Tokyo, Nov 16 - Shares in Japanese noodle maker Nissin Food Products Co. Ltd. jumped 7 percent after analysts lauded its bid for smaller rival Myojo Foods Co. Ltd., saying the acquisition would reduce Nissin's marketing costs as it increased its market share.
Merrill Lynch raised its rating on Nissin's stock to "buy" from "sell" on Thursday and set a target price of 4,900 yen, 35 percent above the current traded price, fueling demand for the stock.
Nissin Food shares were up 7.27 percent at at 3,690 yen at 0425 GMT, compared with a 0.5 percent rise in the food subindex and 0.2 percent gain in the TOPIX.
Investors' hunger for Nissin marked a reversal from Wednesday, when the company's $314 million white knight bid for Myojo sent its shares down 1.15 percent.
Nissin's unexpectely generous offer of 870 yen per Myojo share sharply exceeded the 700 yen being offered by rival bidder Steel Partners, a U.S. hedge fund.
But analysts at Merrill, JP Morgan, Nomura and Mizuho Securities came out in support of the bid on Thursday.
"By playing the role of white knight, Nissin can effectively eliminate a competitor while boosting its own market share," JP Morgan's Naomi Takagi said in a note to clients.
Nissin, maker of "Cup Noodle" instant ramen noodles, will increase its share of the highly competitive $4.4 billion instant-noodle market to 50 percent from 40 percent if the takeover bid succeeds, as analysts expect it will.
Along with increased sales, less competition means Nissin could trim its high promotion costs, which now gobble up about 27 percent of sales revenue. That, analysts said, makes Myojo an attractive target given Nissin's 200 billion yen pile of cash and securities.
"We regard this TOB as an effective use of surplus cash," Merrill Lynch's Ritsuko Tsunoda said.
Nissin's offer expires on Dec. 14.
Steel Partners, an activist hedge fund run by Warren Lichtenstein, is unlikely to come up with a better price for Myojo, analysts said.
The fund is already Myojo's top shareholder with a 23.1 percent stake, and could more than double its investment if it sells to Nissin.
If it chooses instead to hold on to the stake, it could be reluctant to push up Nissin's buying cost in a bidding war as it also owns 5.8 percent of the larger noodle maker.
Analysts said Nissin's bid valued Myojo at 9 times its enterprise value over EBITDA, or earnings before taxes, depreciation and other costs.
After taking into account about 9.2 billion yen in latent real estate and investment gains at Myojo, the price multiple falls to about 6.5 times, below the industry average of 7.5 times.
Myojo Foods shares rose 1.5 percent to 874 yen on Thursday, extending its 13 percent gain from Wednesday and breaking above Nissin's bid price of 870 yen.
Merrill's Tsunoda said the takeover could trigger a further shake-up in Japan's food industry, where large retailers wield increasing power over suppliers.
"Our view has been that manufacturers need to lock in other companies' brands and expand in scale as mega-retailers take shape," Tsunoda said.
"We think this latest case marks the first salvo in a shake-out involving the large swallowing the small in the food industry."