Corporate Profile: Smokin' once again
BAT and Rothmans: Creation Of A Tobacco Giant From Argos To Rothmans: Ups And Downs At BAT
Wednesday 17 March 1999
THE Offices of British American Tobacco overlooking the Embankment in central London, are not at all what you would expect. Bright, gleaming and new, they could hardly be further from the image of the nicotine-stained world BAT inhabits. BAT moved to the building in November, following the de-merger of its financial services businesses to form Allied Zurich.
The swish corridors are bright and airy with barely a hint of tobacco smoke, thanks to a state-of-the-art air-conditioning system. This even includes "air treatment" desks which literally suck the cigarette smoke from the air. In a sense, the shimmering office is a symbol of the company's new beginning. For years the company's share price languished in the doldrums, depressed by the weight of litigation mounting against the tobacco industry in the US and unimpressed by the company's attempt to diversify away from the killer weed.
With the threat of litigation now removed and shawn of its diversifications, there is suddendly a renewed spring its step. BAT's share price has dramatically revived and so confident is the company in its future and chosen industry, that it is forging ahead with a multi-billion pound merger with another tobacco goliath, Rothmans. The transformation could hardly be greater.
Ten years ago BAT was a leaden, disparate conglomerate with interests spanning car parts to DIY. It owned Allied Dunbar, Marshall Field retailing in the US, Argos in the UK as well as Wiggins Teape paper and Yardley cosmetics. Its tobacco business was ex-growth. And the group was about to become the target of the famous pounds 13.2bn break-up bid from the Hoylake consortium, led by the late Sir James Goldsmith. "Blind as a BAT," was one headline at the time, a reference to the then chairman Sir Patrick Sheehy, who failed to see a bid coming.
Now BAT has re-invented itself, rising like a phoenix from the ash tray. The collapse of the Berlin Wall proved an unexpected boon, opening up markets hitherto protected for the domestic Eastern bloc producers. Suddenly tobacco is a growth business again.
More recently BAT has managed to shrug off the potentially ruinous impact of health litigation in the United States with an extra-ordinary settlement. More recently still it has hit the acquisition trail with a pounds 5bn takeover of Rothmans, a deal which gives BAT greater access to the European market with premium brands such as Rothmans, Dunhill and Peter Stuyvesant.
And finally the structure of the business has come full circle. In a process that has seen the group mirror the management theory of its time, BAT has moved from diversified conglomerate to a tobacco group once more, just as it was 20 years ago.
"I do find it ironic," says Martin Broughton, BAT's chairman, from his Thames view office on the top floor of the BAT headquarters. "But I don't attribute it to fashion but other factors like the Berlin Wall falling, privatisation becoming a global phenomenon and free trade springing up around the world."
He adds: "All this is not to criticise my predecessors. It was right to diversify at that time. Tobacco was ex-growth. And even with the benefit of hindsight diversification looked good. People criticised it at the time but welcomed it when we sold out of businesses at good prices."
The shift towards the new management mantra of focus was also backed up by the performance of the business, he says. "We had two growth businesses (tobacco and financial services) and yet we were regarded as a yield stock. It is not following fashion but recognising that the world has changed."
It is a fair point. It was back in 1984 that the shape of the old BAT began to alter. With world tobacco consumption in decline BAT decided to use the cash flow from its mature cigarettes business to fund expansion in a growing sector. Financial services was chosen and the group bought Eagle Star for almost pounds 1bn. It was the start a major dash for growth in financial services as BAT snapped up Hambro Life (later renamed Allied Dunbar), Farmers of the US and established Threadneedle Asset Management.
But by the late 1980s BAT was a sprawling conglomerate that had lost its way. Sir Patrick Sheehy, described at the time as an old-colonial mixture of arrogance and complacency, had apparently thought about re- structuring but had yet to do much about it. With the leveraged buy-out craze at its height, Jimmy Goldsmith pounced, backed by two other arch- predators, Kerry Packer and Jacob Rothschild. The bid failed - and there are wall-fulls of cartoons to prove it in the BAT offices - but succeeded in prodding the wounded beast into action.
BAT suddenly discovered a degree of focus and announced an intention to concentrate only on fags and finance. Everything else would be sold. At the same time the Berlin Wall came down and new investment opportunities for tobacco opened up. After all this it is perhaps a surprise that the de-merger of financial services took so long.
