British American Tobacco (BAT), the world's second-biggest cigarette maker, is buying a controlling stake in Indonesia's fourth-biggest tobacco firm for $494 million (£302 million). After the acquisition of 85 per cent of Bentoel Internasional Investama, it said, it would be seeking to take full control.
The deal gives BAT its first taste of kretek, a kind of cigarette made with tobacco and cloves. Indonesia, where 93 per cent of all cigarettes smoked are kretek - thanks, in part, to their favourable tax treatment compared with traditional "white" cigarettes - is seen as one of the world's most promising emerging markets for tobacco. About a third of the country's 248 million people smoke, making it the world's fifth-biggest tobacco market by volume and among the ten most profitable.
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The Indonesian market, which has grown by 13 per cent in the past two years, is also seen as attractive because of its light regulation, compared with other Asian countries.
BAT, whose top brands include Lucky Strike, Dunhill and Pall Mall, expects to take full control by the end of August for a total of £356 million. It is also expected to take on Bentoel's debts of around £101 million.
John Daly, BAT's Asia-Pacific director, said: "This transaction represents an excellent strategic opportunity to enter the very large and growing Indonesian kretek market and will provide a platform for future growth."
Bentoel sells the Star Mild brand of kretek and has a 7 per cent share of the Indonesian tobacco market. BAT Indonesia, the British company's existing operation in the country, has a 2 per cent share but dominates in white cigarettes, which, because of their higher price, are seen as upmarket.
Philip Morris International, the American maker of Marlboro, has been in Indonesia for several years and became its biggest cigarette manufacturer four years ago with the $5 billion takeover of Sampoerna. Gudang Garam and the Djarum Group, the country's second- and third-biggest tobacco firms, remain Indonesian-owned.
Kretek cigarettes, which take their name from the crackling sound made by cloves when they burn, are said by researchers to contain double the nicotine and almost triple the tar of normal cigarettes. They have been banned in some parts of the United States.
BAT, whose total pre-tax profits in 2008 were £3.1 billion, made profits of £924 million in Asia last year from sales of £2.7 billion. In the past decade it has entered a number of emerging markets, including Turkey, Egypt, Vietnam, South Korea and Nigeria. In February 2008 it won the auction for Tekel, the Turkish state tobacco company, with a £1 billion bid. It followed this shortly afterwards with the £2.05 billion takeover of Skandinavisk Tobakskompagni, Scandinavia's leading tobacco group.
Rogerio Fujimori, a Credit Suisse analyst, said that the latest deal was slightly more expensive for BAT, in valuation terms, than the Tekel one: "We like the strategic rationale of this deal. It obviously enhances BAT's exposure to attractive growing emerging markets, which already account for more than half of group profits."
Jonathan Leinster, of UBS, said: "BAT was for many years the largest white cigarette producer in Indonesia, but its market share has fallen, primarily due to the decline of this segment and the growth of the kretek segment. The acquisition of Bentoel means it should be able to combine the operations. It increases its share to 9 per cent of the market and gives it a presence in the dominant kretek segment. BAT is keen to be able to compete with Philip Morris International in this important market, although PMI has a leading 28 per cent share."
Shares of BAT rose 0.24 per cent to £16.60. Enditem
