An Insider's comments on Japan's high tech business world

* * * * * * * * TERRIE’S TAKE – BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.

General Edition Sunday, December 18, 2016, Issue No. 878

– What’s New — Frothy Market for Asahi in International M&As
– News — La Nina likely to end in March 2017, less snow in 2018
– Upcoming Events
– Corrections/Feedback — Land scarcity for hotels in Tokyo, Osaka
– Travel Picks — Former British Villa in Tochigi, Oysters in Hokkaido
– News Credits

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Frothy Market for Beer M&As

If there is one thing that alcohol and toy companies in Japan can be
sure of, it’s that their domestic sales in Japan will continue to shrink
as the population greys and dies out. So it is that there is an overseas
M&A competition going on among the top 3 brewers in Japan, to keep
revenues and the bottom line trending upwards, by buying out drinks
companies elsewhere. Last week Asahi Group Holdings, the parent of Asahi
Breweries, announced that it will spend JPY888.3bn (US$7.7bn) buying out
a group of SABMiller beer brands in the five Eastern European countries
of Czech Republic, Poland, Hungary, Slovakia, and Romania.

Japanese investors were not impressed with the news, fearing that Asahi
is overpaying, and additionally with only 10% of its sales coming from
international operations that the company is unproven in foreign
markets. As a result, Asahi’s stock plummeted 6.4% when the deal was
announced, before recovering to close at 4.6% down, at 3,497 yen. What
caught our eye about this deal isn’t the high premium Asahi paid, but
rather the locations of brands – locations that Asahi has little
experience in.

Actually, when you look at Asahi’s historical international M&A
approach, you get the sense that they have an insecurity/inferiority
complex that has kept them focused on Japan much longer than their
peers, and which has channeled their investments into small
opportunities. Indeed, CEO Naoki Izumiya said as recently as 2014
the company would be cautious and invest in smaller deals in safe haven
markets like those of South East and Eastern Asia. However,
circumstances and competitors have overtaken this strategy, and now the
company is well and truly outside its comfort zone.

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Why was CEO Izumiya so focused on slow growth back in 2014 versus the
big-bang approach of Suntory, which bought Jim Beam for US$16bn the same
year? Mostly because of his concern about risk and reputation. However,
in the last two years he has had to change his position on both counts.
Firstly he has been unable to restrict the firm to small markets and
small deals because of pressure from his competitors, who are merging
and taking bigger and bigger market shares. As a case in point, while
Asahi is the largest drinks company in Japan and No. 5 in the world,
after the AB Inbev-SABMiller deal that No. 5 position gives Asahi just
1% global market share versus AB Inbev’s now massive 30%. Asahi is
quickly becoming irrelevant in the global markets.

Secondly, although Asahi’s management may have wanted to keep their
international deals smaller since that should mean “safer” – recent
history hasn’t borne this theory out. A case in point is Asahi’s
acquisition of Independent Liquor of Australia/New Zealand (actually
founded in NZ). The Japanese firm was in a hurry to buy the liquor firm
from a pair of private equity funds back in 2011, and after a brief 3
months of due diligence paid out a very rich NZ$1.5bn. In May the
following year, Asahi publicly acknowledged that it had overpaid by as
much as 30% and brought a lawsuit against the PE firms accusing them of
stuffing retail channels to improve their numbers – a lawsuit that it
eventually won. Nonetheless, even after winning a court award of
NZ$208.6m, Asahi still suffered losses in FY2015 of about NZ$208.6m on
the acquisition – a lemon that only now is starting to stabilize.

A very good analysis on the deal and why Asahi may have overpaid (it was
too trusting of the incumbent management numbers) can be found here:

The analysis was written by Andrew Heffernan, owner of wine importer
Colonial Trade Co. Ltd. here in Tokyo.

While the lawsuit must have been stressful enough, a potentially more
damaging situation arose when the newly acquired company itself bought a
small alcohol distributor called The Mill for NZ$18.2m, which then
promptly got involved in a scandal in New Zealand where it was found to
be selling alcohol online to underage school kids. This hot potato was
dumped a year later for a loss of NZ$6.2m. Asahi was lucky that the
reputational damage was confined to New Zealand and didn’t taint the
parent’s brand. After all, the Japanese are very particular about
keeping minors away from alcohol.

