Japan Tobacco Buying International Rights to US Cigarette Brand

30 Sep 2015 | Author: | No comments yet »

Deal set to boost Japan Tobacco.

Hong Kong — Shares in Japan Tobacco plunged on Wednesday after it announced it was paying $5 billion in cash to buy the international rights to Natural American Spirit from Reynolds American. The deal is designed to expand Tokyo-based Japan Tobacco’s reach beyond the shrinking Japanese market and reduce Reynolds’s debt following its $25 billion acquisition of Lorillard Inc. in June. This will be the former Japanese monopoly’s biggest acquisition since 2007 when it bought the Gallaher Group, maker of Benson & Hedges cigarettes in Europe, for about $19bn. Reynolds, the maker of Camel cigarettes, is expected to receive an estimated $3.5 billion after taxes from the deal, according to RBC Capital Markets. RBC analyst Nik Modi said the sale allows the Winston-Salem, N.C.-based company to pay down its Lorillard debt “more quickly than…investors expected,” reducing annual interest expenses by $150 million and increasing earnings by seven cents a share in 2017.

This deal allows them to avoid that cost and pay down debt from the Lorillard transaction.” The Reynolds businesses it is acquiring had profit before income taxes of ¥2.1-billion ($17.5m) and net sales of ¥17.6-billion last year, Japan Tobacco said. The price “might be able to be justified over the medium term” due to factors such as improved operating margins if in-house production is launched, Fujiwara wrote. Analysts at Goldman Sachs noted on Wednesday that even though overall demand for cigarettes was shrinking, the brand performed well in the high-priced market and among young people. Japan Tobacco had also obtained its existing Winston and Camel cigarettes rights outside the US from Reynolds, when it acquired the non-US tobacco assets of RJR Nabisco in 1999. That could help Japan Tobacco in these sectors. “We will look for details of the plan with RAI and pace of business development in Japan and believe volume and manufacturing profits will need to reach a larger scale for the acquisition to have an impact on profits,” they wrote, referring to Reynolds American by its stock symbol.

In February, Mr Koizumi said that this would be Japan Tobacco’s “year of investments” with the focus on growing its tobacco businesses, a strategy which led to its withdrawal from drinks and vending machines. The all-cash transaction doesn’t include the brand’s U.S. operations, Winston-Salem, North Carolina-based Reynolds said in a separate statement. “The deal makes sense for Japan Tobacco as it strengthens their portfolio and adds a premium brand that is popular with the younger smoker,” said Duncan Fox, an analyst with Bloomberg Intelligence. “They paid what they had to to get a fast-growing asset.”

It is the fourth-largest cigarette maker by volume, according to data from Euromonitor International, behind the Chinese government’s monopoly, Philip Morris International and British American Tobacco. The brands became the foundation of an international tobacco business that accounted for about 55% of the company’s revenue in 2014, compared with just 28% for the domestic Japanese tobacco business. JPMorgan Chase and Lazard and the law firm Jones Day advised Reynolds American, while Japan Tobacco was advised by the law firm Freshfields Bruckhaus Deringer. But she said the company, which only employed about 280 people in Europe and Japan, had limited international infrastructure and remained focus on the U.S.

Cameron said it was better for Reynolds American to sell the brand’s non-U.S. rights to a company such as Japan Tobacco with an established global sales infrastructure rather than build such infrastructure itself. About 30% of Japanese men smoke, down from more than 60% a quarter-century ago, according to company figures, while the proportion of women smoking has fallen to about 10% from 14% over the same span.

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