Kirin pays high price for being late to the party

August 2, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — It’s not easy being a Japanese company. Your home market isn’t just economically stagnant, it’s actually shrinking by a million consumers a year for the next two decades. So, the logic goes, Japanese corporations must expand abroad. But as Kirin’s latest takeover of an overseas asset attests, that’s a bum story for shareholders.

Kirin is paying 3.95 billion reais (about $2.6 billion) for a 50.45 percent stake in Schincariol, Brazil’s distant number two brewer after InBev. According to the group’s published financial statements, Schincariol made 54 million reais in 2010. Valuing the whole of the Brazilian group’s equity at 7.9 billion reais means Kirin is paying around 146 times earnings. Oh, and these fell 28 percent from the previous year.

Kirin spins a slightly different case using more flattering accounting. It gives a valuation of around 16 times earnings before interest, tax, depreciation and amortization. But even that looks like an extravagance. It’s not only about a third more expensive than the average beer deal; it’s also about double the multiple that Kirin fetches for its own earnings.

That might be defensible if Kirin had an edge, such as the ability to cut costs or assist in geographic expansion. Kirin has neither. Indeed, up until now the company had made clear its desire to focus on Asia and Oceania. President Senji Miyake on Monday suggested Schincariol was just too good an opportunity to pass up. But even if Brazil’s beer market is growing 10 percent a year, his comments smack of adventurism, not focus.

And without any overlapping operations, there are no cost savings to be realized from the deal. That stands in marked contrast to the other industry deal currently fermenting, SABMiller’s unsolicited $12 billion bid for Australia’s Foster’s. SAB offered just 12 times EBITDA partly because it is only able to extract a couple hundred million dollars of synergies.

By any measure, Kirin is overpaying, has no obvious mechanism to extract value and is drifting from its geographic strategy. That pretty well sums up what it’s like to be a Japanese company on an overseas shopping expedition.
Of course, there’s an alternative. Two years ago, Kirin nearly merged with domestic rival Suntory. The projected cost savings from that deal would have been worth nearly as much as Kirin’s current $14 billion market capitalization. That would have been a party worth going to.

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