JT Faces New Pressure As Tobacco Giants Seek Merger

Source from:  Bloomberg 09/02/2019

The possible merger of the world’s two largest tobacco companies presents the latest headache for Japan Tobacco Inc., which is already struggling to keep up with competition in the heated market for alternative smoking devices.

A renewed effort to combine Philip Morris International Inc. and Altria Group Inc., in creating a tobacco behemoth, would merge two of the most popular smoking alternative products: IQOS and Juul.

Philip Morris has invested billions of dollars in its heat-not-burn product IQOS, and Altria has invested about $13 billion for 35 percent of Juul, which could speed up its expansion worldwide with Philip Morris’s help.

While most of the debate and scrutiny over the potential tie-up has been on the rationale of why Philip Morris wants to buy into a heavily regulated U.S. market, it also puts pressure on Japan Tobacco, the world’s third-largest publicly traded tobacco company.

Although Japan Tobacco does minimal business in the United States, it sells cigarette brands such as Winston and Mevius across the globe.

If those markets gain a significant Juul presence, it would cut into sales of traditional smokes and threaten earnings.

Japan Tobacco has had difficulty gaining traction with its own heated tobacco business, Ploom Tech, and it’s starting to drag on results.

The company last month cut its full-year earnings forecast partly due to weaker-than-anticipated sales tied to its high-tech smoking devices.

Chief Financial Officer Naohiro Minami said Ploom Tech has struggled with keeping repeat customers, and the company was having trouble managing production costs related to the devices.

The increased competition may force Japan Tobacco to double down on its parallel strategy of seeking growth in traditional cigarettes in emerging markets.

While its rivals have been staking their future more heavily on new smokeless tobacco products, Japan Tobacco has viewed the sector as just one alternative, seeing itself as a company offering smokers many alternatives.

Japan Tobacco has snapped up local players in emerging markets from Indonesia to Russia over the past several years, betting it can boost growth with traditional cigarettes in places where smoking rates are still high.

But currency volatility has weighed on international results in recent quarters, and the long-term term prospects for cigarettes remains a question as global demand falls and smoking regulations tighten.

Japan Tobacco’s international strategy also could come under pressure as the Altria-Philip Morris combination is likely to boost the expansion of Juul into Asian markets.

An Altria-Philip Morris deal also puts the spotlight back on Japan Tobacco and U.K.-based Imperial Brands PLC.

Speculation has been smoldering that Japan Tobacco could combine with Imperial Brands, possibility via a joint bid with British American Tobacco PLC.

However, both of the potential bidders are struggling with the industry decline and have significant debt from past acquisitions.

Investors have been fleeing the stock, with shares dropping for three straight years to touch the lowest level since 2012 two weeks ago.

Japan Tobacco has a market cap of about $42.5 billion, compared with $84 billion for Altria and $131 billion for Philip Morris.  Enditem