British American Tobacco Plc, Europe's largest cigarette maker, will buy control of PT Bentoel Internasional Investama of Indonesia, the nation with Asia's most lax restrictions and most smokers after China and India.
BAT today said it will pay $494 million for 85 percent of Bentoel, marking its first foray into clove-flavored cigarettes, known as kretek in Indonesia for the crackling sound they make when lit. Bentoel, whose brands include Star Mild, will help BAT boost its local market share to about 9 percent.
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BAT, the London-based maker of Lucky Strike, is expanding in a country with few of the restrictions seen in Europe and the U.S. More than 90 percent of Indonesia's tobacco users smoke kretek, which can contain double the nicotine and almost triple the tar of conventional tobacco, and minors can buy a cigarette for less than 4 cents.
"We like the strategic rationale," as the deal "enhances BAT's exposure to attractive, growing emerging markets," Credit Suisse analyst Rogerio Fujimori said in a note. He said BAT is "substantially under-represented" in Indonesia, where it makes only conventional cigarettes.
BAT acquired 56 percent of Bentoel from the Rajawali Group, controlled by billionaire Peter Sondakh, and the balance from other investors. Bentoel is the fourth-largest maker of kretek, trailing market leader PT HM Sampoerna, bought by Philip Morris International Inc. in 2005.
[b]WHO's Tobacco Control[/b]
"We will be looking to invest heavily in Bentoel in the years to come," aiming to raise market share, BAT Asia-Pacific Director John Daly said in an interview in Jakarta today.
BAT's Indonesian unit PT BAT Indonesia, which sells conventional cigarettes, has a 2 percent market share, while Bentoel sold 17.7 billion cigarettes in 2008, accounting for 7 percent of the market, BAT said.
Indonesia, the fifth-largest tobacco market by number of cigarettes sold, is the only Asian nation not to sign the World Health Organization's Framework Convention on Tobacco Control. It's also Asia's third most populous country. The International Monetary Fund forecasts it will have the fastest growth among major Southeast Asian economies this year.
BAT, which bought Turkey's Tekel for about $5 billion in June, gets about half its profit from emerging markets. Asia accounted for 18 percent of last year's 12 billion pounds ($20 billion) in revenue.
The 873-rupiah-per-share bid was 16 percent higher than yesterday's closing price for Bentoel, which rose 8 percent to 810 rupiah today in Jakarta trading. BAT is making a tender for the remaining 15 percent of the company's shares, and said it expects to complete the transaction by August.
Shares of Gudang Garam, Indonesia's second-largest cigarette company, rose 5.7 percent.
[b]Shares Rise[/b]
BAT shares rose 5 pence, or 0.3 percent, to 1,661 pence at 11:43 a.m. in London. They've dropped 11 percent in the past year, less than the 17 percent decline by PMI, which paid about $5 billion for 97 percent of Sampoerna.
"The deal revalidates Philip Morris's decision," Citi analysts including Adam Spielman wrote in an e-mailed note. For BAT, the deal "looks expensive. We hope BAT can improve the operations and marketing." The analysts said Bentoel's brands are priced at a discount to those of Sampoerna, and the takeover is "hardly material" for BAT's earnings.
About a third of Indonesia's 248 million people smoke, compared with 21 percent in the U.S., where the Senate this month voted to give drug regulators power to restrict tobacco.
Kretek contains a mixture of tobacco and clove, a spice native to Indonesia, imparting a sweet scent and emiting eugenol, which numbs the throat and makes for a smoother smoke. Almost 3 percent of new smokers in Indonesia in 2004 were aged 5 to 9, compared with just 0.1 percent in 2001, state figures say.
[b]"Primary Need"[/b]
"For many people, cigarettes are a primary need," making kretek stocks "defensive" investments, said Jordan Zulkarnaen, head of research at PT Kresna Graha Sekurindo in Jakarta. "Kretek smokers in villages have low health awareness."
Rajawali Group, based in Jakarta, helped eliminate debt at Bentoel after buying control in 1991. The 25-year-old company's other investments include a charter airline, taxis and plantations. Controlling investor Peter Sondakh was ranked Indonesia's sixth-richest man by Forbes Asia last year, with a net worth of $1.05 billion.
"Developing the cigarette business is so huge that it needs a certain type of investor to take it to the next level," Darjoto Setyawan, managing director of Rajawali, said in an interview in Jakarta.
Deutsche Bank AG, UBS AG, Herbert Smith LLP and Hiswara Bunjamin & Tandjung advised BAT, while Credit Suisse Group AG and White & Case LLP advised Rajawali. Enditem
