Terrie's Take 878 -- Frothy Market for Asahi in International M&As, e-biz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Mon Dec 19 06:58:21 JST 2016

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term 
technology and media entrepreneur living in Japan. 

General Edition Sunday, December 18, 2016, Issue No. 878

- What's New -- Frothy Market for Asahi in International M&As
- News -- La Nina likely to end in March 2017, less snow in 2018
- Upcoming Events
- Corrections/Feedback -- Land scarcity for hotels in Tokyo, Osaka
- Travel Picks -- Former British Villa in Tochigi, Oysters in Hokkaido
- News Credits

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Frothy Market for Beer M&As

If there is one thing that alcohol and toy companies in Japan can be 
sure of, it's that their domestic sales in Japan will continue to shrink 
as the population greys and dies out. So it is that there is an overseas 
M&A competition going on among the top 3 brewers in Japan, to keep 
revenues and the bottom line trending upwards, by buying out drinks 
companies elsewhere. Last week Asahi Group Holdings, the parent of Asahi 
Breweries, announced that it will spend JPY888.3bn (US$7.7bn) buying out 
a group of SABMiller beer brands in the five Eastern European countries 
of Czech Republic, Poland, Hungary, Slovakia, and Romania.

Japanese investors were not impressed with the news, fearing that Asahi 
is overpaying, and additionally with only 10% of its sales coming from 
international operations that the company is unproven in foreign 
markets. As a result, Asahi's stock plummeted 6.4% when the deal was 
announced, before recovering to close at 4.6% down, at 3,497 yen. What 
caught our eye about this deal isn't the high premium Asahi paid, but 
rather the locations of brands - locations that Asahi has little 
experience in.

Actually, when you look at Asahi's historical international M&A 
approach, you get the sense that they have an insecurity/inferiority 
complex that has kept them focused on Japan much longer than their 
peers, and which has channeled their investments into small 
opportunities. Indeed, CEO Naoki Izumiya said as recently as 2014 said 
the company would be cautious and invest in smaller deals in safe haven 
markets like those of South East and Eastern Asia. However, 
circumstances and competitors have overtaken this strategy, and now the 
company is well and truly outside its comfort zone.

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Why was CEO Izumiya so focused on slow growth back in 2014 versus the 
big-bang approach of Suntory, which bought Jim Beam for US$16m the same 
year? Mostly because of his concern about risk and reputation. However, 
in the last two years he has had to change his position on both counts. 
Firstly he has been unable to  restrict the firm to small markets and 
small deals because of pressure from his competitors, who are merging 
and taking bigger and bigger market shares. As a case in point, while 
Asahi is the largest drinks company in Japan and No. 5 in the world, 
after the AB Inbev-SABMiller deal that No. 5 position gives Asahi just 
1% global market share versus AB Inbev's now massive 30%. Asahi is 
quickly becoming irrelevant in the global markets.

Secondly, although Asahi's management may have wanted to keep their 
international deals smaller since that should mean "safer" - recent 
history hasn't borne this theory out. A case in point is Asahi's 
acquisition of Independent Liquor of Australia/New Zealand (actually 
founded in NZ). The Japanese firm was in a hurry to buy the liquor firm 
from a pair of private equity funds back in 2011, and after a brief 3 
months of due diligence paid out a very rich NZ$1.5bn. In May the 
following year, Asahi publicly acknowledged that it had overpaid by as 
much as 30% and brought a lawsuit against the PE firms accusing them of 
stuffing retail channels to improve their numbers - a lawsuit that it 
eventually won. Nonetheless, even after winning a court award of 
NZ$208.6m, Asahi still suffered losses in FY2015 of about NZ$208.6m on 
the acquisition - a lemon that only now is starting to stabilize.

A very good analysis on the deal and why Asahi may have overpaid (it was 
too trusting of the incumbent management numbers) can be found here:


The analysis was written by Andrew Heffernan, owner of wine importer 
Colonial Trade Co. Ltd. here in Tokyo.

While the lawsuit must have been stressful enough, a potentially more 
damaging situation arose when the newly acquired company itself bought a 
small alcohol distributor called The Mill for NZ$18.2m, which then 
promptly got involved in a scandal in New Zealand where it was found to 
be selling alcohol online to underage school kids. This hot potato was 
dumped a year later for a loss of NZ$6.2m. Asahi was lucky that the 
reputational damage was confined to New Zealand and didn't taint the 
parent's brand. After all, the Japanese are very particular about 
keeping minors away from alcohol.

