Altadis 3rd-Quarter Net Falls on U.S. Cigars, Dollar

Source from:  By Thomas Mulier and Loveday Morris Nov. 16 (Bloomberg) 11/20/2007

Altadis SA, the cigarette maker being bought by Imperial Tobacco Group Plc, had a 3.5 percent decline in third-quarter profit after its U.S. cigar revenue was hurt by the weakening dollar. Net income in the quarter was 139.9 million euros ($204.8 million), down from 145 million euros a year earlier, according to nine-month figures released by the Madrid-based maker of Gauloises and Fortuna cigarettes today in a filing. Earnings from cigars before interest, taxes, depreciation and amortization fell by 400,000 euros to 68.9 million euros. Imperial agreed to buy Altadis for 12.6 billion euros in July to gain the biggest cigar business in the U.S. The Spanish company, which makes more than 10 percent of its revenue in the world's biggest economy, faces increased competition with rival cigar maker Swedish Match AB amid the dollar's 12 percent, six- month decline against the euro. ``The division has returned to organic growth, though it's still strongly affected by the unfavorable U.S. dollar evolution,'' Altadis Chief Financial Officer Pierre-Andre Terisse said in a presentation on the company's Web site today. Terisse said the company has been increasing U.S. prices, rather than focusing on boosting the number of cigars sold. Altadis is introducing new products, including flavored cigars, to compete with rivals. The company's `Havana Sweets' range boasts honey and Irish cream flavors. Altadis is also concentrating on cigarillos as consumers opt for a lighter smoke. Flavored Cigars Swedish Match, the world's second largest cigar producer, sells cigars with peach, grape and pineapple flavors in U.S. The Stockholm-based company said in March that it has 35 percent of the U.S. cigar market. Cigar results were ``impacted by U.S. dollar weakness,'' Dresdner Kleinwort analyst Charles Manso de Zuniga wrote in an e-mailed note. ``Cigar earnings before interest, tax, depreciation and amortization are recovering. These results look to be of little consequence to any tobacco stock. Altadis shares are underpinned by the bid from Imperial.'' Altadis shares were little changed, rising 3 cents, or 0.1 percent, to 49.45 euros. Imperial's bid values them at 50 euros each, more than triple the price when the former French and Spanish tobacco monopolies merged to form Altadis in 1999. Spanish Price Gains Profit for the first nine months of the year rose 14 percent as it increased prices in its Spanish domestic market, Altadis said today. Altadis, led by Chief Executive Officer Antonio Vazquez, raised the price of Fortuna by 9 percent to 2.40 euros a pack over the past year as mergers cut the number of tobacco companies, giving those that remain leverage to charge more. Altadis is ``improving the Spanish cigarette results, and also the cigar business,'' Fernando Garcia, an analyst at Espirito Santo in Madrid with a ``buy'' recommendation on the stock, said before the figures were released. ``The company continues to generate strong cash flows.'' Nine-month sales rose 2.7 percent to 3 billion euros. Altadis, the largest manufacturer of cigars in the world, maintained its August forecast for ``solid'' second-half growth excluding acquisitions and currency movements. Operating income ``was fully in line with management's expectations and confirmed the good results of the first part of the year,'' the statement said. Earnings confirmed ``recovery in the U.S. cigar business and tobacco logistics in Spain.'' Industry Mergers Imperial is buying Altadis as combinations take place across the industry in response to government bans on smoking and increases in tobacco taxes. Western European governments from Norway to Italy have barred public smoking and raised taxes on tobacco to promote health, prompting cigarette makers based in the region to expand elsewhere. Buying Altadis would increase Bristol, England-based Imperial's scale in Russia, Europe's largest cigarette market. French and Spanish smokers generate most of Altadis' sales, adding to its allure for Imperial, whose main U.K. and German markets are shrinking. Fortuna controls about 13 percent of the market for cigarettes made from ``blonde'' blended tobacco in Spain, where competitors include British American Tobacco Plc's Pall Mall and Lucky Strike brands. Spain is ``ripe'' for further price increases, BAT Chief Executive Officer Paul Adams said Nov. 1. Blonde Cigarettes Spain's blonde-cigarette market expanded by 1.3 percent by volume in the first half, rebounding after public smoking was restricted last year. The market swelled by 1.2 percent in France, overcoming the imposition of a smoking ban in February. Imperial made its offer in July after Altadis had rejected bid proposals worth 45 euros and 47 euros a share. It's paying the same amount offered in May by buyout firms CVC Capital Partners Ltd. and PAI Partners, the trigger for a four-month takeover battle. The number of tobacco-industry bid targets has shrunk since Japan Tobacco Inc. agreed last year to pay 7.5 billion pounds for Gallaher Group Plc. In addition to buying Altadis, Imperial in February agreed to buy Commonwealth Brands for $1.9 billion to expand into the U.S. market. Altadis shareholders have until Jan. 11 to accept the bid. Enditem