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July / August, 2007


Imperial Tobacco agrees to €16.2 bn bid for Altadis

French-Spanish tobacco company Altadis has accepted a takeover bid from Britain’s Imperial Tobacco valuing the company at €16.2 bn (US$22.4 bn), Imperial Tobacco announced in mid-July.

It said the Altadis board of directors would recommend that shareholders approve the bid, worth €50 a share, in the absence of a higher, competing offer. In both March and April, Altadis spurned two overtures from Imperial Tobacco of €45 and €47 a share. Imperial’s offer of €50 per share matches a rival indicative offer from CVC Capital Partners putting pressure on one of Europe’s largest private equity group to improve its offer or admit defeat and pull out. CVC is now evaluating its options over Altadis, people familiar with the situation said, while CVC declined to comment.

Combined Altadis and Imperial will produce 312 bn cigarettes a year, including Imperial’s Lambert & Butler and Richmond brands in Britain and West and Davidoff in Germany. Altadis makes Gauloises, Gitanes, and Fortuna cigarettes as well as Montecristo cigars.

The deal comes as big tobacco groups look to cut costs to cope with declining western European markets hit by smoking bans in public places and seek to offset these mature markets by expanding in emerging markets such as Eastern Europe and Asia.

The move will strengthen Imperial’s position as the world’s fourth largest cigarette group as it joins with No. 5 Altadis and closes the gap with the world’s top three: Altria, British American Tobacco, and Japan Tobacco. In Europe, Imperial will become No. 2 after Marlboro-maker Altria. It previously trailed Altria, BAT, and Altadis.

When Winston met India
Mumbai — Japan Tobacco International (JTI), the third largest manufacturer of cigarettes in the world recently announced the launch of their premium quality, global brand, Winston in India. The brand will be available in Bangalore, Kerala, and Mumbai. The cigarettes will be manufactured at JTI’s facility in Hyderabad.

“In line with the global positioning, Winston will provide Indian smokers with premium quality... 69mm cigarette sticks in packs of ten at an accessible price of Rs24 per pack in Bangalore, Mumbai, and Kerala,” said a JTI spokesperson.

Winston is the fastest growing cigarette in the world, experiencing over 20% growth globally, since 2001. It has tripled volumes globally in five years while gaining a significant market share in key regions. Winston is the 4th largest brand worldwide, and is the number one brand in CIS region and Russia. It is a price segment leader in many countries like Belarus, Turkey, Malaysia, Iran, Lebanon, and Syria.

Marlboro Man gets a little sweeter
Jakarta — Marlboro’s famous cowboy will be the face of an Indonesian cultural icon after the local unit of Philip Morris International’s (PMI) recent launch of a line of kreteks in the world’s fifth largest tobacco market.

Until now, PMI has dominated the so-called “white” cigarette segment in Indonesia while the country’s top cigarette maker, Gudang Garam Tbk, is synonymous with the clove cigarette that have become synonymous with the country’s identity.

The Marlboro Mix 9 kreteks (nine is considered lucky in Chinese culture)—a mixture of tobacco, cloves, and a fruit flavor— are aimed at urban smokers in Indonesia, where over 90% light up with kreteks.

The Marlboro Mix 9 is priced at 7,000 rupiah (US$0.78) for a pack of 12, slightly higher than the regular Marlboro brand which sells for 8,500 rupiah for a pack of 20.

“Kretek is the biggest market in Indonesia and right now, we are under-represented in the machine-rolled kretek segment,” Toni Darusman, project manager for Marlboro Mix 9, said.

While the number of smokers in many Western countries has fallen in recent years, experts say more than a third of Indonesia’s population smokes today compared with a little over 25% about a decade ago.

Indonesia’s $8 bn tobacco industry provides jobs for 7 mn people and contributes about 10% to the government’s coffers.

