Suntory Holdings' proposed $16 billion buyout of the firm behind Jim Beam bourbon would mark its biggest foreign trophy yet, but analysts warn it will burden the Japanese drinks giant with heavy debt -- and may stoke a bidding war.
The eye-popping bid by Beam Inc. would vault Suntory to number-three in the global liquor market, and marks the latest foreign acquisition by the family-owned firm as it looks abroad to head off a declining domestic market.
Suntory, one of the country's biggest brewers and non-alcoholic drinks makers, is widely known in Japan for commercials featuring Hollywood movie stars including Tommy Lee Jones. Its eponymous whiskey played a starring roll in the 2003 Bill Murray film "Lost in Translation".
Company president Nobutada Saji last year told the leading Nikkei business daily that Suntory was eyeing a deal that would amount to a "once-in-a-lifetime gamble".
The deal announced Monday would be the third biggest overseas acquisition by a Japanese firm, after mobile carrier SoftBank's monster $21.6 billion takeover of US-based Sprint Nextel last year and Japan Tobacco's 2007 purchase of Britain's Gallaher for almost $19 billion.
It also eclipses the value of previous Suntory acquisitions, including the $1.56 billion purchase of the Lucozade and Ribena soft drinks brands in September.
The Beam deal would "create a spirits business with a product portfolio unmatched throughout the world and allow us to achieve further global growth", Suntory's top executive said Monday.
But while a combined Suntory-Beam would post annual revenue of more than $20 billion, analysts questioned the price tag -- a 25 percent premium on Beam's share price on January 10 -- and whether the marriage would save costs.
Ratings agency Moody's warned it may downgrade privately held Suntory's credit rating given that the bulk of the "aggressive" deal would be financed by bank lending.
"Suntory may have excess cash which it could spend towards the acquisition," Moody's said. "Nonetheless, this will still result in a significant increase in debt burden."
Satoshi Fujiwara, an analyst at Japanese brokerage Nomura Securities, echoed that concern, saying "my first impression was that the deal was not cheap at all".
"So they're going to have to produce some synergy benefits," Fujiwara added.
Offer could be met with counterbid
The market for bourbon has been growing steadily in recent years with the Jim Beam brand a key sales driver for the US firm whose other labels include Maker's Mark bourbon, Sauza tequila and Courvoisier cognac.
Osaka-based Suntory listed its food and non-alcoholic beverage unit in Tokyo last year in a $3.9 billion share offering. The unit, in which Suntory still holds a controlling stake, crept up 0.30 percent Tuesday, bucking a 3.08 percent drop in the Nikkei 225 index.
However, Suntory's offer, which must be approved by regulators and Beam shareholders, could lead rivals including France's Pernod Ricard to put in a counterbid, said Jeremy Cunnington, senior alcoholic drinks analyst at Euromonitor International.
"(Pernod Ricard) would not want to miss out on key brands such as Jim Beam and Sauza tequila, which are the second biggest brands globally in their respective categories," he added.
The latest move comes as Suntory is part of a recurring trend for Japanese firms as they see their home market declining due to a shrinking population, an economic downturn and changing consumer tastes.
The drinks giant -- which scrapped plans to merge with bigger Japanese rival Kirin in 2010 -- has announced it is forming a joint venture with Chinese brewer Tsingtao to expand its reach in China, the world's biggest beer market.
It also bought 51-percent stake in Indian food and drink maker Narang Group while, in 2009, Suntory bought Europe's Orangina Schweppes Group for $3.3 billion.
A strong yen in recent years also helped the propel the shopping spree as overseas deals were relatively cheaper for Japanese companies, although such purchases slowed last year as the yen sharply declined.
"If successful, the (Beam) acquisition could over time address Suntory's two main credit constraints: its geographic concentration and its low margins when compared to global peers," Moody's said.
But "Beam predominantly operates in the US, a market in which Suntory historically has had very little presence.
"As a result, operational and integration risks could be significant."