Glenboden M & A Originations

Philip Morris confirms its ‘local champion’ acquisition approach in buy-out of Pakistani tobacco partner

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Origination Status agreement subject to regulatory approval, January 2007;
Asset Lakson Tobacco Co. Ltd., Pakistan’s no. 2 tobacco player with 47% market share;
Buyer Philip Morris International (USA), no. 1 international tobacco producer with 15% volume share;
Seller Lakson’s principal shareholders;
Buyer Rationale consolidate earlier 40% acquisition, gain full control;
Seller Rationale timing, completion of previous agreements;
NBs third leg of three-part acquisition to be public tender for remaining 10% of shares, at same price.
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We’ve previously said that Philip Morris wouldn’t make a counter-bid for Gallaher, because they’re more interested in mopping up national players around the world. It’s taken only one month for PMI’s favoured strategy to be re-confirmed. If you want to find acquisition targets for PMI, around the world, you just need to identify the no.1 tobacco player in an emerging geography which the global players haven’t yet carved up between them. PMI also likes to acquire such companies in stages.

PMI’s strategy stems partly from the group’s focus on Marlboro, but also from the company’s history. Like Coca-Cola, PMI is first on the scene when developing countries open their economies to foreign direct investment.

Unlike Coke though, they’re invariably faced with incumbent tobacco champions. Where these are state monopolies, PMI has to gradually ease the assets of the hands of the mistrustful state, who fears that the greedy multinational will somehow steal the excise duty revenues.

PMI’s signature acquisition sequence has thus evolved: first license agreement for Marlboro, then minority shareholding, then eventually 100% ownership.

In the 1990s PMI did deals like this in ex-Communist countries in central Europe; during the current cycle, since 2003, they’ve done mostly structured deals in Mexico, Serbia, Dominican Republic, Indonesia, Columbia and Ecuador. The Lakson partnership also started as a Marlboro license agreement.

This global strategy will culminate one day in ‘the big one’, namely China National Tobacco Company (CNTC), which makes 33% of the world’s cigarettes – that’s 1,8 trillion sticks p.a. In 2005, PMI embarked on a ‘long term strategic co-operative partnership’ with this entity, starting of course with the Marlboro licence for China. Thus begins an epic story that will run and run.

Assuming no debt, the Lakson valuation is at a slight premium to JTI’s proposed acquisition of Gallaher, at both the P/S and the P /EBITDA levels, but closer comparisons are difficult; Gallaher is a global player, while Lakson is a national no. 2 in a growing and duopoly market.

Some industry insiders say that PMI’s long-term ambition is to have only one brand, Marlboro, and its marketing is geared to gently lead consumers of other brands to migrate to it. Even their L&M brand is really ‘Little Marlboro’.

That would be quite a challenge in the case of Lakson since its star brand, Morven Gold, is no. 1 in Pakistan with 37% market share, so it would be a shame to substitute it with Marlboro in the short or medium term.

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Size (€ mln) 520
Sector tobacco
Asset Quality Pakistan no.2 branded
Seller individuals
Buyer large plc
P/S 4,2
P/Ebitda 14,6
Type equity value
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