UK’s Imperial Acquires Commonwealth Brands
Bristol, England — Imperial Tobacco Group has agreed to acquire 100% of U.S. cigarette manufacturer CBHC Inc., which trades as Commonwealth Brands, from Houchens Industries Inc. for a total cash consideration of US$1.9 bn (£974 mn).
Commonwealth Brands is based in Bowling Green, Ky., and is the fourth largest cigarette maker in the United States, with 3.7% of the 376 bn stick U.S. cigarette market. Commonwealth employs around 720 people, including a sizable sales force, and has a factory that currently manufactures around 14 bn cigarettes a year but has the capacity for 30 bn.
“This is an excellent deal for Imperial,” said Gareth Davis, c.e.o. of Imperial Tobacco Group, “and is consistent with our strategy of entering the U.S. tobacco market in a low-risk manner. I am delighted that we will finally have the U.S. as a significant part of our international footprint and believe that we will benefit considerably from having the U.S. in our market portfolio.”
He added that “Commonwealth Brands is a terrific, young business which gives us immediate and significant access to the world’s most profitable tobacco market. The acquisition provides us with an enhanced operating platform from which we can rapidly launch our own high-quality brands. We will also now avoid the costs associated with our original organic entry, which we estimate would have been in the region of $20 mn a year.”
The acquisition will significantly boost Imperial Tobacco’s footprint in the United States, where it owns cigarette paper manufacturer Robert Burton Associates.
Commonwealth Brands manufactures and sells five discount cigarette brands across the United States and in Puerto Rico, which together account for 13.2% of the discount segment. The two key brands are USA Gold and Sonoma. USA Gold is the eighth best-selling cigarette brand in the United States and Sonoma the 14th. Commonwealth’s other cigarette brands are Montclair, Malibu, and Riviera. Total sales volume in the year to Sept. 30, 2006, was 14 bn cigarettes.
Commonwealth Brands was the first tobacco manufacturer to voluntarily sign the Master Settlement Agreement (MSA) in 1998 and has complied with MSA restrictions on advertising and marketing. The company has never lost or settled any product liability claim, has not been named in any class-action lawsuits, and was not a defendant in the Department of Justice case.
Andrew Darke, an analyst at Evolution Securities in London, told the Associated Press that the purchase was an “unexpected fast-track entry” to the United States, while Morgan Stanley analysts called the deal a “first-class transaction that made strategic sense.”
Davis said the company is planning to launch a range of new tobacco brands in the United States, which could eventually be rolled out across the rest of its global operations, but declined to divulge details of the products because of market sensitivity. He added that he does not expect to make any job cuts at Commonwealth Brands.
Altadis to Spin Off Logistics, Integrate U.S. Cigar Business
Paris — Altadis announced a new two-pronged corporate organization project that includes spinning off the logistics business in France and proposed integration within Logista, and integrating the whole U.S. cigar business within a single legal entity under Seita.
The aim of the projects is to meet two objectives: to strengthen the logistic businesses and to improve the Group’s financial structure through a series of legal and financial transactions.
“In a much more aggressive competitive environment, these projects demonstrate the Group’s commitment to optimizing all its operational, legal, and financial parameters in order to reinforce its position,” said c.e.o. Antonio Vazquez.
The planned transactions will position the Group to more effectively respond to changes in the logistics business, and will provide a stronger base for the Group’s distributive capacity, as well as improve its debt structure.
By spinning the logistics division off from Seita’s tobacco manufacturing and sales operations and transforming it into a subsidiary with its own legal structure, the Group wants to apply in France the organizational model that has already proven effective in Spain and Italy.
The proposed spinoff, which would not have any impact on jobs, would have no effect on the organization of tobacconist distribution operations.
After being spun off, it is proposed that the new company would therefore become a subsidiary of Logista, thus establishing a leading European logistics company.
As for the U.S. cigar business, currently Altadis Holdings USA is majority owned by Seita, with a minority stake held by Tabacalera Cigars International (TCI), a wholly-owned subsidiary of Altadis SA. Following the reorganization, Seita would own indirectly 100% of the shares of Altadis Holdings USA.
