August 7, 2019 / 6:19 AM / 14 days ago

Breakingviews - Kirin’s Japanese makeover is only half pretty

A glass of Kirin Beer is pictured at a tasting room of the Kirin Brewery Company's factory in Sendai, Miyagi prefecture, northeastern Japan March 2, 2012. Kirin resumed the production of all products last month at the plant which was damaged last year by the March 11 earthquake and tsunami. REUTERS/Yuriko Nakao)

HONG KONG (Reuters Breakingviews) - Kirin’s new makeover is only half pretty. The $20 billion Japanese brewer is buying 30% of Tokyo-listed cosmetics and kale-juice maker Fancl for 129 billion yen ($1.2 billion). Moving away from booze and an ageing market makes sense; rivals ​are doing it too. But paying a multiple of earnings more than twice its own for a minority stake is not a wholesome look. 

The maker of Ichiban said on Tuesday that the deal will help promote its health and well-being mission. Kirin has been diversifying since the 1980s - its pharmaceuticals and biochemical business, for example, generates 18% of its revenue. Boss Yoshinori Isozaki hopes to work with Fancl, which also makes health supplements, to develop new products, such as anti-aging skincare items. 

Kirin probably hopes the collaboration will provide a much-needed boost to its top line. Fancl’s revenue grew more than 12% in the year to March, helped by sales in markets like China and Singapore. That’s more than three times the pace for Kirin where over half its revenue still comes from its Japanese beverages business. 

However, Kirin is paying up for a less profitable business: Fancl’s 7% net profit margin is more than one percentage point lower than the brewer’s own. And Kirin’s deal values its target at a pricey 40 times forward earnings, more than twice its own valuation and even much higher than Fancl’s pre-deal multiple of 24 times. 

Another hurdle may be distance. Kirin is buying the shares from Fancl’s founder and his family, and will get some board representation, but is stopping short of a full takeover. That explains why the smaller company’s shares moved barely 1% on Wednesday and Kirin’s fell almost 5%. Shareholders do not see much room for value creation. Minority stake purchases, though common in Asia, are usually a poor basis for a commitment to mutual gain. 

Breakingviews

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