Soft drink makers shift focus in Asia

Some deals are already in the bag. Kirin Holdings, the number one brewer in Japan, recently bought a 14.7 per cent stake in Fraser & Neave, a 127-year-old Singapore company with beverage operations.

Last week, Asahi Breweries of Japan agreed to buy P&N Beverages, an Australian fruit juice maker, to combine with its Schweppes division. Meanwhile, more mergers and strategic links look probable, with global companies expected to consider alliances with companies like Unilever Indonesia and Mamee-Double Decker of Malaysia, the maker of Mamee noodles.

“There are lots of compelling reasons to expand in Southeast Asia,” said Singapore based Aberdeen Asset Management Senior investment manager Chris Wong. “China is not an easy market to navigate, whether with regulation or distribution networks. India is a closed market,” he said, referring to restrictions on operations by foreign companies in India.

The soft-drink market in the Association of Southeast Asian Nations region, which includes Malaysia, the Philippines, Singapore, Thailand and Vietnam, is expected to grow about 40 per cent by 2014, to $17 billion, according to Euromonitor International, a market research company.

And while the Chinese and Indian markets are each forecast to grow about 70 per cent by 2014, the Southeast Asian beverage market is viewed as less risky and with a potential of its own, thanks to a growing segment of wealthier, brandconscious consumers, which contrasts with saturated markets in the West and Japan.

Coca-Cola, canceled plans last year to buy China Huiyuan Juice after the deal was blocked by the Chinese government for antitrust reasons. The ruling resulted in beverage companies’ looking at other parts of Asia for investment. “Now is not the time to increase investments or expand” into China, President of Kirin Senji Miyake said. “Rather the focus is Southeast Asia.”

Analysts said they expected global beverage companies to seek more mergers or links with local companies that have strong identities and distribution networks.

Kirin agreed to pay 1.34 Singapore dollars (about $995 million), for a stake in Fraser & Neave to bolster its softdrink and dairy products businesses in Southeast Asia.

Coca-Cola’s bottling and distribution arrangement with Fraser & Neave expires next year. Coca-Cola is setting up its own plant in Malaysia, but so far there has been no sign of any local linkups. CI Holdings, which owns the Malaysian license to manufacture Pepsi, may also look to expand, analysts said. “CI Holdings, F&N, Mamee are some of the bigger boys looking for wellrun companies in the small-cap space,” said Maybank Investment Bank Analyst Khair Mirza, referring to companies with small market capitalisation.

“But there aren’t many, and those that sell demand high prices.” Beyond Southeast Asia, Australia, with a beer market that offers some of the highest profit margins in the brewing world, is also on the radar screens of global beverage companies.

The president of Asahi, Naoki Izumiya, has said his company will have $9.5 billion available for acquisitions over the next five years, with a focus on Asia and Oceania. Last week, it agreed to buy P&N Beverages for about $330 million.

Analysts say Goodman Fielder, an Australian food manufacturer, could be a possible target for an Asian beverage company. Japanese beverage companies have an added incentive in that a strong currency lowers the price of targets in yen terms. Kirin, which owns a 48 per cent stake in the Philippine brewer San Miguel, has described its business in Southeast Asia as weak. Analysts said the Fraser & Neave move showed Kirin was on the offensive after having dropping a largely defensive attempt to merge with Suntory, a Japanese rival, earlier this year.

Merger talk may be one reason why food and beverage stocks are held at a premium; investors are paying 24 times the earnings of such shares in Asia-Pacific emerging economies, compared with a price multiple of 17.9 in all sectors, Thomson Reuters data show.

A consumption trend that shows Malaysia’s beer market growing at an annual rate of between 4 per cent and 5 per cent, compared with 1 per cent or slower in the US beer market, is another reason such shares are highly prized.

The Vietnamese beer market is growing about 5 per cent a year, according to CLSA Asia-Pacific Markets, a brokerage firm.