With two rivals set to merge, pressure is mounting on Japan's Asahi Breweries to be more aggressive on acquisitions and map out a clear growth path as its home market shrinks.

Kirin Holdings and privately held Suntory Holdings are discussing a combination which would create not only Japan's dominant beer firm but also a soft drinks maker rivaling market leader Coca-Cola.

Japan's beer market has shrunk 15 percent in volume terms in the past decade as the nation's population rapidly ages -- a demographic shift that has prompted Kirin to aggressively diversify out of Japan and also away from beer.

Investors have been praising Kirin's moves to snap up assets around the Asia-Pacific region, and urging Asahi to follow suit.

The market sees Kirin has taken the right direction by expanding overseas and business portfolio. In the light of these actions taken by Kirin, the impression of Asahi is not good, Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management.

Asahi shares have dipped about 1 percent this year, while Kirin shares have risen about 16 percent. Reflecting its lower growth prospects, Asahi shares trade at around 14 times this year's forecast earnings, while Kirin trades at around 22 times.

Unless Asahi can show how it can achieve growth beyond beer business, the market is unlikely to see the firm favorably. Mergers and acquisitions are definitely the way to do it, Sugawara said.


Asahi has made a few international acquisitions and said it is looking at more overseas deals.

It has not set a specific limit on spending, saying with its debt-to-equity ratio standing at about 0.6, it does not see any difficulty in borrowing money to finance deals.

We are not thinking about mergers or alliances in the domestic alcohol business. Our growth strategy is to invest globally, particularly in soft drinks operations, Asahi Managing Director Akiyoshi Koji told an earnings briefing last month.

One investment option for Asahi is Foster's Group Ltd, Australia's largest brewer, which Asahi bought into in the 1990s, but sold later that decade.

Asahi is also expected to expand its presence in South Korea, where it partners retail giant Lotte Group, fund managers and analysts say.

Industry watchers say the huge success of Asahi's Super Dry beer, introduced in 1987 and now the country's best-selling beer, has given it little incentive to reduce its dependence on its domestic beer. The business accounts for more than half of its sales, compared with Kirin's 32 percent.

Kirin, the maker of Lager Beer has been most aggressive among Japanese breweries in overseas acquisitions, spending $1.5 billion in the past two years to buy Australia's National Foods and Dairy Farmers. It also bought a majority stake in Japanese drugmaker Kyowa Hakko in 2007.

It spent another $1.4 billion to acquire a 49 percent stake of the Philippines' San Miguel Brewery earlier this year and is set to buy the rest of Australia's second-largest beer maker, Lion Nathan for $2.8 billion.

For the six months ended in June, Kirin's overseas operations accounted for 38 percent of the company's operating profit despite unfavorable currency rates.

Asahi's acquisitions include the $995 million purchase of Cadbury's (CBRY.L) Australian beverage business Schweppes, and a 19.9 percent stake in China's Tsingtao Brewery (600600.SS) for $667 million in April.

Of course, Asahi has not been just sitting back and watching, and it did do some acquisitions at home and overseas. But it has yet to realize synergy benefits and its overseas operation is suffering losses, said Tomonobu Tsunoyama, beverage sector analyst at Tokai Tokyo Research Center.


A Kirin-Suntory merger is also adding to pressure for Asahi to make acquisitions in Japan's soft drinks market, where Coca-Cola has long commanded the No. 1 slot with a 30 percent share thanks to products such as Georgia canned coffee.

Suntory, with around 18 percent market share, and Kirin, with around 11 percent, will challenge that if they merge, leaving Asahi far behind.

Even before the merger, there was a big gap between Asahi and Kirin, Suntory, although Asahi has positioned the soft drinks business as a growth area, said Mizuho's Saji.

DyDo Drinco and Ito En are among the companies that analysts name as potential targets for Asahi. DyDo is known for its strength in canned coffee sales through vending machines and Ito En is Japan's top maker of bottled green tea.

Ito En is seen as especially attractive to potential buyers, they said, since the company contracts out drinks production and has almost no facilities on its own.

Beer makers are already facing need to streamline their factories in response to falling demand, and additional capacity is a risk in acquisitions, said Tokai Tokyo's Tsunoyama.

In that sense, Ito En does not have factories and has low fixed costs, he said.

Still, Asahi is unlikely to match Coca-Cola and Kirin-Suntory in scale as both DyDo and Ito En have less than 10 percent market share each.

In domestic soft drinks, unless Asahi makes drastic moves such as teaming up with Coca-Cola or buying up second-tier players altogether, it would be very hard to catch up with them, said Mizuho's Saji.

($1=96.36 Yen)

(Editing by Lincoln Feast)