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March, 2007

A Less Litigious Environment Makes U.S. Market More Attractive

Imperial Tobacco’s entry into the U.S. market with its acquisition of Commonwealth Brands says more about the current environment surrounding the U.S. tobacco industry than it does about either of the two companies.

Imperial, based in Bristol, England, is the world’s fourth largest tobacco manufacturer. The company said on Feb. 8 that it plans to buy CBHC Inc., which operates Commonwealth Brands of Bowling Green, Ky., for $1.9 bn. The deal is expected to close in April.

Commonwealth, best known for its USA Gold and Montclair discount brands, has gained 3.7% in market share in the United States in just 16 years. USA Gold is eighth in brand market share, including third among discount brands, while Montclair is 14th in brand market share.

In the past, international tobacco manufacturers have been hesitant to enter the U.S. market because of the risk of litigation.

But Gareth Davis, c.e.o. of Imperial, said that buying Commonwealth “is consistent with our strategy of entering the U.S. tobacco market in a low-risk manner.” Commonwealth has not lost a product-liability claim, and it was the first manufacturer to sign the 1998 Master Settlement Agreement.

Analysts said that Imperial’s interest shows that the U.S. market remains the most attractive and lucrative, with $376 bn in annual sales.

“This move comes after many years of deliberately avoiding U.S. exposure because of ongoing litigation risk,” said Stephen Pope, the head of equity research for Cantor Fitzgerald Europe.

“What is clear is that the Western European market place is losing its allure as smoking bans and extended advertising restrictions are making cigarette sales in the region decline at a rapid pace. The major names … know there are good opportunities in the U.S., provided they are comfortable in their ability to negotiate the potential minefield of legacy litigation.”

“Imperial’s tipping of the hat could also signal an Altadis push into the U.S. market, and then we have some excitement,” wrote Bonnie Herzog, an analyst with Citigroup, in a report. Altadis Group, based in France and Spain, is among the six largest publicly traded tobacco companies in the world.

Meanwhile, Imperial is no doubt closely tracking the legislation introduced in Congress that would give the Food and Drug Administration regulatory control over the tobacco industry.

Reynolds American Inc. has said that a restrictive marketing environment would favor No. 1 Philip Morris, which likely would stay the top U.S. manufacturer if the companies are further limited in how they advertise to adults.

“That legislation does bring more challenges to an already complex regulatory environment in the United States,” said Alex Parsons, media relations manager for Imperial. “But then again, we’re used to running a business in that kind of environment in Western Europe.”

Indeed, Imperial seems ready, willing and able to do battle in the competitive U.S. tobacco marketplace. The question is, who’ll be next to enter the fray? Altadis? Japan Tobacco? With the current environment, you can bet all eyes are on the U.S. market.

- Michael Browne

Tobacco International - March, 2007


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