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E-Malt.com News article: Japan: Country's third-largest beer maker may be bought by a higher-rated rival
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Investors should sell the credit- default swaps of Sapporo Holdings Ltd. as Japan's third-largest beer maker may be bought by a higher-rated rival, analysts at JP Morgan Securities Co. and Shinsei Securities Co. said, according to Bloomberg, February 20.

The cost of protecting 1 billion yen ($8.35 million) of Tokyo-based Sapporo's debt from default will fall to 1.5 million yen, should Asahi Breweries Ltd. offer to buy the company to counter a bid from Steel Partners Japan Strategic Fund LP, said Mana Nakazora, chief credit analyst at JP Morgan in Tokyo. The price was 3.06 million yen as of 6:30 p.m. in Tokyo.

“We recommend selling Sapporo's credit default protection because of the chance it will be bought by a bigger rival,'' said Yasuhiro Matsumoto, an analyst at Shinsei in Tokyo. Asahi is rated five levels higher than Sapporo at A- by Standard & Poor's and has more expertise in operating a beer maker than Steel Partners, he said.

Kirin Brewery Co. may consider an alliance with Sapporo, the Mainichi newspaper reported today, citing an unidentified executive at the Tokyo-based brewer. Asahi will look into an alliance should Sapporo ask for help to counter the Steel Partners takeover, the Nikkei and Mainichi newspapers reported at the weekend, citing Asahi's president, Hitoshi Ogita.

Five-year credit-default swaps, used to speculate on Sapporo's ability to repay its 86 billion yen of debt, fell to the lowest since Feb. 1 today, according to data compiled by Bloomberg. The contracts have dropped more than 11 percent since Feb. 15 as perceptions of creditworthiness improve.

Takeover speculation pushed Sapporo shares as high as 960 yen, the most expensive since July 1997. The stock closed at 897 yen in Tokyo. The company's shares gained last year by less than half the 7 percent increase in Japan's Nikkei 225 index as the beer market shrank.

“We currently have nothing to comment on an ‘if' story,'' said Satoko Yoshida, a Kirin spokeswoman in Tokyo, regarding the Mainichi report.

Both S&P and Moody's Investors Service give Sapporo's debt a high-risk, high-yield rating. Moody's rates it one level below investment grade at Ba1, and S&P ranks it one notch lower at BB. In contrast, Kirin holds S&P's fourth-highest level of AA-, and has a No. 3 rating of Aa2 by Moody's.

Sapporo's earnings before interest and taxes, the pool of money available to pay debt holders, declined last year to 2.8 times the interest it pays, from 4.9 times at the end of 2004, according to data compiled by Bloomberg. A decreasing ratio indicates the company has less capacity to pay creditors.

Tokyo-based Asahi had more than 20 times the amount of money it needs to pay interest to bondholders at the end of 2006, according to Bloomberg data. Kirin had a multiple of 12.

Sapporo's 10 billion yen of 1.9 percent bonds maturing in December 2012 trade at 43 basis points more than the yen swap rate, compared with a 3 basis-point premium for Asahi's 10 billion yen of 1.72 percent securities. A basis point is 0.01 percentage point.

Steel Partners, a New York-based investment fund controlled by Warren Lichtenstein, last week said it wants to boost its stake in Sapporo to 67 percent from 18 percent. Masako Matsuoka, a spokeswoman for Steel Partners in Tokyo, said the fund wants to buy the brewery because it forecasts growth from more consumer spending in the coming years.

The perceived risk of owning bonds of Sapporo, maker of the Yebisu brand, widened to a three-month high of 3.5 million yen last week.

“The risk of owning Sapporo's debt will certainly increase if the company is bought by a fund,'' Shinsei's Matsumoto said. ``The picture on Sapporo's future will be unclear.''

Asahi, Japan's second-largest beer maker by sales after Kirin, may be more interested in buying Sapporo because it wants to increase market share to compete with Kirin, said JP Morgan's Nakazora. Asahi can save money in distribution costs for Sapporo, she said.

Operating income at Sapporo's alcoholic beverage unit business fell 35 percent to 3.2 billion yen in the 12 months ended December from 5 billion yen a year earlier. The real- estate unit's income rose 16 percent to 4.7 billion yen.

``The only area where Sapporo is generating cash is its real estate business,'' said Masaki Hayashi, an analyst in Tokyo at Yasuda Asset Management Co., which manages about $1.7 billion in yen-denominated debt. ``If the company is bought and sells that business, Sapporo's ability to generate cash will be hurt.''

Domestic shipments of regular, low-malt and alternative beers by Japan's five biggest brewers fell 2.1 percent in December to 50.44 million cases, the Brewers Association of Japan and Brewers Council of Happoshu Taxation said in a report last month.

21 February, 2007

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