And so now the man who wanted to avoid large deals has had direct 
experience of how difficult foreign markets can be and yet has decided 
to land  himself squarely in the middle of a large (and we think risky) 
one - JPY888.3bn for five drinks brands in countries that Asahi has no 
significant experience in. No wonder the shareholders dumped the 
company's shares.

Given the difficulties that Asahi has had with friendly and easily 
accessed/managed markets such as Australia and New Zealand, we predict 
that the Asahi  will find itself sitting on a few more local hot 
potatoes as time goes by. The company doesn't seem to have the internal 
resources to cope - as witnessed by their over-reliance on the 
Independent Liquor senior management. Clearly they need to improve their 
recruiting efforts and to set up western-style senior management 
practices, at least for their offshore investments. In the meantime, 
since they are such good customers of SABMiller already, having spent 
billions on Peroni and Grolsch earlier this year, maybe SABMiller will 
help them out by supplying trustworthy local resources to operate the 

On the other hand, if they can get past the challenges of 
internationalizing and do a proper risk analysis before jumping into the 
deal, then the performance metrics of the new businesses look quite 
good: JPY200bn in annual sales, JPY43bn in operating profit, and with 
250m cases shipped a year 150% of the volume the company is doing in 
Japan. Yes, this means a 20-year amortization of the investment, but for 
a company like Asahi, better a long recovery period than simply leaving 
the cash in the bank.

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+++ NEWS

- Okutama to offer empty homes to new families
- La Nina likely to end in March 2017, less snow in 2018
- Pensions to be indexed to CPI, wages
- Asahi Beer making US$7.8bn acquisition in Eastern Europe
- Casinos approved for operation in Japan

=> Okutama to offer empty homes to new families

With an estimated 8m vacant homes in Japan, it has only been a matter of 
time before towns in rural areas would start giving them away. Indeed, 
this has already happened in remote parts of the country. But now a 
Tokyo suburb, Okutama, is getting into the action by offering vacant 
houses to anyone willing to settle in the area for the next 15 years. 
Actually the houses aren't quite free, but close to it. One family of 
ten (admittedly an exception to the usual nuclear family of 3 or 4) 
received a house for a monthly rent of JPY8,000. They also received, as 
will other successful applicants, JPY2m for renovation costs and a 
JPY500,000 bonus if they stay in the same residence for at least 15 
years. ***Ed: Okutama is a beautiful location and now with the Ken-o 
Expressway is easy to get to. No word on whether foreigners can apply 
for the same incentives.** (Source: TT commentary from Japantimes.co.jp, 
Dec 15, 2016)


=> La Nina likely to end in March 2017, less snow in 2018

The Met Agency has said that there is a 70% chance that La Nina effects 
on the weather will end in spring of next year. La Nina is characterized 
by a cooling of equatorial oceans and increasing moisture in the air in 
SE Asia pushing northern weather patterns further north than usual, in 
an oscillating cycle. For Japan this means heavier than normal snow 
falls on the Japan Sea side of the nation, and probably one of the best 
skiing seasons in the last (and next) ten years. With the break in La 
Nina, the weather in future years is likely to become warmer again, and 
snowfalls more sparse. ***Ed: So if you like skiing, you should make the 
most of it this winter.** (Source: TT commentary from reuters.com, Dec 
9, 2016)


=> Pensions to be indexed to CPI, wages

The government plans to index pensions to the inflation rate and 
wage-earner contributions, as a means of reducing its pension bill - 
currently running around JPY54.8trn per year. There are 40m pensioners, 
and they absorb payments equivalent to 10% of the economy. The new 
indexing will be phased in over 5 years, through to 2021, and will allow 
the government to cut back pensions if the CPI goes down, as well as 
aligning payouts more closely to the contributions made by salaried 
workers. ***Ed: Interesting to see that a full 66% of pension payouts 
are funded by pension insurance that practically every worker in Japan 
contributes to, while another 23% comes from government coffers, and 11% 
from investments by pension funds (like the GPIF). (Source: TT 
commentary from bloomberg.com, Dec 14, 2016)


=> Asahi Beer making US$7.8bn acquisition in Eastern Europe

Asahi Group Holdings (Asahi Beer) is on the M&A warpath again, this time 
buying beer brands in Czech Republic, Poland, Hungary, Slovakia and 
Romania from Anheuser-Busch InBev (AB InBev) for EU7.3bn. AB InBev was 
forced to divest the brands as part of a deal with the EU in order to 
allow it to buy-out SABMiller of London, UK. In fact, this was the 
second M&A between the parties, after AB InBev sold the Peroni and 
Grolsch brands to Asahi earlier in August this year for US$2.9bn. ***Ed: 
So that's a cool US$10bn paid out by Asahi just in Europe.** (Source: TT 
commentary from asia.nikkei.com, Dec 13, 2016)


