* Australia's Bega Cheese to pay A$560 mln for Kirin dairy arm

* Price is 10% below what China Mengniu agreed to pay in 2019

* China Mengniu sale was blocked by Australian govt

* Deal helps bega become diversified food giant

SYDNEY, Nov 26 (Reuters) - Australia's Bega Cheese Ltd will buy the Australian dairy arm of Japanese drinks giant Kirin Holdings Co Ltd for A$560 million ($412 million), the companies said on Thursday, a 10% discount on China Mengniu's offer in 2019.

Bega, already Australia's biggest cheesemaker, will acquire some of the country's top milk brands like Dairy Farmers and Pura under the deal, building a portfolio that includes popular spread Vegemite and Kraft peanut butter. [https://bit.ly/3nNnffX ]

For Kirin, the 40.9 billion yen sale ends a two-year struggle to offload a relatively low-margin, price-sensitive asset to bankroll more profitable offshore ventures in health and cosmetics. Kirin's beer unit already dominates Australia with brands like Toohey's and XXXX.

But the price Kirin will get for the unit, Lion Dairy & Drinks, is below the 45.6 billion yen China Mengniu Dairy Co Ltd agreed to pay a year earlier until it was blocked by the Australian government.

"The market was quite hot 12 months ago," said Ian Williams, a former Lion Dairy & Drinks chairman who advises on Japan-Australia M&A deals at law firm Herbert Smith Freehills.

"The broader situation's quite difficult and sales processes take a long time. If you have made a decision to exit, you probably want to access that capital now."

Unlike the China Mengniu deal, selling the business to an Australian company did not require regulatory approval, the companies said. This year Australia gave its treasurer power to veto foreign takeovers that had otherwise received clearance, and China Mengniu's Kirin purchase got the first veto.

Bega, a 121-year-old former dairy cooperative, said the purchase "realises our ambition of creating a truly great Australian food company". Lion has about 6% of the fragmented Australian dairy market, said industry researcher IBISWorld.

"The acquisition makes sense, is within the core competency of Bega and there are significant financial benefits associated with it," said Nathan Parkin, investment director at Ethical Partners Funds Management, Bega's top shareholder.

Bega put its shares in a trading halt as it asked investors to buy A$401 million of new shares to help pay for the purchase. The company currently has a market capitalisation of A$1 billion.

Kirin said it would grow its remaining Australian drinks business by focusing on high-margin categories and new growth markets internationally, particularly craft beer.

($1 = 1.3580 Australian dollars) (Reporting by Byron Kaye and Paulina Duran in Sydney; Additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Lincoln Feast and Stephen Coates)