Japan Tobacco’s Challenges Build Case for a Return to Dealmaking

Source from:  Blooberg 03/31/2017

　　British American Tobacco Plc’s $49.4 billion deal to take full control of Reynolds American Inc. is set to create a giant rivaling Philip Morris International Inc., leaving Japan Tobacco Inc. a distant third among the major global cigarette makers.

　　The Tokyo-based company’s domestic market is shrinking as hundreds of thousands of smokers switch to Philip Morris’s cigarette alternative iQOS. The introduction of plain packaging in the U.K. and record cigarette tax hikes in Russia are weighing on growth in two of its biggest overseas markets.

　　Here are three charts that demonstrate Japan Tobacco’s diminishing global clout -- and show why Chief Executive Officer Mitsuomi Koizumi might have to make a big acquisition of his own to progress toward his previously stated goal of building the world’s biggest tobacco company.

　　Japan Tobacco’s global push began in 1999. Faced with dwindling domestic sales, the former state monopoly acquired the international operations of R.J. Reynolds for $8 billion. It followed up eight years later with the $19 billion purchase of Gallaher Group.

　　“When Japan Tobacco come under pressure, they go out and do a deal,” Owen Bennett, an analyst at Jefferies, said by phone. The U.K.’s Imperial Brands Plc, the fourth-largest player globally, will be the company’s No. 1 target and could fetch 45 billion pounds ($56.7 billion), he said. That’s about 23 percent more than its current market value.

　　Eddy Pirard, who led Japan Tobacco’s acquisition of the international rights to Natural American Spirit, has been chosen to run the company’s overseas business from April. The business plan for 2017 states a desire to expand geographically, “notably through acquisitions.”

　　“We will continue to take a number of strategic initiatives to strengthen our brand equity, geographic reach and emerging products to attain sustainable profit growth in the mid to long term,” spokesman Masahito Shirasu said, though he declined to comment specifically on speculation about any interest in Imperial.

　　The “time is nigh” for Japan Tobacco to strike out again, according to Eamonn Ferry, an analyst at Exane BNP Paribas, putting a 70 percent probability on a Japan Tobacco-led bid for Imperial this year.

　　With an acquisition of Imperial, Japan Tobacco would catch up to Philip Morris and BAT, as well as gaining access to the $117 billion U.S. tobacco industry. Imperial has a 9 percent share of the U.S. market, as well as a nationwide distribution network for vapor products such as Imperial’s e-cigarette brand blu.

　　Imperial, which said in November that investments in its main cigarette brands would constrain profit growth, has not joined the race to develop alternatives that heat rather than burn tobacco. The company is set to provide a trading update Thursday. Enditem