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October, 2007

Japan Tobacco to seek more takeovers, possible full privatization

Tokyo — Japan Tobacco Inc., the world’s third-largest cigarette maker, will seek more takeovers from 2009 to build on the £7.5 bn ($15 bn) purchase of Gallaher Group Plc, according to the company’s President Hiroshi Kimura in a recent interview. He went on to state that further acquisitions “would be realistic from 2009.”

Kimura is seeking to expand overseas as cigarette consumption falls in the Tokyo-based company’s home market, which accounts for 76% of sales. Japanese

tobacco revenue slumped 13% in the first quarter as the nation’s population declined and anti-smoking campaigns increased.

The company, which is half owned by Japan’s government, was “monitoring” opportunities and may move on an acquisition before 2009 if necessary, Kimura said. He did not speculate on possible targets. The maker of Mild Seven and Camel brand cigarettes is focusing on emerging markets in the Middle East and Eastern Europe to expand sales. The company’s international tobacco sales rose 25% to ¥273 bn ($2.35 bn) in the first quarter, led by revenue from Russia, Turkey, Iran, and Spain. The Gallaher acquisition adds Russia and Ukraine to the 10 nations in which JT has either first or second biggest share. The company plans to spend an extra $100 mn annually on advertising and promotional campaigns in its growing markets.

Japan Tobacco is “unlikely to immediately” acquire another cigarette maker, said Daiwa Institute of Research analyst Tokushi Yamasaki. It would be interested in companies, which increased its share in a particular market, he said.

The company also repeatedly discusses the prospects of the Japanese government selling its remaining 50% stake, Kimura said. The government last sold stock in 2004. In December, former Finance Minister Koji Omi said the government would “eventually” fully privatize the cigarette maker.

Imperial tests snus in Alberta
Edmonton — Imperial Tobacco has started to test market known snus in Edmonton as an alternative to traditional tobacco products. The company has yet to decide how long to run the test, which began at the end of September. But it will use studies to determine whether snus—which literally translates to “snuff” from Swedish—is an effective “harm reduction” tool that helps people traditionally unable to quit cigarettes move to something less deleterious, said Imperial Tobacco president Benjamin Kemball.

“We believe the responsible position is to seek out and offer products that may substantially reduce health risks,” he said. “Harm reduction is what any responsible company strives to do.” Studies by US, Swedish, Australian and New Zealand-based university researchers show significant smoking declines among snus users.

In Sweden, only 13% of men smoke, while 22% use the smokeless tobacco product, which Imperial is marketing in oral pouches that promise a slow release of nicotine. Over the same periods of study, lung cancer and oral cancer rates in Sweden declined to the lowest levels in the developed world. That’s because snus production uses a pasteurization process that removes the cancer-causing agents associated with mouth and lung cancer. Traditional North American smokeless tobacco, also known as snuff and dip, has up to 128 mg per kilo of the agents, known as tobacco specific nitrosamines. Imperial believes it will be more popular with smokers due to the flavor of tobacco, although Kemball conceded snus is a slow-release form that does not provide the immediate nicotine rush of smoking a cigarette. It plans to release snus in tins of 20 and 25 pouches, under the Du Maurier brand.

Villiger turns to young, cosmopolitan India
New Delhi — Following the lead of luxury cars, branded foreign liquor, chocolates, and almost everything else associated with luxury, quality cigar brands are now making their way to India.

Style and fashion have become a mantra of the growing class of the young and upwardly mobile with money to spare. These are some of the many reasons that has prompted Swiss cigar maker Villiger Sons Ltd to set up shop in India. “India is an emerging market, a young nation and has thrown open good opportunities for us,” Heinrich Villiger, President and Chairman of the board of the 119-year-old family-held cigar company told the Hindustan Times.

The company is eyeing a growing cigar market comprising the young upwardly mobile that is interested in switching from cigarettes to cigars. To begin with, the company will focus all its attention to the metros in the first year of its operations and later move on to the mini-metros and other cities. Villiger feels the EU, the US, and Asia were the key markets in the cigar business. With 30% growth projected for the cigar market, Villiger said there was an immense opportunity to tap about 15 to 20% of the market in India over next three years. The company aims to be present across various market segments with brands ranging from Rs 10 to Rs 125 per cigar stick.

Should Pall Mall be considered premium for tax purposes?
Manila — A dispute over whether the BAT brand Pall Mall is a premium or mid-price brand and therefore how much it should be taxed by the federal government boiled over into the national press in September.

