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Japan Tobacco's new CEO lights up Imperial with M&A talk

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11/21/2017 | 02:09pm CET
FILE PHOTO: Japan Tobacco Inc headquarters building is seen in Tokyo

Japan Tobacco Inc (>> Japan Tobacco Inc) sparked takeover speculation on Tuesday by naming a new chief executive who wants the world's third-largest international tobacco maker to do more overseas acquisitions to offset falling cigarette sales at home.

Japan Tobacco Inc (>> Japan Tobacco Inc) sparked takeover speculation on Tuesday by naming a new chief executive who wants the world's third-largest international tobacco maker to do more overseas acquisitions to offset falling cigarette sales at home.

Shares in British tobacco company Imperial Brands (>> Imperial Brands), long seen as a likely target, rose as much as 4 percent after Masamichi Terabatake, the CEO-designate, told reporters: "If there are good deals, we would like to actively pursue them".

Terabatake, who has a background in deal-making, said after his promotion was announced that he was willing to take risks, adding that the scale of acquisitions "does not matter".

Two big issues facing Japan Tobacco are a geographic footprint too concentrated in low-growth markets Japan and Europe and competitive weakness in vaping. Buying Imperial would help both issues, analysts at Jefferies have long argued.

Terabatake, who will replace Mitsuomi Koizumi in January, is currently deputy CEO at JT International, the Geneva-based headquarters of the company's overseas operations, where he has spent more than a decade.

The 51-year-old, who worked on Japan Tobacco's $7.8 billion (£5.9 billion) purchase of RJR Nabisco's non-US tobacco business in 1999, did not give any details of possible targets but said:

"There are still many regions we have not entered. There are many markets left for cigarette business to grow."

Consolidation is widely expected in a global tobacco market that is shrinking as more people quit.

British American Tobacco's (>> British American Tobacco) July purchase of Reynolds American ignited expectations that a takeover of Imperial or Altria (>> Altria Group) could follow, as Japan Tobacco and Philip Morris International (>> Philip Morris International) seek to bolster their position against a newly enlarged rival.

Imperial's shares had fallen 23 percent since April on concerns about its competitive position and lack of a vaping device that heats tobacco without burning it. It was trading at less than 12 times earnings before interest, tax, depreciation and amortisation (EBITDA), whereas BAT, Philip Morris and Japan Tobacco are at between 15 and 20 times EBITDA.

That discount, and Japan Tobacco's troubles, have some sources seeing a deal as more likely, though huge market overlap, such as in Britain, makes a takeover complicated.

Sources have suggested that Japan Tobacco and British American could split up Imperial, but warn that BAT may still be digesting its $49 billion purchase of Reynolds.

A spokesman for Imperial, the maker of the Davidoff and Golden Virginia brands, declined to comment

"VAPOUR WAR JUST BEGUN"

Japan Tobacco's domestic cigarette sales have been hurt by more smokers quitting than expected and the popularity of heat-not-burn (HNB) tobacco vaping devices.

It has forecast 92 billion cigarette sales in Japan for 2017, down 13.4 percent from a year ago. That would be 1 billion less than what it had projected in August and 4 billion below an estimate given at the start of year.

Despite commanding more than 60 percent of Japan's cigarette market, the former state monopoly has ceded some of its home turf to Philip Morris, which launched its IQOS HNB product in Japan in 2014 and expanded nationwide in April last year.

Japan Tobacco rolled out its Ploom Tech smokeless tobacco product in central Tokyo in July after production delays.

Terabatake said it was still too early for any company to solidify its lead in this category.

"(The) tobacco vapour war has just begun," he said.

(Reporting by Taiga Uranaka; Additional reporting by Martinne Geller in LONDON; Editing by Himani Sarkar and Alexander Smith)

By Taiga Uranaka and Martinne Geller

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Financials ($)
Sales 2017 19 612 M
EBIT 2017 9 903 M
Net income 2017 6 437 M
Debt 2017 11 605 M
Yield 2017 3,92%
P/E ratio 2017 18,77
P/E ratio 2018 18,30
EV / Sales 2017 6,96x
EV / Sales 2018 6,85x
Capitalization 125 B
Chart ALTRIA GROUP
Duration : Period :
Altria Group Technical Analysis Chart | MO | US02209S1033 | 4-Traders
Technical analysis trends ALTRIA GROUP
Short TermMid-TermLong Term
TrendsBullishBearishBearish
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 15
Average target price 71,5 $
Spread / Average Target 9,1%
EPS Revisions
Managers
NameTitle
Martin J. Barrington Chairman, President & Chief Executive Officer
Howard A. Willard Chief Operating Officer
James E. Dillard Chief Innovations Officer & SVP-Regulatory Affairs
George Muñoz Independent Director
Thomas F. Farrell Independent Director
Sector and Competitors
1st jan.Capitalization (M$)
ALTRIA GROUP-3.15%124 967
JAPAN TOBACCO INC-3.83%66 226
ITC LTD7.37%48 605
HANJAYA MANDALA SAMPOERNA TBK PT--.--%35 377
KT&G CORP--.--%15 253
GUDANG GARAM TBK PT--.--%11 106