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April, 2007

SMOKE Magazine - Cigars, Pipes, and life's other desires

Commonwealth Goes Premium

Bowling Green, KY — Commonwealth Brands will soon launch a new cigarette called Tuscany.

An American blend designed for the U.S. market, Tuscany will carry a premium price, in contrast to Commonwealth’s other cigarette brands, which are value priced.

“We have already conducted test marketing, and the reaction was positive enough that we have scheduled a national rollout for May,” said Joe Pierce, vice president of sales administration for Commonwealth.

Although the product launch will probably take place after the formal acquisition of Commonwealth by Imperial Tobacco, Tuscany was in the works long before those negotiations began, Pierce said.

Pierce could not comment on when or even if any of Imperial’s cigarette brands would be introduced in the U.S. market.

The negotiations had not been completed in mid March, but Pierce thought they might be wrapped up as early as April 1. Approval of the Federal Trade Commission (FTC) had already been obtained.

Commonwealth in its present form essentially came into existence in 1996 when Brown and Williamson was required by the FTC to divest itself of six cigarette brands and a cigarette factory in Reidsville, N.C., when it acquired American Brands. The purchaser was Commonwealth, then a small, local company in Kentucky. It has since become the No. 4 cigarette company in the United States in terms of sales.

Commonwealth’s corporate headquarters is in Bowling Green, Ky., and its manufacturing is done at the former American Brands’ factory in Reidsville.

In another development, Pierce revealed that Commonwealth will continue to distribute and sell the Peter Stokkebye RYO/MYO brands McLintock and Bali Shag after the acquisition of the company.

“Commonwealth began exclusive distribution of McClintock and Bali Shag in 2005,” said Pierce. “Both products are produced by Peter Stokkebye’s tobacco factory in Denmark.”

McLintock was developed in 1998 solely for the North American market. Bali Shag was first introduced in the United States in 1998 but was originally marketed in 1932 in Denmark. It is said to be the only true European hand-rolling tobacco sold in the United States.

“We are expecting more growth for these brands, especially in the high-tax states,” Pierce said.

McClintock is available in three styles: Full Flavor, Light, and Menthol. Bali Shag is available in three styles also: Halfzware Shag, Light Halfzware, and Golden Shag. - (Bickers)


France
Altadis Rejects £7.9 Bn Bid from Imperial
Paris — Altadis has rejected a £7.9 bn “friendly” takeover approach from Imperial Tobacco, the world’s fourth-largest cigarette company, leading analysts to speculate on the possibility of a hostile takeover or a potential counterbidder entering the picture.

However, the desire for “friendly talks” was reiterated by Imperial, as a company spokesman said, “We are focused on discussing the Altadis reaction, and look forward to progressing friendly dialogue.”

The British group, headed by c.e.o. Gareth Davis, has long been touted as a potential suitor for the Franco-Spanish owner of brands such as Gauloise and Fortuna.

Such a deal would add to recent consolidation in the sector, which has seen Gallaher agree to a £7.5 bn takeover from Japan Tobacco.

The move on Altadis came just over a month after Imperial made its first step into the U.S. market in February after buying Kentucky-based Commonwealth Brands from Houchen Industries for almost £1 bn.

Market watchers had anticipated Altadis rejecting the offer and seeking a higher price, while others fully expect a counterbidder to emerge, perhaps British American Tobacco.

“We see a counterbid on behalf of British American Tobacco more probable,” Caja Madrid analysts said, ruling out such a move from either Altria’s Philip Morris or Japan Tobacco, mainly for anti-trust reasons in both cases.

But the Spanish investment house noted that it does not rule out a capital risk company possibly joining the bidding ring, highlighting that Altadis is a “strong cash generator, easily segregated, etc.”

Societe Generale analysts said they believed Imperial Tobacco’s offer to be too low as it did not reflect improved prospects for the group’s cigarette business or take into account its world-leading cigar division.