The Philippine Star reported that the domestic cigarette company Fortune Tobacco had also appealed to the Department of Finance (DOF) the medium-price tax rate assigned to Pall Mall in July.

The newspaper said Philip Morris Philippines Manufacturing had earlier raised the same objection.

Since a review by the federal finance undersecretary in July, BAT has paid an excise tax rate of 6.74 Philippine pesos per pack for its Pall Mall brand.

Earlier, when the Philippine Bureau of Internal Revenue (BIR) ruled in January that Pall Mall should be considered a premium brand, a rate of P26.06 per pack had been applied.

Confusing the issue is the fact that most Pall Malls sold in the Philippines are manufactured under a licensing agreement between BAT and La Suerte Cigar and Cigarette Co. But others—apparently manufactured elsewhere—are sold in duty-free shops. - (Bickers)

Tobacco-state governors promotes local product through paper
Vigan city — A type of paper made from tobacco has gotten its first big customer: the government of the state of Ilocos Sur.

The Philippine Information Agency said in September that Ilocos Sur Governor Deogracias Victor Savellano has ordered a large volume of tobacco paper from the National Tobacco Administration (NTA).

The paper is being produced at the NTA’s Agricultural Research Department at Batac, Ilocos Norte, the neighboring state to the north, as an alternate use of tobacco.

According to Savellano, the paper is excellent for official communications. “Using our own product is an effective way of promoting on it,” he added. His order was for 100 reams of standard size and a light yellow color.

Both Ilocos states are significant producers of tobacco.

Besides paper, the Filipinos hope that tobacco will prove a good basic material for organic insecticides for fish ponds and eventually for organic feed for fishes.

“Having been convinced that the quality of the paper would be a good material for printing of some vital documents, we therefore place our,” Savellano said. - (Bickers)

PMI to build leaf transshipment hub in Philippines
Subic Bay — Philip Morris International (PMI) is to invest more than $20 mn in building a leaf tobacco warehouse in the Philippines to serve its markets in the Asia-Pacific region.

Nelson was reported as saying that PMI would initially refurbish a warehouse in Subic so that it was capable of holding about 6 mn tons of tobacco, and then build a facility in 2009 with a capacity of 25 mn tons.

Plans to sell Tekel
Istanbul — Turkey plans to offer Tekel Cigarette for sale by tender in October, industry and government sources told Reuters, the latest of several planned attempts to sell the tobacco firm.

Finance Minister Kemal Unakitan said in May the state-owned firm would be sold after a July 22 parliamentary election, in which the pro-business AK Party was re-elected.

Turkey has tried several times to sell Tekel, postponing most recently a plan to sell the former monopoly in April. In February it cancelled a sale saying it planned to boost market share first.

Tekel has a 40% share of the market in Turkey, with annual sales of around $8 bn. But its share has fallen from 60% since Ankara first planned to sell it in 2001.

Earlier this year the government raised a special consumption tax on tobacco, which some in the government opposed because of the possible impact on the Tekel privatization.

In 2003, Japan Tobacco offered $1.15 bn for Tekel but Ankara cancelled the tender, saying bids were unsatisfactory. There were no bids in a 2004 tender.

The sale is part of a broad privatization program backed by Turkey’s major creditor, the International Monetary Fund. It was one of several deals postponed or cut back before the July election.

United Kingdom
Imperial Tobacco sees share gains in UK and Germany
London — Britain’s Imperial Tobacco Group Plc recently said its current year trading remained in line with its own expectations helped by cigarette market share gains in its two key markets of the UK and Germany. The company, makes Britain’s two top-selling cigarette brands Lambert & Butler and Richmond, together with West and Davidoff in Germany.

Japan Tobacco plans to close factory in Britain
Cardiff — Japan Tobacco Inc said it plans to close a factory in Wales and shift production to a plant in Northern Ireland, its first consolidation of output since its acquisition of Gallaher earlier this year.

Japan Tobacco, the world’s third-largest cigarette maker, said it would close its Cardiff factory in Wales in September 2009, affecting 184 jobs. The factory, one of 33 in the Japan Tobacco group, produces about 330 mn cigars a year.

The bulk of Cardiff’s output will be shifted to its Lisnafillan factory in Northern Ireland in a move that is expected to create 95 jobs, Japan Tobacco said in a statement.

