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December, 2006

U.S. Tobacco Cooperative

United Kingdom
Gallaher Deal Made in Japan
Tokyo — Confirming industry speculation, the world's third largest cigarette group, Japan Tobacco Inc., made a 7.5 bn pound ($14.7 bn) cash offer for rival Gallaher Group Plc.

The purchase is the largest by a Japanese company outside its home market and the biggest tobacco deal in history.

Analysts said the deal makes a good match in Europe, with Weybridge, UK-based Gallaher, the world’s fifth largest cigarette maker, earning 70% of its profits from Britain, Ireland, Austria, and Sweden, while Japan Tobacco is strong in Spain, France, and Italy. Both are major players in the fast-growing tobacco markets of the former Soviet Union. Gallaher already markets Japan Tobacco's Camel brand in the UK, Ireland, and Sweden.

“Russia and Ukraine are the two markets where the potential Gallaher plus Japan Tobacco combination look most interesting,” said David Ireland, an analyst at ABN Amro in London.

Analysts say Tokyo-based Japan Tobacco is keen to expand outside its home country because, even though it has a two-thirds share of its domestic market it has seen smoking levels decline and its market share fall. For Japan Tobacco, still 50% owned by the Japanese government, overseas cigarette sales have been the main driver of profit growth. In 2005 its international volumes overtook its Japanese volumes for the first time.

“We approached the Gallaher management because having a large scale is increasingly important as regulations are getting stricter worldwide,” Japan Tobacco c.e.o. Hiroshi Kimura told a news conference. “We believe they had judged that it would bring more merits in the future if they join us and expand in size.”

Japan Tobacco named Gallaher as a potential target last year, after Turkey rejected its $1.2 bn bid for state-run cigarette maker Tekel. The company, whose brands include the world's No. 2 cigarette brand Mild Seven, paid $8 bn in 1999 for international rights to Camel, Winston, and other R.J. Reynolds brands.

The acquisition of Gallaher would reinforce Japan Tobacco’s world No. 3 position behind Marlboro maker Altria Group Inc. and British American Tobacco Plc.


Malaysia
Philip Morris considering further investments
Kuala Lumpur — Philip Morris (M) Sdn Bhd is committed to Malaysia and will continuously look at further investments in the country in the next few years.

Philip Morris Asia Ltd. managing director (Malaysia and Singapore) Joseph Tcheng said investments would depend on demand for the company’s products in the domestic and export markets.

“We are studying feasibility reports. We have been gradually increasing our investments in Malaysia. To date, we have invested over RM800 mn in our factory in Seremban.

“It is one of the most advanced manufacturing plants in Asia — a fully integrated factory equipped with some of the most advanced technology and control systems in tobacco processing and blending,” he said.

Currently over 80% of the products manufactured are exported to markets such as Taiwan, Hong Kong, Singapore, Indonesia, Vietnam, Nepal, and the Middle East.

Last year, Philip Morris invested over RM103 mn in a cast leaf plant in Seremban, the first in Asia and among four such plants internationally.

The construction of the cast leaf plant is integral to Philip Morris International Inc.’s master plan to develop Malaysia into a complete and integrated manufacturing facility.

Output of the cast leaf plant is not only meant for domestic consumption, but is also exported to the Philippines and Australia.

“Next year, we will be exporting cast leaves to Europe as well. It is a cost-saving measure for us as we used to import these sheets. It also improves the quality of our cigarettes,” Tcheng said.

He said Malaysia also housed the group’s regional technical operations, which conducted research and development and served a number of its factories in Asia, including Australia, the Philippines, Indonesia and Malaysia.

Philip Morris, which is a member of the Confederation of Malaysian Tobacco Manufacturers (CMTM), is also helping to develop the local tobacco agronomy industry in efforts to make Malaysia a supplier of quality and competitively priced tobacco post-implementation of the Asean Free Trade Area in 2010.

The plan is to gradually reduce the price of tobacco during this period.    “Philip Morris is working with about 1,200 tobacco farmers, and we are helping them to increase their yield and improve quality so that they can remain competitive and Malaysia will still have a viable tobacco industry when the time comes,” Tcheng said.   According to Tcheng, CMTM has contributed RM70 million to the National Tobacco Board to help in the restructuring of the local tobacco leaf industry in the next five years.

