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Changes Brewing at Sapporo

Aggressive U.S. fund Steel Partners is bidding for Japan's third-largest beer brewer despite that company's anti-takeover provisions

A U.S. private fund's proposed offer to take a controlling stake in Sapporo Holdings, Japan's third-largest beer brewer, sent the company's shares sharply higher on Friday and added froth to other Japanese brewers' stocks.

In January, Steel Partners Strategic Fund—the Tokyo operations of Warren G. Lichtenstein's New York-based Steel Partners and Sapporo's largest investor—urged Sapporo to consider abandoning the so-called poison pill provisions adopted last year by its board. Such provisions can make it too costly for a corporate raider to launch a takeover. Sapporo's management had planned to respond by Feb. 16.

But Steel Partners didn't wait for an answer. On Feb. 15 the fund proposed a friendly takeover that would boost its 17.5% stake to 66.6%. It said it would offer 825 yen ($6.80) a share, which works out to $1.3 billion and was more than 4% higher than that day's closing price.

The move prompted Goldman Sachs analyst Katsunori Tanaka to upgrade his "Sell" rating to "Neutral" and raise his 12-month share price target to 730 yen, from 500 yen. Tanaka's recommendation helped lift Sapporo's stock 12.6% on a day when the Nikkei 225 Stock Average lost 0.1%. Other brewers benefited, with Asahi Breweries (ASBRF) adding 1.6% and Kirin Breweries (KNBWY) 4.2%.

Diluting the Brew

In a letter to Sapporo President Takao Murakami, Steel Partners said that if it decides to make a formal offer it wouldn't reshuffle management or change Sapporo's business operations. That civility might be hard to take seriously for anyone familiar with the $6 billion fund's aggressive tactics as a shareholder activist.

Sapporo said today it would respond with its own request for a more detailed proposal. "We will be asking for more information," Sapporo director Yoshiyuki Mochida told reporters.

The company later posted a statement on its Web site saying it would ask shareholders to vote on whether to stick with board-approved anti-takeover measures. The measures included offering shareholders with less than 20% of voting rights a chance to buy additional shares for one yen (less than a penny) each—which would effectively dilute the holdings of its biggest shareholders.

In a Feb. 16 note to investors, Nomura Securities analyst Yoshiyasu Okihira said Sapporo could block a bid by discouraging investors from selling their shares or by activating poison-pill measures. Goldman's Tanaka agreed. "We think there is little likelihood that the Sapporo board will agree to the proposal in its current form," Tanaka wrote in a report.

Analysts also said Sapporo could ask a rival to outbid Steel Partners, though hardly anyone thinks it would find a suitor willing to pony up $2.5 billion for the company. Those prospects dimmed further after Sapporo and Asahi later denied reports that they were considering a tie-up.

Recently, Lichtenstein's fund has been on the prowl in Japan. In October it made a hostile bid for noodle maker Myojo Foods (MYJOF) that was thwarted when the Tokyo company agreed to a merger with rival Nissin Food Products (NFPDF). Some have criticized the fund's intentions as disingenuous, accusing it of putting its own profits above the interests of Sapporo's shareholders.

Drop in Domestic Sales

Sapporo is hardly an attractive investment. In the fiscal year through December, its price-to-earnings ratio was 139—high when compared with the 38.4 average for Japanese makers of consumer products. The company's return on equity was a paltry 2.1%, vs. the 9% average for the sector.

The company's Sapporo and Yebisu brands have struggled as Japanese consumers have turned up their noses at domestic mass-market beers and other alcoholic beverages. In the year through December, Sapporo's operating profit dropped 16.4%, to $71.7 million, on a 4.1% decline in sales, to $3.63 billion. Last year domestic beer shipments fell 0.7%, to 497 million cases, the lowest since 1992, when brewers adopted a new method for keeping statistics.

There's a remote possibility that Sapporo's crown jewel, real estate, might attract another suitor. The company's property portfolio includes Tokyo's Yebisu Garden Place, a complex of tony shops and offices where Morgan Stanley and other brokerages are housed. Real estate accounts for just over 5% of Sapporo's sales but three-fourths of its operating profit.

Hall is BusinessWeek's technology correspondent in Tokyo .

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