According to the statutory timeline, the information and consultation process with employee representatives (the Altadis Group European Works Council, the Seita Central Works Council, and the Company Union Committee in Spain) was scheduled to begin March 7.
Stellar Slims Make Debut
New Delhi — Cigarette manufacturer Godfrey Philips (GPL) is looking at a greater share of the king-size segment with the launch of Stellar Slims, India’s first slim cigarettes.
Ajit Suryanarayan, e.v.p. of the new product development center at Godfrey Phillips, said the product had been developed to offer “full satisfaction and low nicotine” to the consumer.
A new line of machinery had been installed to manufacture the product, developed after two years of market study and research and development, he added.
The new cigarettes are 22.12 mm thick compared to regular cigarette brands’ 24.7 mm thickness. The company’s multi-disciplinary product development had sourced a special low-nicotine tobacco variety, he said, adding Stellar Slims would have about 10% less nicotine compared to other king-size cigarettes.
Suryanarayan said the appeal of slim cigarettes has become popular worldwide and the segment was growing at a significant pace. “We want to target the prudent, classy, king-size cigarette consumer who does not want to compromise on taste and flavor,” he said.
“The company will introduce Stellar Slims in key markets where the king-size segment is growing at over 15% per year. These will be about 40 in number all over the country,” he said, adding that GPL is targeting sales of about 8 mn sticks in the first year. With the addition of Stellar Slim, GPL anticipates a 10% market share in the king-size segment, which comprises 8% of the entire tobacco market in India.
PMI to Cut 370 Jobs
Lausanne —Philip Morris International has announced it is cutting one in five jobs at its new international headquarters in Lausanne.
The company said in a statement that around 300 of the 1,500 jobs in the western Swiss city would disappear, as well as 70 others in subsidiaries abroad.
Spokesman Michael Pfeil said the job cuts — to be completed by the end of 2008 — were necessary to increase efficiency and to be able to react better to the dynamics of the market.
He added that the company would do its best to find internal solutions but there would be redundancies.
News of the job cuts came two weeks after the parent company of Philip Morris — Altria — announced plans to spin off Kraft Foods.
However, the Philip Morris spokesman said there was no connection between the job cuts and the spinoff plans.
Tekel Privatization Moving Forward
Istanbul — Both British American Tobacco (BAT) and Imperial Tobacco are considering bids of up to $1 bn for Tekel, Turkey’s state-owned tobacco company. Following the Turkish Competition Board’s approval of Tekel’s privatization, officials said that the tender could be formally announced this month, assuming it wins government approval.
In an interview with The Times (London), BAT c.e.o. Paul Adams said, “If the Turkish Government puts Tekel up for sale, we would take a look at it.”
The Times also reported that Imperial’s board met to consider an offer and has given Gareth Davis, its c.e.o, permission to proceed.
Turkey is the world’s seventh-largest cigarette market, with about 100 bn cigarettes smoked every year.
BAT, the world’s second-largest tobacco company, already has an 8% share of the Turkish cigarette market.
Other possible bidders include Japan Tobacco International (JTI) and Spain’s Altadis, reported The Times. Meanwhile, Philip Morris International, the owner of Marlboro, is the market leader in Turkey with a 42% share, meaning the company may well be excluded from bidding on competition grounds, said The Times.
The Turkish government has twice tried to sell Tekel in the past. In 2003 JTI offered $1.15 bn, but the government canceled the sale, terming the bid unsatisfactory. Then in the 2004 offer no bids were received due to the restrictions imposed on the sale.
When it was first slated for privatization in 2001, Tekel’s share of the domestic cigarette market was about 60%, but this has now fallen to about 40%. Officials fear that any further delay would devalue the company still further.
There is also the looming problem of an expected 10% tax increase on cigarettes, which the government wants for budgetary reasons and the European Union is seeking for the purposes of harmonization with regards to Turkey’s EU bid.
Privatization officials oppose the move and Prime Minister Recep Tayyip Erdo?an has yet to decide on the timing. The government had told the International Monetary Fund (IMF) that it intended to privatize Tekel this year.
