikkei 225 average . But shares in the beer maker have fallen 3.2 percent since reports of the deal surfaced on April 27, slightly less than a 4.0 percent fall in the benchmark over the same period.

Merrill Lynch advised Asahi on the latest deal, while JP Morgan acted for Ajinomoto.