Sun, Dec 10, 2006 page12

• Japanese firms go on defensive in noodle wars

  The US hedge fund Steel Partners' hostile bid for Myojo, Japan's No. 4 instant noodle maker, had Nissin coming to the rescue

  • THE GUARDIAN
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  The instant noodle is an easy target for food snobs. What could be attractive, they ask, about spindles of artificially flavored flour and water that have been steeped in saturated fat before being boiled and served in a polystyrene cup?

  In Japan, the question would be met with incredulity. Here, instant noodles have risen from humble beginnings in Osaka to become an industry worth US$4.4 billion a year. To the Japanese, the "cup noodle" isn't just a quick and easy snack -- it is a cultural icon.

  Last year, they slurped down 5.44 billion portions of instant noodles -- or ramen -- according to the Japan Convenience Foods Industry Association. That's an average of 42 meals for every man, woman and child, who have an amazing 983 varieties to choose from.

  Worldwide more than 85 billionn portions were eaten last year, more than half of them in China, according to the International Ramen Manufacturers' Association. Japan exports 87 million packets a year.

  The West, too, has developed a taste for instant noodles: Last year 3.9 billion servings were sold in the US, where the noodles are shortened so they can be eaten with a fork.

  With such high stakes, it came as no surprise when Japanese noodle manufacturers went on the defensive after the US hedge fund Steel Partners launched a recent takeover bid for Myojo, Japan's fourth-biggest instant noodle maker. If successful, the move would have given a foreign firm an unprecedented foothold in the Japanese market.

  No sooner had Steel Partners offered ?700 (US$6) per share in Myojo than Nissin, the industry's leader, countered with a US$314 million offer of ?870. The bid, if successful, will give it control of half the domestic market.

  "By playing the role of white knight, Nissin can effectively eliminate a competitor while boosting its own market share," said Naomi Takagi of JP Morgan.

  Nissin's acquisition is the latest chapter in a commercial success story that began in a garden shed in suburban Osaka almost half a century ago.

  It was there, in 1958, that Momofuku Ando, a food industry executive who was appalled by the starvation he had witnessed in post-war Japan, boiled a batch of fresh noodles, fried them in palm oil and left them to dry into a solid brick: the cup noodle was born.

  That year, his firm, Nissin, sold 13 million packets for ?35 each at a time when the average monthly salary was ?13,000 and fresh noodles were six times cheaper. But by 1970, annual sales had soared to 3.6 billion.

  Japan's falling birth rate has been blamed for a 1.6 percent drop in overall sales last year, but Nissin still believes that global demand will reach 100 billion servings a year by the end of the decade.

  In one survey, the Japanese voted instant noodles their country's most important invention of the 20th century, ahead of karaoke, the Sony Walkman and Nintendo game consoles.

  Last summer, Nissin's noodles even made it into orbit when the Japanese astronaut Soichi Noguchi included special "zero-gravity" packets in his rations aboard the space shuttle Discovery.

  Back on earth, the upheaval in the Japanese instant noodle industry looks set to continue. Having failed to build on its 23.1 percent interest in Myojo, Steel Partners last week reportedly raised its stake in Nissin to 7.37 percent.

  The US firm is now thought to be Nissin's biggest shareholder, surpassing the 6 percent stake held by a foundation set up by Ando. It also stands to gain from its failed buyout if, as many expect, it sells its Myojo shares to Nissin for ?870 each.

  "My impression is that Steel Partners is the biggest winner," an analyst from Credit Suisse said. "The domestic instant noodle market has matured along with other processed foods, but noodle firms still have plenty of potential to increase their business overseas."

  Nissin, which says it wants at least a 33.4 per cent stake in Myojo, would need ?12.7 billion to fund the acquisition, but can call on cash and equivalent reserves of more than ?200 billion, according to Merrill Lynch. But Steel Partners' ?36.9 billion stake in Nissin has left the Japanese food industry wary of hostile takeovers, particularly by foreign companies.

  "We think this latest case marks the first salvo in a shakeout involving the large swallowing the small in the food industry," Ritsuko Tsunoda of Merrill Lynch said.

  Next spring, regulations on mergers and acquisitions will be relaxed to make it easier for foreign firms to bolster their presence.

  "The trend won't be limited to the food industry," the Credit Suisse analyst said.
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