Vultures circle as assets come up for grab

In Britain, output in the second quarter was surprisingly strong, reflecting what has been happening in Europe and America and reinforcing the impression that the worst of the recession has passed.

History shows that as a recession ends, strong and well-financed companies look to pick up cheaply valued but healthy assets to boost their global presence – and that is exactly what is happening.

The biggest bid on the table is Kraft’s £10.2bn offer for Cadbury, and while some would argue that consolidation in the drinks sector is a permanent process, a new round is beginning in the Far East, where Suntory is buying Orangina Schweppes for £2.6bn in what will be the biggest overseas acquisition by a Japanese drinks group.

The French soft drinks producer enjoyed sales of about €1bn last year with its Orangina, Oasis, Pulco, Trina and La Casera brands but the most attractive asset to Suntory is the right to the Schweppes brand in most of Europe and the extra channels that offers for distribution of its beers and spirits.

Orangina itself was sold to Cadbury by Pernod Ricard in 2000 and then to two private equity houses, Blackstone and Lion Capital, in 2006. The latest deal means they are effectively doubling their money. They were able to do so because not only did Suntory want Orangina, but so did its Japanese rival brewer, Asahi.

The Japanese home market for beers and spirits is declining as the population ages, so domestic producers are seeking to expand their overseas markets to compensate.

They fear that unless they expand, they too will become victims of the global consolidation process. For instance, if Beijing were to allow greater foreign penetration of its markets by the global drinks producers, the Japanese groups might not be able to compete with the financial firepower of the likes of SAB Miller, AB InBev and Diageo.

SAB Miller is in fact already in talks with Femsa over a potential purchase of the Latin American beverage group’s beer business, which includes brands such as Sol and Dos Equis. Heineken, which has distributed Femsa’s beers in the US since 2005, is also understood to be sniffing around as Femsa looks to shift more focus to its Coca-Cola operations.

Earlier this year, Suntory, which is privately controlled, bought the Australasian beverage maker Frucor for €600m as part of the move to grow overseas. But there is a bigger picture. Even before it secured Orangina, Suntory announced it was in merger talks with Kirin, its larger Japanese rival.

The Orangina deal gives Suntory a stronger hand in the merger negotiations, but when the two companies complete their merger later this year, they will be one of the world’s largest combined food and drinks groups and a more difficult target for a potential predator.

In wines and spirits, Diageo has halted its share buyback operation to protect its balance sheet, but that does not preclude acquisitions at the right price, and while Pernod Ricard has declared itself on the sidelines until 2011 following last year’s purchase of Vin & Sprit, others such as Bacardi, Beam Global and Brown Forman would like to expand their portfolios or come closer together.

In addition, VJ Mallya, owner of India’s United Spirits and the country’s biggest brewer, is also looking for an international alliance following the collapse of talks with Diageo. The next few months could be interesting.

Finance on Friday, 02.10.2009