“Many of these farmers will have to leave the tobacco farming industry — a drop from 12,000 farmers to about 5,000,” he said. “We are helping these farmers to move to other crops. We are also encouraging those staying in the industry to look into integrated farming, for example, fishing and animal husbandry,” he said.

In addition, Philip Morris (M) Sdn Bhd will focus on two key strategies —comprehensive regulation and quality products — to build its business in the country, said Tcheng.

“Strong and effective regulations that are enforceable for tobacco products will give us a level and predictable playing field to operate and compete in. And we will compete vigorously to promote our three major brands — Marlboro, L&M, and A Mild,” he told StarBiz.

“Another top priority is to ensure quality in everything that we do — in the manufacturing and distribution processes as well as how we grow our tobacco, innovate our products, and build the talents that we have.” 

Philip Morris currently has a 16% share of the local cigarette market. Marlboro cigarettes make up some 60% of the company’s sales, while L&M and A Mild each account for 20%.

“Malaysia is an important market for us as we still have a lot of room to grow. In the long term, we want to achieve market leadership in every market that we operate in,” Tcheng said.


Malaysia
JTI launches ‘lights’ awareness campaign
Kuala Lumpur — JT International Bhd (JTI) has embarked on a major campaign to provide specific information to consumers who might misinterpret brand elements displayed on JTI cigarette packs.

The campaign will advise smokers that they should not assume that any cigarette is less harmful than any other, for instance, because of its taste, strength, color, or because of descriptive terms including words like “lights” and “mild.”

"JT International is implementing this campaign initially in 14 markets around the world," the company said in a statement on Dec 13. The messages will be delivered to adult smokers via a printed on-pack notation, which will appear on packs of JTI cigarettes.

The information will simultaneously be communicated to a wider audience via information cards at points of sale for tobacco products, in addition to the ongoing educational information via its Web site.

“Adults who choose to smoke need to have relevant information regarding the risks involved,” said Martyn Griffiths, managing director of JTI. “JTI is committed to being open and transparent about our product and this campaign demonstrates that commitment.”


Turkey
TEKEL attempts to lure investors with two new cigarette brands
Ankara — TEKEL, Turkey's alcohol and tobacco monopoly, is launching two new brands of cigarettes before its privatization next April, in an effort to add excitement to its brand portfolio. The privatization tender was rescheduled after an earlier attempt in 2006 failed due to lack of investor interest.

The initial plan of privatizing TEKEL in two blocks of factories and brands has been abandoned, according to the Turkish Daily News; instead, the state will conduct a block sale of both together.

TEKEL is now trying to increase its market share with new brands. One of them, Kariyer, was launched Dec. 1, targeting the middle-income group. The second, Cool Black, aimed at high-income consumers, will go on sale Jan. 1.

Privatization Administration officials said that as the TEKEL privatization tender approaches, those interested in the company are becoming clear, with three funds and two cigarette factories expressing interest. The candidate companies are in search of Turkish partners at the moment, officials said.

TEKEL will be put out to tender on April 2007 and the tender process is expected to be completed by the end of June. One factor affecting the proposed tender date was that the final audit report on TEKEL is to be issued at the end of March. TEKEL will release its full-year 2006 data by the end of February. The auditing firm will then finish its auditing report by the end of March. In April, the tender conditions will be publicized.

The reason behind the decision to privatize TEKEL with a block sale rather than the original intention of selling it in two parts was the demands by investors. Negotiations will continue until the tender date, thus last-minute changes remain a possibility.

As the tender approaches, companies interested in the privatization of TEKEL are categorized as "strategic candidates" and "financial investors." Under the financial investors category, one U.S., one British and one Hong Kong-based investment fund are mentioned. Strategic candidates operating in the tobacco sector have been named as British-American Tobacco and Imperial.


Turkey
BAT marks fourth year in Turkey, says investment has exceeded five-year plan
Ankara —  British American Tobacco (BAT), manufacturer of cigarettes including the Kent and Pall Mall brands, has invested $300 million in Turkey over the past four years, according to its Turkey general director Johan Vandermeulen.

