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Moody's affirms Kirin's A3 ratings on Fancl acquisition

Moody's on Aug. 7 affirmed Kirin Holdings Co. Ltd.'s A3 stable ratings after the Japanese brewer agreed to acquire a 30.3% stake in cosmetics-maker Fancl Corp. for ¥129.3 billion.

"Kirin has reduced leverage in recent years, so this transaction will have a minor financial impact," said Motoki Yanase, the rating agency's vice president and senior credit officer.

The agency added that Fancl's revenue and profit are about 5% of Kirin's, indicating "little earnings impact upfront."

Before the deal announcement, Moody's estimated that Kirin's debt/EBITDA ratio would increase to mid-2x from 2.3x for the fiscal year ended March 2019. The agency noted that the acquisition is an "unexpected new strategic direction to monitor."

Moody's added that it expects Kirin's profit to decline in 2019, reflecting increasing investments for future growth, including in digital marketing and new businesses related to both the food and beverage and pharmaceutical segments. The EBITDA margin has shown a declining trend, falling to 12.5% in the year to March 2019 from 15.2% in 2017, the agency said.

Moody's said it could upgrade Kirin's ratings if its debt/EBITDA ratio is sustained at about 2.0x and its EBITA margin improves to close to 20%.

Meanwhile, a ratings downgrade could occur if material debt-funded acquisitions or share repurchases cause its debt/EBITDA to rise close to 3.0x or retained cash flow/net debt to fall below 15%. Negative pressure on the ratings could emerge from continued erosion of the brewer's margins, loss of market share in Japan and lower profitability, such that its EBITA margin drops below 10% for a prolonged period, Moody's said.

As of Aug. 6, US$1 was equivalent ¥106.34.