Suntory pays up to quench thirst for Japan escape
By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
Suntory is paying up to quench its thirst for overseas growth. The newly-listed Japanese firm wants to double its sales by 2020, partly through foreign acquisitions. To help achieve that goal, it’s paying GlaxoSmithKline 1.4 billion pounds ($2.1 billion) in cash for British brands Lucozade and Ribena. That’s a big premium to reduce its exposure to a tough domestic market.
The soft drinks and snack maker is living up to its motto “Yatte Minahare”, which chief executive Nobuhiro Torii explains as “Go for it” or “Take a risk”. After raising $4 billion from an initial public offering in July, Suntory is paying almost 14 times the two brands’ combined earnings before interest, tax, depreciation and amortisation. By comparison, Suntory paid about 11 times EBITDA when it bought Orangina for around $3 billion in 2009.
Lucozade and Ribena tick two boxes at once for the Japanese firm. The iconic brands provide a strong business in the United Kingdom which Suntory can use to expand sales of Orangina. It also gives Suntory access to growth markets in Nigeria and Malaysia where the two brands already have a presence.
Though revenue at Lucozade and Ribena has been pretty flat in the past three years, there is potential for them to expand into adjacent emerging markets. That wasn’t a priority for GSK, which is focusing on brands more closely linked to health. Suntory also expects cost savings of around 7 to 8 million pounds a year in the medium term.
The end result should boost Suntory’s overall profitability. Margins are weakest at home: Japan generated 64 percent of revenue but only 52 percent of operating profit during the first half. Even if domestic competition eases off, Japan’s ageing and shrinking population means it makes sense for Suntory to expand abroad.
Japanese overseas M&A has had its fair share of disasters. By comparison, Suntory’s track record is relatively impressive. The company has made four significant acquisitions in its history, including Orangina and Danone’s Frucor in 2008, and incurred no goodwill impairment losses, according to Nomura. That suggests Suntory’s latest big gulp deserves the benefit of doubt.