Japan's Kirin Holdings Co. (2503.TO) and Suntory Holdings Ltd. are in merger talks, a person close to the matter said Monday, in a development that could lead to the creation of a huge beverage company that would rival Coca-Cola Co. in terms of sales but not profits.

Kirin and privately held Suntory have posted relatively strong earnings in recent years in spite of the sluggishness of the domestic beer and beverage market, which has been hurt by a shrinking population and a weak economy. But the two companies have been pushing hard to increase their overseas presence in the face of a gloomy Japanese outlook, making various foreign acquisitions recently, and analysts say a merger could give them more funds in their future international M&A efforts.

If the merger goes through, it would create a new food and beverage giant with combined sales in 2008 of Y3.8 trillion, or about $40.9 billion. That would exceed Coca-Cola's 2008 revenue of $31.94 billion.

But its combined net profit would be Y112.4 billion, or about $1.21 billion, far below the profits of foreign rivals such as Coca-Cola's $5.8 billion, suggesting that improving profitability would be a key task for a merged company.

The person familiar with the matter said a merger would face a number of hurdles, but didn't elaborate. Such a huge consolidation would likely require clearance from antitrust authorities: the merged entity would grab about 50% of Japan's beer market, leaving Kirin's archrival Asahi Breweries Ltd. (2502.TO) with a 37% market share.

In trading on the Tokyo Stock Exchange, Kirin's share price jumped on the possibility of the merger, and was up 8.5% at Y1,401 at 0128 GMT.

Though their home market is deteriorating, Japan's beer makers have resisted the consolidation trend until now. Because buying a company within the same industry often requires layoffs and closures, Japanese companies have historically been resistant to mergers. Instead, the nation's big beer makers tend to seek ways to diversify into far-flung areas, from baby food to flowers to increase revenue.

Both companies have been busy increasing their international businesses.

Kirin, which holds a 46% stake in Australia's Lion Nathan Ltd. (LNN.AU) and 48% of the Philippines San Miguel Brewery Inc. (SMB.PH), is stepping up efforts to increase its presence in Asia and the South Pacific. It aims to generate about 30% of its revenue outside of Japan by 2015.

Suntory, which currently bottles and distributes PepsiCo Inc. (PEP) products in Japan, has already established a presence in China, obtaining the biggest beer market share in Shanghai and neighboring areas. Earlier this year, the company paid more than EUR600 million (A$1.18 billion) for Groupe Danone SA's Australian and New Zealand drinks business Frucor.

The two companies have also joined hands in the area of procurement, allowing Kirin to join Suntory's system to procure cardboard for use in soft drinks and other products.

Both have been active in business outside Japan and diversifying into food- and health-related fields to expand its sources of revenue.

-By Hiroyuki Kachi, Dow Jones Newswires; 813-6895-7562; hiroyuki.kachi@dowjones.com