Kirin and Suntory Iron out Differences

Kirin and Suntory’s proposed merger will create one of the biggest drinks companies in the world. Their combined $40.9bn alcohol and soft drinks sales would put them above Coca-Cola, which today stands at $31.9bn, and in a position to compete with the likes of SABMiller and Anheuser-Busch on the world stage.

Global reach is vital because the Japanese beer market has shrunk by 75% over the last 15 years. That is why Kirin splashed out $2.4bn to take a controlling stake of Australian brewers Lion Nathan and $1.2bn for nearly half of the Philippine San Miguel Brewery in 2009. It is also why Suntory paid Danone $837m for juice firm Frucor.

A merger would give a new Kirin-Suntory company major savings in terms of joint procurement, greater pricing power and enough muscle to compete in the global markets it needs to prosper. The only question is: will they be allowed to do it?

Maximising the market

A joint Kirin-Suntory company will own 30% of the domestic market for soft drinks, 50% of beer and nearly 80% for whiskey, which means serious antitrust questions will have to be asked before any merger is allowed to go ahead. But the organisation tasked with asking those questions, the Japanese Fair Trade Commission, is caught between two ideologies.

On the one hand, it has been in contact with western counterparts seeking advice on how to lose its reputation for leniency. On the other, the trade ministry is applying pressure to it to allow dominant firms to grow into global champions. So which way will it go?

A Japanese legal source told foodprocessing-technology.com that the general consensus is the deal will be done. “The feeling is that the Japan Fair Trade Commission will not block the merger.

“It was publicly reported that currently the parties are in the so-called prior consultation procedure during which the main competition issues should be ironed out. A Japanese newspaper reported in December 2009 that the Japan Fair Trade Commission made more than 1,000 inquiries as to the merger so it is unlikely that the proper formal investigation, which is fixed by statute to a 30-day review period, can start any time soon.”

Global markets

If it does get past the Japanese Fair Trade Commission, Kirin-Suntory will then have to get the green light from European authorities. Under European law, companies with a combined global turnover of $7.06bn, including sales of over $373,300 within the European Economic Area [EU states plus Iceland, Norway and Liechtenstein], are bound by European merger controls.

Suntory achieved sales of $102m in Europe in 2008 and has since bought Orangina Schweppes, worth around £1bn in European sales, which would appear to put the new company at the mercy of European legislation.

“My understanding is that no filing has been made at EU level,” another source said, who asked not to be named. “However, the parties may have to file at EU Member State level, depending on their sales in each EU Member State.”

In addition, there are several cultural obstacles to the Kirin-Suntory merger. For a start, Kirin is a public company affiliated to one of the country’s biggest conglomerates while Suntory is a private, family-run firm.

Osaka City University Graduate School of Law professor Masako Wakui said cultural factors could be the biggest barrier to a merger. “I heard that the Suntory family wants a 33.4% share of the new company, which would give them the power of veto over critical decisions. Kirin shareholders won’t be happy about that and, as they are a public company and subsidiary of the Mitsubishi group, they will need to be convinced to vote in favour for any merger to go ahead,” Wakui says.

On top of that, Japanese managers and business owners are traditionally set against closing premises and making staff redundant. Merging together Kirin and Suntory’s assets would logically involve a certain amount of fat trimming but the country is in the midst of its worst economic downturn since World War II. Could the new company really make the correct business decisions in those circumstances?

“The traditional practice of lifelong employment in Japan is changing,” says Wakui. “The redundancy situation is better here than in the US or UK but it is happening more and more and even people with no restrictions on their contracts can be encouraged to retire early. These things are happening so often now, I don’t think this would be a barrier to any new company.”

Competitive forces

Despite the threat of a new behemoth suddenly appearing on their doorstep, it is unlikely that Asahi and Sapporo will be looking to throw spanners in the wheel of any merger deal. “The Japanese have a unique attitude towards mergers and acquisitions,” Wakui says. “Companies do not complain when their competitors merge together because they want to maintain good relationships and they know that they might want to merge themselves one day.”

Our anonymous legal source is confident that despite the sizeable hurdles facing the deal, a new Kirin-Suntory superpower will emerge blinking into the light at some point in 2010. “I think it is likely to go ahead as Japan needs a strong player in the sector to be able to compete internationally,” he says.

But owing to the cultural differences between the companies Masako Wakui is less certain a deal will be forged and even if it is, she warned, it may not be the happy solution either company was looking for when they began cosying up to one another.

“If the Kirin-Suntory merger goes ahead it will trigger a wave of mergers,” she says. “The Japanese business community sees the need to merge companies into bigger companies, so they can compete globally.

“But unless you’re a pharmaceutical company where the demands of research and development make mergers sensible, becoming a bigger company doesn’t necessarily assure competitiveness. Japan Airlines merged with Japan Air System believing it would make them stronger but they are in crisis and, if the government had not stepped in, they would be bankrupt.”