Exit Godzilla

Kirin: A would-be beer monster has been stopped by market volatility. Japanese brewers Kirin and Suntory have called off talks to merge into a giant that would have 50 per cent of the Japanese beer market. It is a shame, but not a shock, that the deal failed. Consolidation will still make sense in smoother times.

Wobbling markets are tough conditions in which to agree on relative valuations. The benchmark Nikkei index has fallen more than 9 per cent since January’s peak. Tokyo-listed Kirin must have felt that even more keenly than its family-owned rival. Settling on how to divide the enlarged company between each side’s shareholders, a perennial merger challenge, was made even harder.

Other typical deal challenges seem to have got in the way too, such as who should run the group. Kirin shareholders may have viewed Suntory’s directors as an unknown quantity, especially after they splurged on European juice brand Orangina mid-way through merger talks. Thrashing out an agreement over “soft” issues may not have seemed worth the bother. Neither side is a forced seller.

But these factors do not kill the logic for the transaction. Japan's beer volumes are expected to decline by some 14 per cent by 2014, according to consultancy Business Monitor International. Were the two companies to crunch out a 5 percentage-point increase in their margins — which would still leave them less profitable than AB Inbev — they could save $1.3 billion a year.

Taxed and capitalised, that’s worth almost $8 billion today.

This was a big deal to let slip away. Assume Suntory makes $1.4 billion of Ebitda in this calendar year, as Credit Suisse estimates. Pop that on Kirin’s 7.5 times enterprise multiple and the company would be worth $9.8 billion. Add it to Kirin’s valuation today and the new group would have been worth more than $30 billion. Failure to bag this prey may be a setback for animal spirits in what remains a weak M&A environment. But the Godzilla of beers deserves a second try.