Kirin makes move on Lion Nathan

Kirin, Japan's largest diversified drinks conglomerate, announced on Thursday that it is interested in purchasing the part of Lion Nathan that it doesn't already own. Kirin currently holds 46.13% of Lion Nathan, the second-largest beer, wine and spirits company in Australasia. Lion Nathan confirmed Thursday that it has received an approach, and that it has set up a committee of directors independent of Kirin to consider the proposal. Lion Nathan's shares were then suspended ahead of a statement. A price has been put forward by Kirin, but has not been publicly released.

A Kirin press release states that trading will resume on Monday, April 27, if Lion Nathan decides not to respond to Kirin's opening. It also says that "the proposal is preliminary, incomplete and non-binding".

Kirin will have to pay at least A$2.4 billion ($1.7 billion) for the shares it doesn't own, based on Lion Nathan's last traded price of A$8.31 before the shares were suspended.

Frederic Gits, senior director at Fitch Ratings in Tokyo, says that "given that Lion Nathan is already consolidated into Kirin, the transaction would not have much impact on the financials of Kirin, except that the equity minority interest will be replaced by debt, thereby increasing the leverage at group level (assuming it is fully debt financed). Economically, though, Kirin will get full access to Lion Nathan's cash flows."

In other words, the dividends which used to go to the minority shareholders will flow to the acquirer, boosting the buyer's bottom line. The downside will be more debt.

A Tokyo banker not involved in the deal says a successful privatisation would improve Kirin's bottom line, but not its top line.

Kirin posted sales of ¥2.3 trillion ($23.4 billion) in the fiscal year ending December 2008 and net income of ¥80.18 billion. Its total debt-to-equity ratio is 0.72 times, according to a February 2009 company presentation, which also said that Kirin is planning asset liquidations totalling ¥100 billion. The aim is to achieve a debt-to-equity ratio of 0.5 times over the long term, but to allow up to 1.0 times on a temporary basis to achieve "growth-oriented investment", the presentation states.

In a report published Thursday, Moody's Investors Service expressed concern about the company's debt, which has risen to ¥660 billion at the end of 2008, compared to ¥240 billion at end 2006.

Lion Nathan is tiny compared to Kirin with sales of $1.36 billion, Ebitda of $385 million and debt of approximately $1 billion for the year ending September 30, 2008, according to a different Moody's report.

"Lion Nathan has better operating margins than Kirin, which adds to the deal's attraction, as does Australia's faster growth rate, and there is little execution risk as the companies know each other well," says Fitch's Gits.

Another banker not part of the advisory consortium says that the deal makes sense from Lion Nathan's perspective too as it "is also looking to boost growth and profitability and has much to gain from merger synergies with Kirin".

Kirin and Lion Nathan earlier joined up to explore a merger with Coca Cola Amatil, which could also have led to cost savings. However, the target rejected the deal in February 2009. Kirin has also bought Dairy Farmers and National Foods in Australia in recent years.

After these acquisitions, Kirin's debt levels are beginning to attract attention. Although the company has an Aa3 rating from Moody's, the outlook is negative, and was put under further review on Thursday. "The company's balance sheet is getting a bit heavy, so how they finance the deal will be important," says Jun Sakurabayashi, a ratings analyst at Moody's.

Fitch's Git says that "the danger is that as the number of targets in Asia decreases, Kirin will end up paying more. (Fellow Japanese brewer) Asahi paid around 14 times Ebitda for its stake in Tsingtao, which sounds a lot for a minority stake in what remains a difficult market."

However, a Tokyo analyst who preferred to remain anonymous argues that the company "is on auto-pilot in terms of achieving this deal. Kirin is a very strong company, and one of the few companies in this environment which could raise permanent capital. Also, it has a strong relationship to the Mitsubishi Group, so funding should be cheap and plentiful." Kirin announced in August last year that it had amassed a $3 billion war chest with which to follow a profit-centred growth strategy.

The proposal is likely to be initially funded from cash on the balance sheet and bridge loans, followed by a debt or equity fund-raising exercise in six months' time. The Lion Nathan business generates so much cash that raising debt against the deal should not be difficult, says the Tokyo analyst.  

The acquisition (if it goes through) would add the same type of core drinks business as Kirin is already in. The food and beverage business has strong cash flows, and Moody's Sakurabayashi says that Kirin does an excellent job of cutting costs.

"It's a tricky environment these days. I wouldn't be surprised if Kirin wanted to tie in their partner more closely, assert some control. Kirin has had had the original stake for a very long time," says the Tokyo banker not involved in the deal.

Adding to the deal's attraction is that the Australian dollar has weakened against the yen.

In a nod to corporate governance and shareholder value, it has recently become a trend for listed Japanese companies to improve their return on equity by privatising their subsidiaries. MUFG, Japan's largest bank by assets, last year privatised both Union Bank of California and Mitsubishi UFJ Securities.

J.P. Morgan and Deutsche Bank are Kirin's financial advisers. Deutsche's presence is believed to be due to the fact that the original investment, negotiated some 10 years ago, was done by Bankers Trust. Bankers Trust was subsequently bought by Deutsche. Caliburn Partnership is advising Lion Nathan.