Glenboden M & A Originations

BAT acquisition of Bentoel provides valuation benchmark in tobacco

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Origination Status buyer announcement of company acquisition, June 2009
Asset PT Bentoel Internasional Investama Tbk (Indonesia), no.4 domestic tobacco producer
Buyer British American Tobacco plc (UK), no.2 global tobacco producer
Seller Rajawali Group and minority shareholders
Buyer Rationale entry into large and 'bridge' Indonesian kretek market
Seller Rationale attractive valuation and timing; focus on property, plantation and mining businesses
NBs Bentoel had 7% tobacco market share in Indonesia in 2008
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This is the first significant tobacco deal, since Philip Morris International bought the 60% of Rothmans in Canada, that it didn't already own, in the middle of 2008. It provides a valuation benchmark, albeit in the atypical Indonesian tobacco market; it also confirms that, unlike in other FMCG sectors, a no.4 player in a market can still have value, in the cigarette business. More deals could follow, if JTI and imperial get their act together in the huge Indonesian market.

Indonesia is a very big tobacco market ...Indonesia is the world's fifth largest tobacco market, by volume, at 250 bln sticks per annum, after China, the US, Russia and Japan. It's also an unusual market, in that 95% of sales are of kretek cigarettes, mixing tobacco with cloves, while only 5% are of the 'white cigarettes' that Europe and north America are used to.

BAT had only 2% of the tobacco market in Indonesia, before this deal. With Bentoel, this will grow to nearly 10%. The acquisition also provides credibility for BAT in kretek, as well as brands including Star Mild and Sejati.

... in a globalising industry ...At its top end, so globally, tobacco, like beer, is a highly consolidated business. Just as there are arguably only four global players in brewing (AB InBev, SABMiller, Heineken and Carlsberg), so there are also four in cigarettes (Philip Morris, BAT, Japan Tobacco and Imperial).

Interestingly the Indonesian market, in spite of its size and perhaps because of its atypical kretek focus, still has two independents amongst its top four players. Will this change ?

... so more deals are probable eventuallySure, the no.1 player in that market is Philip Morris, through PT Sampoerna that it acquired in 2005. However, the nos.2 and 3 in that country are staunchly independent players, namely Gudang Garam and Djarum. Might we see a match-making situation, where JTI and Imperial enter the breach, and globalise Indonesia over time ? History and its precedents suggest that this will happen.

Bentoel and its kreteks are in long-term decline ...In terms of valuation, this deal, although within the range, is at the bottom end of comparables. This might reflect an opinion that the future of kretek in Indonesia is limited, compared with white cigarettes. That's underlined by the fact that Bentoel's sales haven't grown in recent years (see chart). The company also has a very low EBITDA margin, by tobacco standards.

... but that no.4 player still has valueOn the other hand, and just like the acquisition of Commonwealth Brands in the US in 2007, this transaction confirms that a no.4 player in a market can still be attractive and highly valued, in tobacco, unlike other FMCG businesses where 'no.1 or strong no.2' is the mantra. It's all a question of margins.

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THIS LEAD'S VALUATION
Size (€ mln) 530
Sector tobacco
Asset Quality Indonesia no.4 branded
Seller mid-cap plc
Buyer large plc
P/S 1,7
P/Ebitda 12,9
Type enterprise value
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