North Korea
North Korea reportedly sanctions cigarette counterfeiting
Pyongyang — In a piece titled “The Tony Soprano of North Korea,” Time Magazine reports that North Korea has eclipsed China as the number one counterfeiter of cigarettes. The report says their investigator found that 10 to 12 factories sanctioned by the government produce a total 41 bn counterfeit cigarettes a year. The North Koreans have been able to import equipment from Taiwan and mainland China to produce the cigarettes. Overall, the trade reportedly generates US$80–160 mn in profit for the regime every year.

The article claims much of the contraband first makes its way to Subic Bay in the Philippines and include popular brands such as Marlboro, Benson & Hedges, and Mild Seven, among others. The cigarettes are then shipped to Asia, Europe, and even to the US. Later this year, the US is expected to bring to trial a case targeting alleged members of a Chinese organized-crime gang accused of moving counterfeit currency, illegal narcotics, and contraband cigarettes from North Korea into the US—in addition to at least $1 mn in illegal weapons such as pistols, machine guns, and rocket launchers.

PMI invests in Philippine hub
Manila – Philip Morris Philippines Manufacturing Inc. will invest US$20 mn to renovate a warehouse in the Subic Bay freeport, located north of the capital Manila, to serve as the company’s interim transshipment hub for tobacco leaf in Asia.

Armand Arreza, administrator of Subic Bay Metropolitan Authority, said “tobacco leaf from the Philippines, Vietnam, and Indonesia will all be consolidated here in its hub.”

Philip Morris, which sells three in every 10 cigarettes sold in the country, will use the 4,000-square meter warehouse for two years, and will eventually build a new $80 mn facility either in Singapore or Subic.

“We are competing with Singapore for Philip Morris’ new facility. We have the advantage since they’re already here. I think for them, it is a question of cost and efficiency,” said Arreza, adding that the cigarette maker will decide in a year where to build the new facility.

Arreza said SBMA plans to develop a 15-hectare area within the freeport as a site for warehousing and logistics operation.

Thailand turns out the tobacco, before taxes take toll
Bangkok – Thailand Tobacco Monopoly has received unusually high orders ahead of the Cabinet’s resolution to raise excise duty on cigarettes. Spokesman Prapatsorn Pongpanpisand recently announced production had risen to 150 mn cigarettes a day from the usual figure of 105 mn. About 1.5 bn cigarettes, or 75 mn packs, with an estimated value of Bt2.88 bn have been stocked.

Philip Morris Thailand also witnessed an increase in orders, from 1.5–2 mn packs a day to 4.5–5 mn packs during the period.

United States
Altria Group shifts production over the Atlantic
Richmond — Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving US-based cigarette production for non-US markets to Philip Morris International (PMI) facilities in Europe. Due to declining US cigarette volume, as well as PMI’s decision to re-source its production, Philip Morris USA (PM USA) will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the US market at its Manufacturing Center in Richmond, Virginia. Altria Group, Inc. said that it expects PM USA to record an initial pre-tax charge of approximately US$325 mn in the second quarter of 2007 for costs related to the program, primarily for employee separation, with additional estimated charges of approximately $50 mn for the remainder of 2007.

The program is expected to generate pre-tax cost savings beginning in 2008, with total estimated annual cost savings of approximately $335 mn by 2011, of which $179 mn will be realized by PMI and $156 mn by PM USA. Cumulative total expenses through 2011 are estimated at approximately $670 mn, all of which will be at PM USA.

PMI is expected to shift sourcing of approximately 57 bn cigarettes from Cabarrus to PMI facilities in Europe by the third quarter of 2008, and PM USA will close its Cabarrus manufacturing facility by the end of 2010. The Cabarrus facility currently employs approximately 2,500 people. PM USA and PMI are significant purchasers of US leaf tobacco and will continue to purchase US tobacco for future production. Looking ahead, PM USA said that it plans to source its production of cigarettes sold in the US from its manufacturing facility in Richmond.

Tobacco International - July/August, 2007
U.S. Tobacco Cooperative

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