And so now the man who wanted to avoid large deals has had direct
experience of how difficult foreign markets can be and yet has decided
to land himself squarely in the middle of a large (and we think risky)
one – JPY888.3bn for five drinks brands in countries that Asahi has no
significant experience in. No wonder the shareholders dumped the
company’s shares.

Given the difficulties that Asahi has had with friendly and easily
accessed/managed markets such as Australia and New Zealand, we predict
that Asahi will find itself sitting on a few more local hot
potatoes as time goes by. The company doesn’t seem to have the internal
resources to cope – as witnessed by their over-reliance on the
Independent Liquor senior management. Clearly they need to improve their
recruiting efforts and to set up western-style senior management
practices, at least for their offshore investments. In the meantime,
since they are such good customers of SABMiller already, having spent
billions on Peroni and Grolsch earlier this year, maybe SABMiller will
help them out by supplying trustworthy local resources to operate the

On the other hand, if they can get past the challenges of
internationalizing and do a proper risk analysis before jumping into the
deal, then the performance metrics of the new businesses look quite
good: JPY200bn in annual sales, JPY43bn in operating profit, and with
250m cases shipped a year 150% of the volume the company is doing in
Japan. Yes, this means a 20-year amortization of the investment, but for
a company like Asahi, better a long recovery period than simply leaving
the cash in the bank.

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+++ NEWS

– Okutama to offer empty homes to new families
– La Nina likely to end in March 2017, less snow in 2018
– Pensions to be indexed to CPI, wages
– Asahi Beer making US$7.8bn acquisition in Eastern Europe
– Casinos approved for operation in Japan

=> Okutama to offer empty homes to new families

With an estimated 8m vacant homes in Japan, it has only been a matter of
time before towns in rural areas would start giving them away. Indeed,
this has already happened in remote parts of the country. But now a
Tokyo suburb, Okutama, is getting into the action by offering vacant
houses to anyone willing to settle in the area for the next 15 years.
Actually the houses aren’t quite free, but close to it. One family of
ten (admittedly an exception to the usual nuclear family of 3 or 4)
received a house for a monthly rent of JPY8,000. They also received, as
will other successful applicants, JPY2m for renovation costs and a
JPY500,000 bonus if they stay in the same residence for at least 15
years. ***Ed: Okutama is a beautiful location and now with the Ken-o
Expressway is easy to get to. No word on whether foreigners can apply
for the same incentives.** (Source: TT commentary from,
Dec 15, 2016)

=> La Nina likely to end in March 2017, less snow in 2018

The Met Agency has said that there is a 70% chance that La Nina effects
on the weather will end in spring of next year. La Nina is characterized
by a cooling of equatorial oceans and increasing moisture in the air in
SE Asia pushing northern weather patterns further north than usual, in
an oscillating cycle. For Japan this means heavier than normal snow
falls on the Japan Sea side of the nation, and probably one of the best
skiing seasons in the last (and next) ten years. With the break in La
Nina, the weather in future years is likely to become warmer again, and
snowfalls more sparse. ***Ed: So if you like skiing, you should make the
most of it this winter.** (Source: TT commentary from, Dec
9, 2016)

=> Pensions to be indexed to CPI, wages

The government plans to index pensions to the inflation rate and
wage-earner contributions, as a means of reducing its pension bill –
currently running around JPY54.8trn per year. There are 40m pensioners,
and they absorb payments equivalent to 10% of the economy. The new
indexing will be phased in over 5 years, through to 2021, and will allow
the government to cut back pensions if the CPI goes down, as well as
aligning payouts more closely to the contributions made by salaried
workers. ***Ed: Interesting to see that a full 66% of pension payouts
are funded by pension insurance that practically every worker in Japan
contributes to, while another 23% comes from government coffers, and 11%
from investments by pension funds (like the GPIF). (Source: TT
commentary from, Dec 14, 2016)

=> Asahi Beer making US$7.8bn acquisition in Eastern Europe

Asahi Group Holdings (Asahi Beer) is on the M&A warpath again, this time
buying beer brands in Czech Republic, Poland, Hungary, Slovakia and
Romania from Anheuser-Busch InBev (AB InBev) for EU7.3bn. AB InBev was
forced to divest the brands as part of a deal with the EU in order to
allow it to buy-out SABMiller of London, UK. In fact, this was the
second M&A between the parties, after AB InBev sold the Peroni and
Grolsch brands to Asahi earlier in August this year for US$2.9bn. ***Ed:
So that’s a cool US$10bn paid out by Asahi just in Europe.** (Source: TT
commentary from, Dec 13, 2016)

