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Kirin investor turns activist with call for new growth strategy

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Via Financial Times

One of Kirin’s largest shareholders has launched a campaign to persuade the Japanese brewer to focus on making beer and ditch the “unrealistic hope” that it can thrive as a cumbersome conglomerate also encompassing food, biotechnology, pharmaceuticals and cosmetics. 

The effort by UK-based Independent Franchise Partners (FP), which is poised to intensify in coming weeks, marks a new front in the effort by activist and long-only investors to shift management thinking at the top of corporate Japan. 

While many investor campaigns in recent years have focused on convincing Japanese companies to part with their often substantial piles of excess cash via buybacks or raised dividends, FP is pushing for a wholesale change in Kirin’s growth strategy.

FP has a 2 per cent stake and has held Kirin shares for six years. But in common with some other investors and sellside analysts, it has been increasingly dismayed by Kirin’s conviction that it can deliver strong growth by branching out into a series of business areas that have nothing to do with beer. 

Those concerns were crystallised by Kirin’s midterm plan, announced earlier this year, to seek “businesses bridging pharma and food and beverages”. That drove FP to engage publicly with one of its investments for the first time. 

In February, Kirin spent $1.2bn to buy a 95 stake in biochemicals company Kyowa Hakko Bio, and then in September spent the same amount to acquire a 33 per cent stake in cosmetics and health supplement company Fancl.

Analysts were sceptical about Kirin’s $1.1bn investment in Fancl, with SMBC Nikko analyst Naomi Takagi saying that “given the firm’s past track record on acquisitions, it is unclear whether the deal will generate synergies”. 

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In an October 7 letter to Yoshinori Isozaki, Kirin’s president, FP’s managing partner Hassan Elmasry said the decision to buy the Fancl stake despite objections from investors “indicates to us that management is determined to proceed in a direction that destroys value”. 

The next phase of FP’s campaign will involve making a presentation to Kirin’s senior management, directly linking the heavy sell-off in shares to the company’s strategy. The presentation will argue that Kirin is trading at nearly a 50 per cent discount to its sum-of-the-parts value and at a discount to rival breweries who have maintained a focus on beer. 

In the six months following Kirin’s announcement of its midterm plan, its shares fell 24 per cent.

The stock has increasingly traded on a conglomerate discount as the market had judged it could no longer value Kirin as an internationally competitive and acquisitive brewery, but instead as a group likely to increasingly suck management time into areas in which it has limited experience. 

Kirin’s recent shift to the healthcare and pharmaceutical business follows a pattern of Japanese companies diversifying to offset a chronic decline in the domestic beer market, which peaked 25 years ago.

Having shunned overseas beer deals in the wake of a disastrous 2011 foray into Brazil with a $3.9bn acquisition of family-owned Schincariol, the company has said it wants to spend a part of ¥300bn ($2.8bn) allocated over the next three years to promote new businesses. 

Kirin declined to comment on FP’s letter.

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