“We believe that Imperial’s announcement of its willingness to offer 45 euros per share will be seen as too low by investors considering past deals... 49 euros is a fair takeover price in our view,” the French broker said.

Deutsche Bank analysts were less optimistic about the prospect of a higher bid, however, warning that expectations in this area may be overblown.

“Shareholder wishes to maximize value may be tempered by the realization that there may not currently be any other bidders for Altadis,” the German bank said, echoing Caja Madrid’s view that BAT is out there on its own.

Merrill Lynch noted, however, that BAT has already said Altadis is too expensive.

The U.S. bank said Imperial’s offer represents “fair takeout value” and shareholders would be unwise to hold out for a higher price.

“While a counterbid from a third party cannot be ruled out, it would seem unlikely... With the challenges faced by Altadis across its markets, we feel that holding out for an offer much above 45 euros per share may not be in the best interests of shareholders.”

Despite the concerns of financial analysts, “Altadis will be taken over,” said one industry source. “It’s inevitable... whether by Imperial or BAT, or by one or more capital risk firms.

“Part of the problem for Altadis is its dual-country management, in my view... this makes it more vulnerable,” the source said.

Meanwhile, Imperial announced that it boosted its UK market share and raised output in the regions outside Western Europe so far this fiscal year. In Britain, the company reported a 46% share of the market in February, up half a percentage point from five months earlier. Outside of Western Europe, Imperial boosted output by 6% in the first five months of the financial year, the company said in a trading update.


Pakistan
PMI Completes Lakson Deal, New C.E.O. Named
Karachi — Philip Morris International Inc. (PMI) announced the completion of its acquisition of an additional 50.21% stake in Lakson Tobacco from a number of principal shareholders.

Combined with PMI’s existing 40% stake in Lakson Tobacco and an additional 7.41% of shares irrevocably tendered by shareholders at the close of the public offer, PMI would own approximately 97.62% of Lakson Tobacco, subject to customary regulatory and verification processes.

“PMI looks forward to a bright future for Lakson Tobacco in Pakistan,” said Matteo Pellegrini, president of PMI’s Western Asia region. “This acquisition combines PMI’s international expertise and global brand portfolio with Lakson Tobacco’s local knowledge and strong brands, including market leader Morven Gold.”

Lakson Tobacco’s board of directors also announced the appointment of Salman Hameed to the position of chairman and c.e.o. of Lakson Tobacco.

Looking to the future, Hameed said, “Our focus will be to bring together the complementary strengths of Lakson Tobacco and PMI,” adding “Lakson’s business performance over the years provides a strong platform for growth.”


United States
Despite Fourth Quarter Dip, Reynolds Up for Year
Winston-Salem, NC — While fourth quarter profits slipped, Reynolds American Inc. said that profits increased 16% for 2006 overall. Sales were up 1%, growing to $2.07 bn from $2.05 bn.

“Reynolds American continued to build on its momentum in 2006, with all of our operating companies posting full-year profit gains,” said c.e.o. Susan M. Ivey.

As the company had predicted, profits in the fourth quarter were down, which Reynolds attributed to quarterly volume and promotional fluctuations.

The Winston-Salem, N.C.-based company reported profits of $180 mn for the fourth quarter, compared with $297 mn for the same quarter a year ago. The company said that decline was driven largely by the timing of promotional expenses and by lower shipment volume.

“R.J. Reynolds posted significant achievements in 2006,” said Daniel M. Delen, who joined the company as R.J. Reynolds’ president on Jan. 1, 2007. “We continued to enhance our overall performance, and we further refined our marketing strategies to fuel additional gains on Camel, Kool, and Pall Mall.” On a combined basis, these three brands commanded 12.41% of the market in 2006 — up 1.09 share points from the prior year.

“That’s a tremendous accomplishment,” added Delen, saying that it helped R.J. Reynolds continue to slow its overall share decline. The company’s 2006 decline was 0.50 market-share points, compared with 0.84 points in 2005 and 1.27 points in 2004. “This steady progress puts us on track to begin overall share growth by the end of 2010.”

