Japan Tobacco Raises Outlook, Open to More M&A

Source from:  By Edwina Gibbs TOKYO, Aug 9 (Reuters) 08/10/2007

Japan Tobacco Inc. (2914.T: Quote, NEWS , Research) lifted its annual profit outlook, predicting a 26 percent jump on the inclusion of earnings from its British acquisition the Gallaher Group and said it is open to buying more firms in the future. The Gallaher acquisition -- the biggest purchase of a foreign company by a Japanese firm -- has spurred further consolidation in the cigarette industry. Britain's Imperial Tobacco (IMT.L: Quote, Profile , Research) has agreed to buy Franco-Spanish rival Altadis (ALT.MC: Quote, Profile , Research), while Altria Group Inc. (MO.N: Quote, Profile , Research) is looking at whether to spin off its Philip Morris International tobacco business. Chief Executive Hiroshi Kimura said that for the time being JT was focused on integrating Gallaher but the task should be completed within two or three years and there could be M&A opportunities where governments were looking to privatise their tobacco interests. "In short, we're not planning anything in the near future, but beyond that, (M&A) is one of the things we'll be thinking about," he told a news conference. The world's third-largest cigarette maker now forecasts its operating profit will jump to 419 billion yen ($3.5 billion) for the year to next March from 332 billion yen a year earlier. That, however, falls short of a Reuters Estimates consensus of 442 billion yen from eight analysts. It projects annual revenues at 6.4 trillion yen. It had previously forecast a 6 percent decline in operating profit -- which would have been the first fall in seven years -- but the outlook excluded the earnings contribution from Gallaher, which it bought in April for 7.5 billion pounds ($15.2 billion), or 9.75 billion pounds including debt. In its international business, it expects synergies with Gallaher to save costs of over $300 million by 2010. International earnings before interest, taxes, depreciation and amortisation (EBITDA) should grow by at least $100 million after taking into account promotional expenses, it said. "Previous Gallaher management was more interested in short-term profit, and didn't necessarily invest in brand equity," Yasushi Shingai, executive vice president of JT International, told a news conference. "We're going to be investing in improving quality." The takeover of Gallaher will enable JT to further expand its international cigarette business, its main source of profit growth in recent years, and offset declining sales at home. JT, which is 50 percent owned by the Japanese government, makes Mild Seven cigarettes and owns the Camel, Winston and Salem brands outside the United States. Gallaher's brands include Benson & Hedges, Silk Cut and Mayfair in Britain. Combined with Gallaher, JT has 10.8 percent of the global market behind Altria with 18.2 percent and British American Tobacco Plc (BATS.L: Quote, Profile , Research) with 12.3 percent. "We've been increasing share and profits in Western Europe and we are going to keep doing that, and we are also going to be pursuing growth in areas like the CIS and Asia where consumers are now looking to buy more expensive cigarettes," said Shingai. For the April-June quarter, JT's operating profit fell 8.6 percent to 93.3 billion yen on a 5.4 percent decline in sales. Its performance at home suffered in comparison with the same period a year earlier when consumers rushed to stock up on cigarettes ahead of a tax hike. Prior to the announcement, shares of JT closed down 4.4 percent at 610,000 yen. The benchmark Nikkei average <.N225> rose 0.83 percent. Enditem