Japan Tobacco spokeswoman Yukiko Seto said the company has just started negotiations with the labor union and could not yet give an estimate of the charge it might incur from the closure.

JT also recently announced it would close its Linz factory in Austria by the end of 2009, affecting 300 jobs. The factory makes the Benson & Hedges and Memphis brands and has an annual production volume of about 20 bn cigarettes.

United States
Lorillard follows trend, boosts price on Newport
Greensboro — Lorillard Inc. became the third big cigarette producer to implement a price increase, adding a nickel a pack to its Newport brand. Lorillard is the third-largest cigarette maker in the US. The recent price increase follows actions in the last couple of weeks by the Reynolds American Inc. and Altria Group Inc.’s Philip Morris.

PMUSA to operate a receiving station on its own
Richmond — Philip Morris USA will operate a leaf receiving station that it manages itself this fall. All its other stations are managed by independent operators.

The new station will open in Frankfort, Kentucky in November 2007 and will receive burley leaf.

Since the company began contracting with farmers in 2000, most of the receiving station operators it has dealt with have been independent business owners, many of whom used to run tobacco auction warehouses.

But the company is experimenting with the Frankfort station in a pilot program to explore new ways to deliver high-quality service to its growers.

Another pilot program will test a “mobile” leaf receiving station.

The current locations of PM USA receiving stations are:

  • Flue-cured: Alma, Georgia; Danville, Virginia; Kinston, North Carolina; Lumberton, North Carolina; Robersonville, North Carolina; and Wilson, North Carolina.
  • Burley: Carrollton, Kentucky; Hopkinsville, Kentucky; Lebanon, Kentucky; London, Kentucky; New Holland, Pennsylvania; Hartsville, Tennessee; Danville, Virginia; and Weber City, Virginia.
Nearly all of the tobacco PM USA now purchases in the US is bought through its contract program, which it calls the Tobacco Farmer Partnering Program.

According to PM USA, the program offers a number of benefits for farmers. They include predictability, since growers know the buyer of their contracted tobacco and how much that buyer is willing to purchase even before planting season; fairness, because growers benefit from competitive pricing and same-day, on-site payment, and communication.

It gives PM USA direct interaction with growers and provides an effective means for enhancing supply security, quality and consistency and for encouraging dialogue on important issues such as the use of crop protection agents and reducing tobacco-specific nitrosamines. - (Bickers)

Swedish Match acquires US cigar company
Bethlehem — Harris Williams & Co. has recently announced the sale of Cigars International, Inc., a portfolio company of Svoboda, Collins L.L.C., to international strategic buyer Swedish Match AB.  The transaction closed August 31, 2007.  

Headquartered in Bethlehem, Pennsylvania, Cigars International, Inc. ( www.cigarsinternational.com) is a leading direct marketer of cigars and related products through a multi-channel platform including catalogs, websites, retail locations, and wholesale distribution.

  This is the second big-name purchase for Swedish Match in recent months. This summer they announced the acquisition of Bogaert Cigars, a cigar producer based in Belgium.

Camel No. 9 100s to hit US retail
New York — Following the introduction earlier this year of Camel No. 9, the Camel is now making No. 9 100s styles available at retail. Camel No. 9 has been very well received by adult smokers since its introduction this past February, including better than expected appeal by adult male smokers. Camel No. 9 100s gives the Camel brand another product option for adult smokers to try. Approximately 35% of adult smokers smoke a 100s brand, with nearly 46% of female adult smokers choose a 100s.

Smoker loses appeal in cigarette price fix case, but others loom
Los Angeles — A smoker who accused tobacco companies of jacking up cigarette prices to recoup bns of dollars they pay each year to US states lost a recent federal court appeal.

Steve Sanders also sued the California Attorney General, contending that state laws stemming from the 1998 multi-state Master Settlement Agreement (MSA) have artificially driven up prices and violate antitrust laws.

Sanders claims that settlement spawned a “cartel” that allowed the four largest US cigarette makers to hike prices by $12.20 per carton—more than twice what they needed to cover costs—without fear of losing sales or market share.

The Ninth US Circuit Court of Appeal noted that the case joins several unsuccessful actions in alleging price fixing as tied to the multi-state settlement, which was designed to force tobacco makers to shoulder costs associated with smoking. However, two other federal appellate courts have allowed similar cases to proceed to the discovery stage.

Tobacco International - October, 2007

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