=> Casinos approved for operation in Japan

After 15 years of bitter infighting and disappointment, the 
LDP-dominated Diet finally passed legislation on Thursday to legalize 
casinos in Japan. The nation's regulatory authorities will apparently 
need about a year to finalize rules and regulations governing the 
industry, and so the first casinos are not expected to be in operation 
until 2022 or 2023. A battle between casino operators has already 
erupted, with MGM pledging to invest as much as US$10bn into an 
operation in Japan. ***Ed: Tokyo, Yokohama, and Osaka are expected to be 
the initial sites for casinos, followed by Naha, Sapporo, and, perhaps, 
Fukuoka (since it's most easily accessed from China and South Korea). 
***Ed: The top 3 biggest gambling countries in the world are not China 
and Japan as you might expect, but rather: 1 - Australia, 2- Singapore, 
3- Ireland.** (Source: TT commentary from fortune.com, Dec 14, 2016)


NOTE: Broken links
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posting them, thus breaking our links -- we apologize for the inconvenience.


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=> No events this week.



=> => In last week's TT877 we interviewed Seth Sulkin and VJ Daswani 
about the economics of investing and running hotels in Japan at present. 
More than a few readers responded with additional comments - the best of 
which was the following.

*** Our reader says:

I'm with a Japanese commercial RE firm that does office buildings and 
hotels. What your two respondees said is largely in line with our 
experience, although we do development from the ground up and we mostly 
operate our own properties. I would say that the land values that we 
deal with are much higher than those quoted in the piece, but then again 
we are pretty much only interested in land in the better areas on the 
Yamanote line, in Chuo-ku or Kita-ku in Osaka and in similar areas. I 
think a lot of the other operators have roughly the same philosophy in 
terms of prospecting locations.

Therein lies the problem that I wanted to highlight: finding land in 
locations that you want -- and which will be profitable and remain 
profitable even if the inbound numbers slow down. It is very, very 
difficult. Whenever a fresh tract comes on the market, the bidding for 
it becomes quite fierce and as a result the incumbent owners often 
decide just to sit on it and try again at higher prices in 1-2 years time.

At least in the segment of the business hotel market that we operate in, 
land availability is by far the biggest constraint to expansion or 
segment entry. Construction, finance, etc. can all be arranged at 
relatively economical rates - it's the land availability which is a 
problem. If readers are asking themselves every time they read about 
hotel capacity issues in Tokyo and Osaka "Why don't they just build 
more?" Well, land scarcity is why not.



=> Former British Villa in Oku-Nikko

Fusion of British and Japanese Cultures, Tochigi

Nikko is renowned for its intricately adorned shrines and temples, 
beautifully serene landscapes, and fresh mountain air. It is also the 
location for a unique historical building, the Former British Villa in 
Oku-Nikko. This gorgeous place opened its doors to visitors in July 
2016, and many people still don't know about it. Therefore, it is not as 
crowded as other tourist spots in the area.

Here you will learn a lot about Sir Ernest Mason Satow, a British 
diplomat who played a significant role in the Meiji Restoration of 
Japan, and will be able to enjoy a fusion of the British and Japanese 
cultures during that period, which creates the feel of a "semi-Western 
atmosphere" in the Former British Villa. The villa is set right on the 
shores of Lake Chuzenji, next to the Italian Embassy Villa, which is 
also open to the public. So you may as well consider purchasing an 
economical joint ticket to see both.


=> Akkeshi Gourmet Park
The Oyster Town of Hokkaido

Akkeshi, coming from the word "Akkekeshi" (an Ainu word), means a place 
with lots of oysters, and hence, Akkeshi town, in eastern Hokkaido is 
well known for its oysters. Akkeshi Gourmet Park sits on a hill, and 
there is an observation deck on the third floor of the building where 
superb views can be had of nearby Akkeshi Bay, Akkeshi Bridge, and Lake 
Akkeshi in the distance.

In the building, there is a restaurant on the second floor with more 
than half of the menu containing oyster dishes. Take your pick: fried 
oysters, raw oysters, oyster pasta, oyster porridge, oyster salad, 
oyster rice bowl, oyster curry, and the list goes on and on. There are a 
few non-oyster dishes as well. Next to the restaurant, there is a 
barbeque area where fresh oysters and other seafood items can be 
barbequed or grilled and eaten on the spot. There is also a fish market 
selling live oysters, fish, scallop, prawns, sea urchin and a wide 
variety of live seafood.




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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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