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 food and beverage company that would better compete with rival Anheuser-Busch Inbev N.V.

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. 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 Co.'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 official statements, both Kirin and Suntory said nothing has been decided.

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 as of 0128 GMT.

A merger would be positive for both firms and would be "a huge threat" to other players in sector, said Tokai Tokyo Research Center analyst Tomonobu Tsunoyama. "This would trigger further realignment."

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 in order to increase revenue.

Both companies have been busy increasing their international businesses.

Kirin, which holds a 46% stake in Australia's Lion Nathan Ltd. and 48% of the Philippines San Miguel Brewery Inc., 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. 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.

A merger would bring together two companies that each has more than a century of history primarily in the brewing business. The Nikkei reported Monday that the two firms are considering initially forming a holding company this year, but the person declined to comment on the matter.

Kirin is larger than Suntory in terms of sales and market share, so would likely acquire Suntory, though those details will need to be worked out during the talks, analysts said.

Kirin, best known as the maker of beer brands such as "Kirin Lager" and "Kirin Ichiban," was established in 1907. The Tokyo-based company operates beer maker Kirin Brewery, soft drink maker Kirin Beverage and pharmaceutical company Kyowa Hakko Kirin. It generated sales of Y2.3 trillion for the business year ended Dec. 31 2008.

Established 1899, Osaka-based Suntory produces well-known whisky brands such as Yamazaki but it has been diversifying into food and health-related fields to expand its sources of revenue. It had sales of Y1.5 trillion during 2008.

Last week, beer shipment data for the January-June period showed Kirin regained the top spot in the domestic beer market for the first time in three years. Suntory is ranked the third after Asahi Breweries.

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