Finance Minister Kemal Unak?tan said recently that he was determined that companies such as Tekel and state-owned Halkbank would be privatized this year. He rejected claims that 2007 would be a lost year because of presidential elections in May and parliamentary polls due by November.
Gallaher Reports Sales Growth
Weybridge, England — Gallaher Group, the UK cigarette maker that’s in the process of being acquired by Japan Tobacco, said full-year pretax profit rose by 9.2% last year on growing sales in eastern Europe and improved margins.
Business in the UK, its second-largest market after continental Europe, suffered a 3.4% decline in sales volume — pegged in part to the recent ban on smoking in public places in Scotland and a move by smokers toward lower-priced cigarettes.
But price increases allowed Gallaher to lift its UK sales by 0.3% to £3.67 bn while slightly improving its market share by a tenth of a percent to 38.7%. The UK accounted for 43.7% of total sales.
Bans similar to Scotland’s are due to be introduced in Wales and Northern Ireland in April and in England in July.
The UK’s third-largest tobacco group is expanding in eastern Europe, Russia, and in former Soviet countries as traditional markets like the UK and western Europe become more hostile to tobacco.
In December, Gallaher agreed to be acquired for £7.5 bn by Japan Tobacco, the world’s third-largest cigarette company. The deal is expected to be completed in April.
BAT Sees Growth in Developing Markets
London — British American Tobacco plc said profit rose 7.3% last year as the company sold more tobacco in developing markets.
Net income rose to 1.9 bn pounds (US$3.7 bn) from 1.77 bn pounds in 2005, the London-based company said.
During the year, Kent volume rose 16% on the back of significant increases in Russia, Romania, Ukraine, and Chile and market share growth in Japan. Pall Mall volumes jumped 40% on growth from Spain, Greece, Poland, Russia, and Bangladesh.
“Marginal” Lucky Strike volume growth came as rises in Spain, France, Italy, and Indonesia were offset by lower industry volumes in Germany and Japan. Dunhill volumes rose 6% on South Korean, Taiwan, Australian, South African, and Middle Eastern growth.
Other factors that helped its profit rise included price hikes in Australia, cost savings in Italy, France, the Netherlands, and Mexico, and Brazilian action against illicit trade.
Altria Reports Strong Results
New York — The Altria Group’s net revenues for the fourth quarter of 2006, at $25.4 bn, were up 3.7% on those of the fourth quarter of 2005, while operating income increased 16.2% to $4.2 bn and net earnings were up 29.3% to $3.0 bn. For the full year 2006, net revenues, at $101.4 bn, were up 3.6% on those of 2005, while operating income increased 4.9% to $17.4 bn, earnings from continuing operations were up 12.7% to $12.0 bn, and net earnings, including discontinued operations, increased 15.2% to $12.0 bn.
During the fourth quarter, Philip Morris USA increased its cigarette market share by 0.1 of a percentage point to 50.1%, driven by Marlboro and Parliament, but volume shipments, at 45.3 bn, were 0.4% down from those of a year ago and down about 2.0% when adjusted for trade inventory changes and the timing of promotional shipments. PM USA’s premium brand sales as a proportion of its total sales increased by 0.7 percentage points to 92.3%.
During the full year, PM USA’s volume shipments, at 183.4 bn, were down 1.1% on those of 2005, but about 1.5% down when adjusted for trade inventory changes and the timing of promotional shipments. PM USA’s premium brand sales as a proportion of its total sales increased by 0.5 percentage points to 92.1%.
Philip Morris International’s cigarette volume shipments increased by 3.9% during the fourth quarter of 2006 to 191.4 bn, driven by improved results in all geographic regions and worldwide duty-free, Altria reported.
In the EU, PMI’s cigarette shipments were up 2.3% or 1.3 bn pieces, representing the strongest volume performance in this region in three years. Elsewhere, PMI’s shipments were up by 10.7% in Latin America, by 4.2% in Asia, and by 1.8% in Eastern Europe, the Middle East, and Africa.