Delen noted that Camel was the cigarette industry’s fastest-growing brand in 2006. More than half of the brand’s full-year gain of 0.68 share points came from the company’s increased focus on the performance of Camel’s menthol brand-styles. This focus, which included the introduction of Camel Wides Menthol, has strengthened the brand’s position in the important and growing menthol category.

In addition, Delen pointed to the company’s mid-year expansion of the Camel trademark to a new smokeless and “spitless” tobacco product called Camel Snus as one of the many ways that the Camel brand continues to build on its long heritage of innovation. He said he was pleased with the Camel Snus test market, which is providing valuable learning that will enhance the product’s potential.

“This year, Camel will continue to provide innovative entries that satisfy unmet consumer desires,” Delen said. “A good example is [the] launch of Camel No. 9, which we developed with feedback from adult female smokers. Camel No. 9’s regular and menthol styles each offer a ‘light and luscious’ blend in a distinctive pack.”

Turning to Kool, Delen said a highlight of 2006 was the introduction of a wide-gauge cigarette called Kool XL. “Because it is ‘smoother’ and ‘wider,’” he said, “Kool XL provides a tangible point of difference from competing brands. And moving forward in 2007, Kool will continue to deliver consumer-relevant brand differentiation.”

Delen noted that Pall Mall’s demonstrated ability to grow market share with limited support prompted R.J. Reynolds to reclassify Pall Mall as a “growth brand.” Like Camel and Kool, Pall Mall’s growth comes primarily from competitive brands, so this move will complement the company's efforts to build market share and profits.

R.J. Reynolds’ brand-portfolio strategy includes three brand categories, which are now named: growth, support, and non-support. Each of these categories plays a specific role in returning the company to overall share growth.

The company’s total retail cigarette market share for 2006 was 29.78%, down 0.50 points from the prior year. The company’s premium to value brand mix improved 1.1 percentage points to 61.5% for the full year.

Reynolds American’s year-end financial position was improved by favorable results from its acquisition of smokeless tobacco company Conwood in May 2006. Shipments of moist-snuff products were up 25.15%, up 2.48% from the prior-year period.

“Our acquisition of Conwood significantly broadened our business and diversified our profit stream,” said Reynolds American c.e.o. Susan Ivey.


United States
Universal Sees Earnings Improvement
Richmond, VA – Universal Corp. announced a significant improvement in third-quarter earnings, noting that income from continuing operations for the quarter ended Dec. 31, 2006, was $35.8 mn, compared to a loss of $349,000 last year. Results were significantly improved due to improved results in all reportable segments as well as reduced restructuring and impairment costs. Revenues in the quarter were $516 mn, up 8.4% from the same period last year.

Allen B. King, chairman and c.e.o., noted, “The remainder of the fiscal year is expected to benefit from seasonal shipping patterns for North American, African, and European tobaccos while other origins move toward seasonally low periods. Although we have seen improvements this year from steps we took last year and a better South American crop, we will continue our efforts to improve our worldwide operations and to eliminate unproductive operations and assets. We have been disappointed with results from our flue-cured growing projects in Africa, and we are taking the necessary steps to reduce our costs and improve margins there.

“While it will take time to restore our profitability to prior levels in all of our operations,” he added, “we have made substantial progress. Our debt levels have been significantly reduced, our balance sheet has strengthened, and we are beginning to see the results of our efforts reflected in reported earnings.”

Universal modified its segment reporting because of its decision to sell its non-tobacco operations. With that change, effective for this quarter, the worldwide leaf tobacco business represents the company’s continuing operations. The tobacco operations have been classified into three reportable segments. The flue-cured and burley leaf tobacco operations are reported in two segments: North America and Other Regions. The company reports Other Tobacco Operations as one segment.


Tobacco International - April, 2007
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