BAT buys Indonesian cigarette maker..

June 17, 2009 - London-based British American Tobacco (BAT), the world's second-largest cigarette producer by sales after Philip Morris International Inc. (PMI), said on Wednesday, June 17th it had acquired a majority stake in an Indonesia clove cigarette maker, Bentoel Internasional Investamal (BII) for $494m, as the company seeks growth in emerging markets to offset slowing sales in mature economies.

BAT wants some of that Indonesia 'cash cow' that PMI enjoys. According to the World Health Organization 2008 data, Indonesia is the third biggest consumer of cigarettes in the world.

BAT said that it has bought 85% of Bentoel from the Indonesian Rajawali Group and other shareholders for 4 million. Separately, Rajawali confirmed that it sold its entire 56.96% stake in Bentoel. BAT hopes to complete a tender offer for the remaining shares by the end of August.

The deal, which values BII at $580m, would allow BAT to enter Indonesia’s big kretek market, or clove-flavoured cigarettes that are consumed by nine in 10 Indonesian smokers.

Philip Morris International, BAT’s main rival, is the Indonesian market leader with about 29 per cent of the estimated 230bn kretek sticks sold last year, mainly through its Sampoerna unit, which it bought for $5bn in 2005. It is followed by Gudang Garam and Djarum, two local companies that control 21.1 per cent and 19.4 per cent of the market, respectively.

Ben Stevens, BAT’s finance director, said there could be further room for consolidation given that the deal would lift BAT’s market share by volume in Indonesia only from 2 per cent to 8 per cent, leaving it a small operator in the world’s fifth-biggest tobacco market. He said 8 per cent was still a small market share and BAT would like to increase that. “If another acquisition opportunity comes up we would certainly not rule it out.”

Indonesia has comparatively lax rules and is the only Asian country not to have signed the WHO Framework Convention on Tobacco Control (FCTC) on Tobacco Control. Indonesia, where cigarette sales jumped 11.5 per cent in the first quarter of this year to 59bn sticks compared to the same period last year.

Government officials acknowledge the long-term cost of its policies is likely to be greater than the short-term gains, but are conscious that harming the interests of millions of people employed in the industry could be politically damaging.

Last year, BAT spent about £3bn ($4.9bn) to acquire Tekel, the Turkish tobacco company, and Skandinavisk Tobakskompagni, the cigarette arm of Denmark-based ST Group.

References: BAT buys Indonesian cigarette maker by Justine Lau in Hong Kong, FinancialTimes.com
, 6/17/2009; BAT Taps Growing Indonesian Market Global Tobacco Giant Pays $494 Million for Bentoel to Expand in a Growing Market by TOM WRIGHT, Wall Street Journal, 6/17/2009; UPDATE:British American Tobacco Buys 85% Of Bentoel For $494M, clovecigarettes.org, 6/17/2009.

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