For the full year 2006, PMI increased its cigarette volume shipments by 3.4% to 831.4 bn on those of 2005.
Shipments were increased in Asia by 12.3%, by 10.8% in Latin America, and by 1.7% in Eastern Europe, the Middle East, and Africa.
In the EU, shipments were down 2.8%, though, adjusted for the 2005 one-time distribution change in Italy of 3.0 bn units, they were down by 1.7%.
“We finished 2006 with a strong fourth quarter and enter 2007 on an exciting note with [the Jan. 31] announcement of the spinoff of Kraft Foods to Altria shareholders,” said Louis C. Camilleri, chairman and c.e.o. of Altria Group Inc.
“For the full year 2006, our tobacco businesses achieved strong results, benefiting from improving trends in Western Europe at Philip Morris International and from an increase in total retail share, to 50.3%, at Philip Morris USA,” Camilleri added.
In other Philip Morris news, the U.S. Supreme Court threw out a $79.5 million punitive damages award to a smoker’s widow in February, a 5-4 ruling in favor of Philip Morris USA, which contested an Oregon Supreme Court decision upholding the verdict.
In the majority opinion written by Justice Stephen Breyer, the court said the verdict could not stand because the jury in the case was not instructed that it could punish Philip Morris only for the harm done to the plaintiff, not to other smokers whose cases were not before it.
States must “provide assurances that juries are not asking the wrong question ... seeking, not simply to determine reprehensibility, but also to punish for harm caused strangers,” Breyer said.
The decision did not address whether the size of the award was constitutionally excessive, as Philip Morris had asked.
Nat Sherman Goes 100% ‘Fire-Safe’
New York — Nat Sherman, the worldwide tobacco company, announced that all of its cigarette brands sold nationwide now meet the low-ignition propensity — i.e., so-called “fire-safe” — standards adopted as mandatory by a number of states, including New York, Vermont, and California.
According to Joel Sherman, president of Nat Sherman, “Since many states are moving in the direction of mandatory standards, our decision was intended to simplify inventory management and eliminate the risk of shipment violations for our customers who distribute our brands in multiple states, some of which may have mandatory standards and some without.”
None of the major tobacco companies has as of yet followed Nat Sherman’s lead. All of them instead assert they want a national standard mandated by the federal government that, they claim, would reduce the possibility of conflicting state standards. However, all of the state standards adopted thus far are similar and are based on model legislation developed by the Coalition for Fire-Safe Cigarettes, a group of nearly 50 health and fire-fighting organizations headed by the National Fire Protection Association.
TTI Announces FAST Alliance
Eldersburg, MD - Tobacco Technology Inc. (TTI), a global tobacco flavoring house, has spearheaded the formation of the FAST Alliance, a first-of-its-kind industry collaboration with peers dedicated to the tobacco industry. FAST (or Flavor Applications Solutions for Tobacco) addresses the challenges of new product development and the ability of mid-tier players to lead the curve on innovation.
The goal of FAST is to develop new technologies for the application of flavors in tobacco products and/or tobacco product components and packaging. TTI’s team of experts gathered industry colleagues to find a way to respond quickly and creatively to changing requirements and new challenges, such as contamination of machinery and goods that can occur during primary processing. The formation of the FAST alliance helps solve problems and also creates new product development opportunities for components of tobacco products that are completely unique. Virtually any tobacco product component can be flavored. New technology currently in development by the FAST Alliance will allow customers to bring new products to market with the same efficiencies they enjoy with established products.
Along with TTI, the core members of FAST are SPI Developments, a machinery company involved in fluid control and automation systems (www.spidevelopments.com ); Titan Adhesives (www.titanadhesives.com ); and Southlake Corp., the North American distributors for SPI Developments and experts in machinery in their own right.
In addition to this core group, FAST will work on a project basis with select companies that cannot officially join the Alliance at this time. These companies include a major producer of board and pack stock to the tobacco industry; a packaging company; a company that produces cellulose acetate tow; and a producer of industrial gums. Projects undertaken by FAST involve both specific charters from customers as well as proprietary developments within the alliance.
Tobacco International - March, 2007
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