The perils of over-ambition

Asahi, meanwhile, agreed to buy Permanis, Malaysia's second-biggest soft drinks maker, and shortly afterwards completed the NZ$1.5 billion ($1.27 billion) acquisition of Australasia-focused Independent Liquor.

All of these transactions came in at reasonably high valuations - they ranged from 12.5-15.7x EBITDA, with Independent Liquor registering 13x - and this was a reflection of the intense competitive environment as much as the companies' growth trajectories.

Buoyed by low costs of capital and a strong yen, Japan's beverage giants often ended up battling each other for assets (according to industry sources, once the bidding reaches 13-15x EBTIDA, financial investors get uncomfortable). They were also battling their own demographics. Japanese population growth is negative, GDP growth is stagnant, price deflation is a longstanding problem, and consumer spending is in decline.

With the government agitating firms to enter new markets, it was a case of differentiate or decay.

Eighteen months on from the Independent Liquor acquisition, Asahi is claiming foul play. The Japanese company says the previous owners, Pacific Equity Partners and Unitas Capital, artificially inflated Independent Liquor's earnings ahead of the transaction. Asahi logged a one-time charge of JPY8 billion ($85.5 million) in its 2012 results to cover losses on the deal and has gone to court seeking damages.

The private equity firms say the allegations are untrue and that Asahi had full access to information and management during a three-month due diligence process. They have instigated legal proceedings of their own.
Presumably the full facts of the matter will emerge in court, so it isn't worth dwelling on who might be right and wrong at this juncture.

What the case does appear to flag up, however, is the risk involved in expanding too far and too fast. This is familiar to all private equity investors, who have either seen portfolio companies struggle after making strategic errors or completed carve-outs from other firms that are seeking to unwind overambitious positions.

Shortly after the Independent Liquor deal closed, one of the PE executives involved spoke favorably of Asahi's thoughtful approach to integrating the two corporate cultures. It is generally acknowledged that Japanese companies are far more sophisticated outbound investors than the raw groups that pioneered the country's late 1980s M&A boom. They spend longer on due diligence and are cautious in their approach but they aren't infallible.

Just like other multinationals, the integration issues facing Japanese buyers exist on a nuanced level. For example, a fantastic local marketing strategy won't work if global, regional and national teams are unable to interact properly. This is, arguably, particularly important in Australia and New Zealand where attempts to curb binge drinking have seen ready-to-drink alcoholic beverages hit by tax hikes and alcohol content caps. Everyone with exposure to these markets needs to re-strategize.

Asahi's 2012 net profit reached a record high of JPY57.2 billion, largely thanks to its recent overseas acquisitions. Sales rocketed to JPY1.6 trillion with overseas sales coming in at JPY158 billion, up more than 67% year-on-year. The company has been in China for a while, but of its eight subsidiaries or joint ventures in Southeast Asia and Oceania, all bar one have been added in the last two years. (The oldest holding, Schweppes Australia, was only acquired in 2009.)

Expanding into new territories at such speed, is it surprising that some acquisitions haven't worked out as planned?

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Consumer
• Exits
• Australia
• New Zealand
• Consumer
• Exit