Japan’s beverage companies have been in a buying mood lately. So far this year three deals have made the beverage industry’s Top 10 of the past decade. The dealmaking doesn’t seem to be tapering off, either: Suntory Holdings said on Sept. 10 that it is in talks to buy Orangina SAS, a European soft-drinks maker that is owned by private equity firms Lion Capital and Blackstone.

Like most Japanese brewers and soft drinks producers, Osaka-based Suntory sees more potential growth overseas. For years, Japan’s beverage companies focused on winning at home—arguably one of the world’s most cutthroat beverage markets. Their strategy was to flood the market with thousands of new products every year, often putting unit sales before profits. But Japan’s population is graying, and analysts expect the beverage market to shrink in coming years.

So now Japanese dring makers want to enter the global markets, but there they will have to compete with the global giants Coca-Cola, PespiCo, AB InBev and Diageo. To improve their chances of survival, Suntory and Kirin Holdings have been discussing since July the possibility of merging to create a $41-billion behemoth. Together, they could fend off hostile bids from would-be acquirers. At home, their alliance could spur a round of consolidation, with Asahi Breweries and Sapporo Holdings seeking out new partnerships, analysts say.

Tokyo-based Kirin is Japan’s biggest brewer, accounting for a third of all beer sold domestically. A merger would give Kirin and Suntory about half of Japan’s beer market, and the two--the second- and third-largest producers, according to Tokyo-based market researcher Inryou Souken--would own a sizable chunk of the country’s $30-billion soft drinks market. Though their products overlap somewhat, they would have a broader lineup of beers, whiskeys, green and oolong teas, canned coffees and energy drinks.

Few analysts question the wisdom of a Suntory-Kirin merger. But it wouldn’t be easy pulling it off: They would be battling their own lack of experience managing a global work force while attempting to combine their operations and cultures. They also seem to have different ideas about which overseas markets hold the most promise. Suntory's investment in Lion Capital and Blackstones Orangina in 2006 would give them a toehold in Western Europe, where it has little presence. (Last October it agreed to acquire New Zealand-based energy drinks maker Frucor from France’s Danone last year.)

Analysts worry that acquiring Orangina would saddle Suntory with debt and a commitment to Europe even as Kirin focuses on Asia. “Kirin’s strategy in Asia-Pacific makes more sense," says Tokai Tokyo Research Center analyst Tomonobu Tsunoyama. "It would let them establish their brand faster in a growing market." Kirin has spent $4 billion in Asia since last year, buying stakes in food and beverage companies San Miguel in the Philippines and Lion Nathan, National Foods and Dairy Farmer in Australia.

Rating agency Fitch said it wasn’t clear how Suntory would benefit from adding Orangina’s soft drinks brands in Europe. Suntory would likely have a tough time selling beer or teas in Europe or importing Orangina and other soft drinks to Japan’s already-crowded market. “If you can’t do anything better than the previous owner what’s the point of making the acquisition?” says Fitch analyst Frederic Grits. (Businessweek)