Vandermeulen spoke at a reception to mark BAT's fourth anniversary in Turkey at the Ankara Swissotel. During his speech, he noted that although the company had planned to invest $250 million between 2002, when it started operating in Turkey, and 2007, the investment made so far had reached $300 million.

Vandermeulen also stressed that BAT was very pleased with the performance of its Turkish operation as well as with the contribution it has made to the Turkish economy. Vandermeulen noted that BAT has become one of the leading export companies in Turkey, adding that they would be continuing their investments in Turkey based on their full confidence in the Turkish economy.

BAT Turkey corporate relations coordinator Tuna Turagay's address warned against illicit cigarette resales and said that BAT was ready to cooperate with all public agencies to end illegal activities in the sector. 

BAT, a 104-year-old company, has created jobs for 950 people in Turkey, where it started operating in 2002. The company's share in the Turkish tobacco market is 8% and it exports more than half of its production. BAT, which carries out its production in the company's factory in Tire, Izmir, has 64 factories in 54 countries and 97,000 employees.


United States
Supreme Court refuses Reynolds' appeal
Washington, D.C. — The U.S. Supreme Court refused to consider an appeal by R.J. Reynolds Tobacco Co., which sought to dismiss a lawsuit on jurisdictional grounds. The Court's decision, issued without comment, means the case can now proceed in federal court in Washington state.

The case involves a Philippine immigrant, Nilo D. Tuazon, who sued Reynolds in 2003 for allegedly participating in a worldwide conspiracy to suppress information regarding the health-related effects of cigarette smoking. Tuazon smoked Salem cigarettes, a Reynolds brand, for more than 40 years in the Philippines, and then moved to Washington state, where he filed his lawsuit in a federal court.

Reynolds, a subsidiary of Reynolds American Inc., said its activities in Washington state were not sufficient to give courts there jurisdiction. R.J. Reynolds Tobacco Co. is based in Winston-Salem, N.C.

The company also said that the federal appeals courts have issued inconsistent rulings on the jurisdiction question, a claim that parties seeking Supreme Court review often make in hopes that the justices will seek to clarify the issue.

"Because the law...is unclear, businesses that sell products in numerous jurisdictions cannot predict where they may properly be subject to suit," the company said in a court filing.

Lawyers for Tuazon argued that Reynolds had a sufficient presence in Washington state to be sued in a court in that state. The company had a license to do business there, employed staff, sold 2.5 million to 3 million cigarettes a year in the state, and lobbied against state and local laws that would potentially restrict tobacco advertising, Tuazon's attorneys said.

Tuazon's lawyers, which include attorneys from the public interest group Public Citizen, also said that the lower federal courts have not been divided on the issue. Reynolds moved to dismiss the case but was denied by the federal district court and appeals court.

The case is R.J. Reynolds Tobacco Co. v. Tuazon, Nilo D. (05-1525).


United States
Tobacco giant set to introduce Newport competitor
Richmond, Va. — Philip Morris USA, the No. 1 cigarette maker in the United States, is poised to introduce a Marlboro-branded menthol that will compete directly with Newport.

Newport, made by Greensboro, N.C.-based Lorillard Tobacco Co., is the No. 1 menthol brand in the country and the No. 2 cigarette brand overall. No. 1 is Philip Morris' Marlboro.

The company plans to start selling Marlboro Smooth in March, spokesman Bill Phelps said. It will be available nationwide.

Marlboro Smooth has a unique flavor and will not replace Marlboro Menthol, Phelps said. "Marlboro Menthol . . . has been growing, so we believe that the menthol category growth, combined with Marlboro Menthol's momentum, creates an opportunity to gain market share and grow within that category."

Bonnie Herzog, a tobacco industry analyst with Citigroup, said in a note to investors that industry sources have told her that Philip Morris is introducing the line extension as a direct competitor to Newport.

"Our contacts stated that in a consumer test, 40% of Newport smokers indicated they prefer the new Marlboro Smooth and would purchase it if they had the opportunity," Herzog wrote.

She added that she anticipates the new brand will be sold at a lower introductory price for the first few months, and "then be aggressively discounted like Marlboro Menthol."


Tobacco International - December, 2006
SMOKE Magazine - Cigars, Pipes, and life's other desires


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