=> Casinos approved for operation in Japan

After 15 years of bitter infighting and disappointment, the
LDP-dominated Diet finally passed legislation on Thursday to legalize
casinos in Japan. The nation’s regulatory authorities will apparently
need about a year to finalize rules and regulations governing the
industry, and so the first casinos are not expected to be in operation
until 2022 or 2023. A battle between casino operators has already
erupted, with MGM pledging to invest as much as US$10bn into an
operation in Japan. ***Ed: Tokyo, Yokohama, and Osaka are expected to be
the initial sites for casinos, followed by Naha, Sapporo, and, perhaps,
Fukuoka (since it’s most easily accessed from China and South Korea).
***Ed: The top 3 biggest gambling countries in the world are not China
and Japan as you might expect, but rather: 1 – Australia, 2- Singapore,
3- Ireland.** (Source: TT commentary from, Dec 14, 2016)

NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links — we apologize for the inconvenience.


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=> No events this week.



=> => In last week’s TT877 we interviewed Seth Sulkin and VJ Daswani
about the economics of investing and running hotels in Japan at present.
More than a few readers responded with additional comments – the best of
which was the following.

*** Our reader says:

I’m with a Japanese commercial RE firm that does office buildings and
hotels. What your two respondees said is largely in line with our
experience, although we do development from the ground up and we mostly
operate our own properties. I would say that the land values that we
deal with are much higher than those quoted in the piece, but then again
we are pretty much only interested in land in the better areas on the
Yamanote line, in Chuo-ku or Kita-ku in Osaka and in similar areas. I
think a lot of the other operators have roughly the same philosophy in
terms of prospecting locations.

Therein lies the problem that I wanted to highlight: finding land in
locations that you want — and which will be profitable and remain
profitable even if the inbound numbers slow down. It is very, very
difficult. Whenever a fresh tract comes on the market, the bidding for
it becomes quite fierce and as a result the incumbent owners often
decide just to sit on it and try again at higher prices in 1-2 years time.

At least in the segment of the business hotel market that we operate in,
land availability is by far the biggest constraint to expansion or
segment entry. Construction, finance, etc. can all be arranged at
relatively economical rates – it’s the land availability which is a
problem. If readers are asking themselves every time they read about
hotel capacity issues in Tokyo and Osaka “Why don’t they just build
more?” Well, land scarcity is why not.



=> Former British Villa in Oku-Nikko

Fusion of British and Japanese Cultures, Tochigi

Nikko is renowned for its intricately adorned shrines and temples,
beautifully serene landscapes, and fresh mountain air. It is also the
location for a unique historical building, the Former British Villa in
Oku-Nikko. This gorgeous place opened its doors to visitors in July
2016, and many people still don’t know about it. Therefore, it is not as
crowded as other tourist spots in the area.

Here you will learn a lot about Sir Ernest Mason Satow, a British
diplomat who played a significant role in the Meiji Restoration of
Japan, and will be able to enjoy a fusion of the British and Japanese
cultures during that period, which creates the feel of a “semi-Western
atmosphere” in the Former British Villa. The villa is set right on the
shores of Lake Chuzenji, next to the Italian Embassy Villa, which is
also open to the public. So you may as well consider purchasing an
economical joint ticket to see both.

=> Akkeshi Gourmet Park
The Oyster Town of Hokkaido

Akkeshi, coming from the word “Akkekeshi” (an Ainu word), means a place
with lots of oysters, and hence, Akkeshi town, in eastern Hokkaido is
well known for its oysters. Akkeshi Gourmet Park sits on a hill, and
there is an observation deck on the third floor of the building where
superb views can be had of nearby Akkeshi Bay, Akkeshi Bridge, and Lake
Akkeshi in the distance.

In the building, there is a restaurant on the second floor with more
than half of the menu containing oyster dishes. Take your pick: fried
oysters, raw oysters, oyster pasta, oyster porridge, oyster salad,
oyster rice bowl, oyster curry, and the list goes on and on. There are a
few non-oyster dishes as well. Next to the restaurant, there is a
barbeque area where fresh oysters and other seafood items can be
barbequed or grilled and eaten on the spot. There is also a fish market
selling live oysters, fish, scallop, prawns, sea urchin and a wide
variety of live seafood.



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