Suntory Makes It M&A Time With IPO to Stir Drinks Makers

Three years ago, Suntory Holdings Ltd. pulled out of a merger that would have created a business bigger than Coca-Cola Co. Now it’s back at the global drinks table, selling up to $4.7 billion of shares to fund acquisitions.

The owner of brands from Yamazaki whiskey to Orangina soda didn’t walk away from the merger talks with Kirin Holdings Co. for lack of ambition. Suntory said it pulled out because it couldn’t secure control of a company that would have had 2010 sales of some $40 billion.

With their domestic market shrinking, Japan’s drinks makers are seeking growth overseas. For Osaka-based Suntory, the share offering planned for July 3 is about raising capital for deals that could tilt the global soft drinks industry east and re-order the sector in Japan.

“Suntory probably already knows what they want to buy and are in negotiations,” said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. “They will buy them as soon as they get the money.” Suntory says it hasn’t decided on any deals.

Suntory said in a regulatory filing May 29 that it plans to raise as much as 476 billion yen by selling about 40 percent of its soft drinks subsidiary, Suntory Beverage & Food Ltd. Final pricing is due June 24 in Japan’s biggest IPO since September. It comes as Tokyo’s stock market, though off recent highs, continues to enjoy its best valuations for years as Japan’s government wheels out an economic stimulus program.

Evian, Volvic

The soft drinks business had revenue of just under 1 trillion yen ($9.8 billion) in 2012, and accounted for 54 percent of Suntory’s revenue and about half of its operating profit. The unit says it aims to double sales by 2020.

To do that, Suntory said in December it plans to acquire companies in Southeast Asia, Middle East, Africa, and Latin America. Yamato said a deal in Europe could come first: drug maker GlaxoSmithKline Plc last month put U.K. soft drinks brands Lucozade and Ribena up for sale. Analysts say they could fetch at least 1.5 billion pounds ($2.3 billion).

Suntory discussed buying Danone SA’s bottled water assets in 2011, according to people familiar with the matter at the time, though no deal was reached. Danone was said to value its water business, including brands Evian and Volvic, at up to $7 billion, beyond Suntory’s range at the time.

Art Gallery

Suntory is a household name in Japan, selling drinks from canned coffee to beer, sponsoring TV shows, and operating its own fine art gallery and concert hall.

Overseas it’s best-known by whiskey and movie buffs. Suntory’s Japanese single malt whiskies now regularly win top international awards. And actor Bill Murray’s character in the 2003 film ’Lost in Translation’ introduced the name to filmgoers with the line, ’’For relaxing times, make it Suntory time.’’

Under the leadership of Nobutada Saji, 67, a University of California Los Angeles MBA and a grandson of founder Shinjiro Torii, the family-controlled business has expanded vigorously outside Japan.

Since he took over as president in 2001, Saji has bought French soda maker Orangina and New Zealand’s Frucor for a total of 376 billion yen. In 1980, when Saji was in charge of the U.S. division, Suntory bought a PepsiCo Inc. bottling company serving the East Coast for 20 billion yen.

Silver Moustache

A keen golfer and swimmer with a trademark silver-flecked moustache, Saji cuts a lean, well-known figure in Japanese business circles. He also heads up the Torii clan’s real estate company that controls nearly 90 percent of Suntory Holdings, making it one of Japan’s richest families.

Last year, he steered Suntory Holdings to earnings of 37 billion yen on sales of 1.9 trillion yen. That compares with Kirin’s 56 billion yen in net income on revenue of 2.2 trillion yen and Asahi Group Holdings Ltd.’s profit of 57 billion yen on sales of 1.6 trillion yen.

Suntory’s heavyweight status after the listing and any big acquisitions it makes will shake up the international drinks market, predicts Yukihiro Wada, head of the Japan practice at consulting firm Kurt Salmon.

“Just the listing may not be enough for Suntory to take on global rivals such as Pepsi and Coca-Cola, but it’s getting there,” Wada said. “It will have the financial strength to go ahead with big acquisitions.”

After the collapse of the 2010 deal with Kirin, Saji made it clear that he had plans to make Suntory bigger -- and knew where he would get the money.

‘Prospective Bride’

“When we need funds for acquisitions, we’ll consider selling shares,” Saji told reporters in Tokyo after the talks broke down.

Rivals Asahi and Kirin have indicated flagging interest in large-scale international dealmaking: Kirin said it will work to improve its existing business and ramp up shareholder return, while Asahi says it will focus on smaller deals.

“Unlike Kirin and other competitors, Suntory has been successful in overseas acquisitions,” said Kazuhiro Miyashita, a board member at a researcher Inryosoken. “It may be possible for Suntory to become a truly global company this time.”

At home, one potential target for Suntory is Dydo Drinco Inc., an Osaka-based coffee and beverage maker. Though the company is small, with a 1.9 percent market share in 2012, according to Euromonitor, it has an attractive network of vending machines.

“Everyone seems to be aiming at Dydo,” Miyashita said. “I think it’s the best prospective bride.”

The company had a market value of 69 billion yen as of May 30. Dydo declined to comment.

Sammy Davis

Torii started Suntory in 1899 as a wine store in Japan’s second city. It takes its name from a combination of the sun-like red circle that figured on the label of early drinks and the founder’s surname. Suntory built Japan’s first whiskey distillery in 1923 at a time when most scoffed at the idea that Japan might compete with traditional whiskey distillers in Scotland and Ireland.

Plugged over the decades by Western celebrities from Sammy Davis Jr. to filmmaker Francis Ford Coppola -- father of ’Lost in Translation’ director Sofia Coppola -- Suntory’s single malt whiskey is now sought after internationally, commanding premium prices.

As Japan’s economy roared ahead in the 1960s, the company saw an opportunity in beer despite the dominance of Kirin and Asahi. It took 45 years, until 2008, to make a profit on the brew, and Suntory now claims a market share exceeding 14 percent.

How long Saji remains the ultimate decision-maker at Suntory is open to question. He has said he wants to give up his position to a successor suited for global business. Though neither Saji nor the company commented on who might follow him, the man in charge at the unit now set to be listed is well placed: Nobuhiro Torii, 47, who has been with Suntory since 1997, is a great-grandson of Shinjiro Torii and one of the highest-ranking family members at the company besides Saji.