Suntory takes $16 billion swig of Beam

Japanese outbound M&A off to a heady start as Suntory buys Beam for $16 billion, placing Morgan Stanley at the top of league tables.

Suntory, the Japanese beverage group, has bought US whisky maker Beam for $16 billion, catapulting the company into the US market in the second largest liquor M&A deal on record.

The deal reflects Japanese companies’ thirst for offshore acquisitions after lacklustre volumes in 2013.  Japanese outbound M&A chalked was $52.5 billion in 2013, down 53% from the record high of $111 billion in 2012, according to Dealogic.

“Last year, Japanese outbound M&A volume was significantly lower, so some people thought that the bid from Japanese companies was no longer there,” said Kenji Kimura, global head of M&A at Nomura. “But we see a revival in interest as there are more Japanese companies looking outside of Japan for future growth and an international platform,” he added.

Faced with stagnant growth at home, Japanese companies have turned offshore. Beam's portfolio of brands include Jim Beam, Maker's Mark, Teacher's and Laphroaig Scotch whiskies and Sauza tequila, while Suntory makes Japanese whiskies such as Yamazaki, Hakushu, Hibiki and Midori liqueur. The merger will make Suntory the third largest spirits maker.

The deal is the third largest Japanese outbound M&A deal on record, following Softbank’s 2013 acquisition of Sprint Nextel for $36.1 billion and Japan Tobacco’s acquisition of Gallaher Group in 2007 for $19.1 billion, according to Dealogic.

Suntory will acquire all outstanding Beam shares for $83.50 per share in cash or a total of about $16 billion including the assumption of Beam's outstanding net debt. The price is at a 25% premium to Beam's closing price on January 10, 2014.

The Japanese have a reputation for over-paying and Beam did not come cheap. It was struck at an enterprise value to Ebitda multiple of more than 24 times compared to a multiple of 15 times for liquor M&A deals in the last decade, according to Dealogic.

“The deal is expensive,” said Moody’s analyst Mariko Semetko. “However, Suntory’s earnings were previously concentrated in Japan and the acquisition helps to diversify its concentration risk,” she added.

Suntory will fund the deal through a combination of cash and financing provided by The Bank of Tokyo-Mitsubishi UFJ. Mitsubishi UFJ Morgan Stanley advised Suntory and the deal takes  Morgan Stanley to top of the global M&A rankings year-to-date. Centerview Partners and Credit Suisse advised Beam.

However, there are concerns over the amount of debt that Suntory is taking on. Shortly after the deal was announced, Moody's placed Suntory’s A3 rating under review for downgrade. Suntory had Y643 billion ($6.2 billion) of cash as of September 30, 2013, which is higher than historical levels, according to Moody’s. However, it adds that the acquisition will still result in a significant increase in debt burden of more than $10 billion.

“Suntory has not yet disclosed the capital structure but we expect it to assume a sizeable amount of debt and it remains to be seen how quickly it can bring its debt levels down,” Semetko said.

Founded in Osaka, Japan in 1899, Suntory Group is Japan's leading player in alcoholic and non-alcoholic beverages, with sales of $17.6 billion in 2012. The company has been on an acquisitive streak, having acquired GlaxoSmithKline’s Lucozade and Ribena drink brands in 2013.  

Suntory and Beam already have a business relationship under which Suntory distributes Beam products in Japan and Beam distributes Suntory's products in Singapore and other Asian markets.

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