Kirin to pay $2.5 billion for Lion Nathan

Lion Nathan's independent board committee has agreed key terms under which Kirin, Japan's largest diversified drinks conglomerate, will acquire the 54% of the Australian company it does not already own for $2.5 billion in cash, the two parties announced yesterday. Kirin will fund the acquisition from existing cash balances and its usual lenders.

The price amounts to A$12.22 ($8.72) per share, which represents a premium of 47.1% to Lion Nathan's closing share price of A$8.31 on the Australian Securities Exchange on April 22; a 52.9% premium to the volume-weighted average price (VWAP) of A$7.99 in the month leading up to that date; and a 48.9% premium to the three-month VWAP of A$8.20.

The transaction goodwill of A$3.19 billion (¥220 billion) is to be amortised over 20 years, resulting in annual amortisation of ¥11 billion ($114 million), plus existing goodwill amortisation of ¥10 billion, for a total of ¥21 billion. Kirin's cash will be boosted by receiving 100% of Lion Nathan's dividends as opposed to the 46% it currently receives.  

Minority shareholders of Lion Nathan, the second-largest beer, wine and spirits company in Australasia, will receive A$11.50 per share from Kirin, an additional fully-franked interim dividend of A$0.22 per share, and a fully-franked special dividend of A$0.50 per share. 'Fully franked'  refers to the Australian custom of companies paying investors franking credits, which are "tax credits to the extent corporate tax has already been paid on the dividend amount", according to Paul O'Regan, head of corporate at Clifford Chance in Tokyo. The credits compensate for tax paid by the investors on their dividends.

The price represents 13.8 times Lion Nathan's reported Ebitda of A$592 million for fiscal 2008 and 12.5 times the mean consensus Ebitda forecast of $654 million for fiscal 2009. Excluding dividends, the proposal values 100% of the Australian company at A$7.7 billion. However, the proposal will be subject to a number of conditions, including a second bidder, regulatory approval and any material adverse changes.

The sale will be done under a scheme of arrangement. This is only possible during friendly transactions (that is, with the support of the board of directors), and requires a majority of shareholders by number present and voting at the EGM plus 75% of the votes cast at the the meeting to be in favour of the scheme,explains explains Tracy Whirisky, a lawyer at Clifford Chance in Tokyo.  To acquire a 100% interest through a takevoer bid, in contrast, would required the support of shareholders representing at least 90% of the outstanding share capital, as any remaining shareholders' share could be compulsorily acquired. The sale is expected to go through by September. The parties say they are aiming for an impelementation of the agreemen within seven days.

Kirin will carry out a "limited amount of confirmatory due diligence", according to Lion Nathan's press release on Monday.

Lion Nathan's chairman, Geoff Ricketts, described the price as "full and fair". In the press release, he points out that the offer price implies a total shareholder return of 338% since the initial Kirin investment in April 1999, compared to 101% for investors in the ASX S&P 200 index over the same period.

However, he added during a conference call with analysts yesterday that it is highly unlikely that there will be any synergies between Kirin's National Foods operation in Australia and Lion Nathan, given their very different distribution channels and transportation methods, as well as their different geographical focus.

Analysts were split on the price. While Merrill Lynch's Australia analyst on the conference call referred to the price as "fantastic", the Morgan Stanley Australia analyst argued that the price is not as generous as the "stratospheric" multiples that Asahi, Japan's number one beer maker, has been paying in the region. Asahi bought Australian Cadbury Schweppes for 15 times its financial 2008 Ebitda of A$78 million in December 2008, and paid a financial 2008 Ebitda multiple of 14.2 for a 19.9% stake in China's Tsingtao that it bought from Anheuser-Busch InBev in January 2009.

Members of the Lion Nathan board, who support the deal, countered that the market today is weaker than last year, and added that it is almost impossible for a competing bidder to appear and push up the price given that Kirin already owns 46% of the company.

"A 12.5 times multiple for fiscal 2009 (based on brokers' forecasts) is higher than the 11.4 times Ebitda median multiple of the transactions in the brewing sector in the last 10 years -- but this is a relatively low risk transaction, as Kirin knows what it is buying after being the largest shareholder in Lion Nathan for 11 years," notes Frederic Gits, senior director for Fitch Asia-Pacific in Tokyo.

The most important statistic for Kirin president Kazuyasu Kato is surely that Japan's population is growing at 0.02% per year, while Australia's population, although small compared to Japan's, is growing at 1.2%. That's 60 times as fast. In addition, the Japanese beer market is over-crowded with Asahi, Kirin, Suntory and Sapporo fighting it out in a shrinking market place. Beer prices have been driven down by cost-conscious consumers in recent years, even to the extent of beers being created which are not, in fact, beers. They are marketed like beers, but because they contain a different chemical mix, they are tax efficient and can be sold at a substantial discount.

Kato's strategy is to expand into foreign markets. Kirin acquired Australian milk and juice producer National Foods from Philippine brewer San Miguel for ¥294 billion in 2007, which then served as the vehicle to buy Australian milk producer Dairy Farmers for ¥47 billion in 2008. Lion Nathan will cost a further ¥250 billion.

While the strategy makes sense, debt specialists are unhappy about the increasing debt load. "Traditionally, Kirin carried very low debt, below one times Ebitda, but it went up to two times with the acquisitions of National Foods and Kyowa Hakko, and would stand at about three times with the proposed transaction," says Fitch's Gits. Kirin Holdings' A+ rating is now on negative watch at Fitch as the estimated leverage of more than three times Ebitda (if fully debt financed) would not be consistent with the current rating. But a downgrade would be limited to just one notch, says Gits.  

Kirin says in a presentation of the deal that it will allow debt-to-equity of up to one times for growth re-oriented investments before seeking to return below that level.

Kirin's initial investment in Lion Nathan, Australasia's (New Zealand, Australia and New Guinea) second biggest brewery behind Foster's, was done 11  years ago. Earlier in 2009, the two companies made a joint bid for Australia-based Coca Cola Amatil (CCA). CCA for many years acquired and operated Coca Cola bottling plants, but is now a broad-based beverage company. The Coca Cola company is a 30% shareholder, and CCA is the sole licensee for Coca Cola in Australia. CCA has a very strong position in Australia, with 60% of the carbonated soft drinks market. It has its own expansion plans and rebuffed the offer.

Lion Nathan too is growing vigorously. In the six months to March 31, 2009, the company reported that net sales increased 5.5% to A$1.184 billion, while group earnings before tax improved by 8.4% to A$308 million. The company expects an even higher growth rate in the second half.

The company most clearly in the line of fire is now Foster's, which has over half the beer market in Australasia, and would be a tempting target for Kirin. However, by the same token, if Foster's resists a takeover, it can block Lion Nathan's future growth. It will certainly be interesting to see where Kirin's acquisition-oriented strategy goes now, given the dearth of easy -- and cheap -- targets.

J.P. Morgan and Deutsche Bank are advising Kirin, while Caliburn Partnership is advising Lion Nathan.