Suntory’s opening salvo. Japan’s Suntory Beverage & Food last week announced a deal to buy GlaxoSmithKline’s Lucozade and Ribena brands in a USD2.1b deal. The transaction price translates to an estimated 30x PER. We anticipate more such deals with the next target likely an ASEAN-centric brand. To add spice to the competition, rival firms such as Asahi Group and Kirin Holdings may also be on the prowl, motivated by a shrinking market at home.

Next stop: ASEAN. Following its initial public offering earlier this year, Suntory, armed with a war chest of USD5b, explicitly stated its plan to make overseas F&B acquisitions. Lucozade and Ribena together have majority of sales from Europe, with Africa a small but growing market. We believe Suntory is still hungry for more deals and its next acquisition target would most likely be ASEAN-centric, considering its lack of presence in this region despite various forays over the years.

Thirst for soft drinks. Other than Lucozade and Ribena, notable deals by Suntory included the 2009 acquisitions of carbonated fruit beverage company Orangina Schweppes and carbonated energy drink-maker Frucor Group. Strategy-wise, we believe Suntory will be keen to bolster its traditional strength in ready-to-drink (RTD) teas with complementary soft drink varieties and brands. And ASEAN countries are expected to be among the fastest-growing markets over the next five years.

Coffee brewing fresh possibilities. Instant coffee currently is one of the fastest-growing F&B sub-segments in the Asia Pacific. It is expected to grow at 7.1% CAGR over the next five years, largely driven by ASEAN where the drink is widely accepted. Although Suntory is wellknown at home for its “Boss” RTD coffee, it does not have a major presence in either the instant coffee or overseas markets.

Shopping list for Suntory. We believe heightened M&A activities in ASEAN’s F&B space will drive overall sector valuations higher and examine some possible targets in this report. Del Monte Pacific is a dominant brand in the Philippines for healthy RTD fruit juices among other things, while the same preference for healthy choices may make Asian drinks leader Yeo Hiap Seng an attractive target. Their brand portfolios should greatly complement Suntory’s. Super and Old Town are strong brands in instant coffee, with a growing presence in Asia.

Source: Maybank Kim Eng Research - 19 Sep 2013