Mr Broughton, then, has certainly risen to the top of BAT at the right time. Aged 52, he has been at BAT all his working life - 28 years - and is now running the show at a time of huge expansion. Analysts' opinions of him are mixed. Some find him a little distant. Other say he is shrewd. "He is a very smart cookie," one says. "He has tended to get a rough ride from the City. But I think that is because of the way he comes across. He is reserved and that is sometimes interpreted by some that he hasn't got the answers."
At our time of meeting he is looking weary after a red-eye trip back from Moscow. This has been followed by the signing off of the circular for the Rothmans deal, which was issued to shareholders on Monday, and the signing off of BAT's final accounts.
The Rothmans deal is a key landmark in its quest to become the world's largest tobacco company, a target which will entail wrestling pole position from Philip Morris, maker of the mighty Marlboro. It takes BAT, which controls the Lucky Strike, John Player and State Express 555 brands to a world market share of 16 per cent, within touching distance of Philip Morris' 17 per cent. BAT-Rothmans will be market leader in 55 countries, compared to the current 33, with a market share of over 50 per cent in Latin America and Africa.
It is markets such as these that hold the key. Western markets like the US and Western Europe are already mature and becoming further depressed as the anti-smoking lobby gathers pace. But consumption in South America and other emerging markets is mushrooming as the major companies persuade the locals to dump their cheap roll-ups for a branded, filtered alternative.
The biggest cloud on his horizon is litigation. Does the relentless stream of cases - BAT is still the subject of over 600 actions in the US - ever get him down? "It does. Though the only things that really bother me are the overtly political ones [cases]. It is a tremendous distraction for us and for our investors."
He senses that the tobacco companies must "look again at its defence". He says the plaintiffs have moved away from their individual case to looking more at the tobacco company as an example of bad corporate behaviour. "The tobacco companies should start addressing this more," he says.
At the moment, however, BAT is enjoying something of a respite. Last November it was part of a landmark $200bn settlement to cover the costs to Medicaid - the US government's health insurance programme - of treating smoking-related illnesses. The deal ended years of legal wrangling and led to a 55 cent increase in the cost of a pack of cigarettes in the US.
The settlement was seen as a watershed for the industry as it put a quantifiable ceiling on the tobacco firms' potential liability and established a crucial legal precedent. Previous estimates of the possible costs of litigation had also been far higher. However, the recent award of $50m to a smoker in San Francisco has raised the spectre of major litigation once again.
All this does not seem to have overly troubled investors who at one time avoided the sector. However, as analysts cynically suggest, the defensive qualities of tobacco stocks proved attractive last year and who is going to complain about a stock that has outperformed the market by 37 per cent since its de-merger?
Being portrayed as the industrial equivalent of Dr Death must be all the more galling for Mr Broughton as a non-smoker who claims to have never had a smoke in his life. He is surrounded by manic puffers though, including his deputy chairman, the former chancellor Kenneth Clarke, who is a well known cigar lover. His predecessor Sir Patrick Sheehy was a major consumer of his company's products.
Do the ethics of the industry bother him? "I have no problem with it," he reflects. "It [smoking] is an individual choice. I know drink doesn't do me any good but I am happy to have a drink [red wine and gin and tonic are his favourite tipples]. We all make lifestyle choices and we ought to be entitled to make them. After all, it is legal."
Although he has never worked anywhere else he contends that the people who work in the tobacco industry are "more fun". "They are more libertarian," he says. "They have thought about their beliefs and addressed the issues."
Looking forward he senses that BAT could change again if market conditions demand it. "Will my successor take us into something else? Maybe. If we get so much bigger in tobacco that there is not much left to do, then that is possible."
And what sector would he recommend for diversification? "I recommend they go into alcohol. It would be similar issues and would have a lot more in common than financial services."
Revenue: pounds 10.3bn
Pre-tax profit: pounds 2.2bn
Market Value: pounds 8.6bn
No of employees: 120,000
Directors: Martin Broughton (chairman); Kenneth Clarke (deputy chairman, left); Rupert Pennant-Rea; Johann Rupert; Wong Kok Siew
Brands: BAT - State Express 555, Lucky Strike, Pall Mall, Benson & Hedges (not in UK), John Player.
Rothmans - Rothmans, Dunhill, Peter Stuyvesant.
Market share: 16 per cent worldwide
1976 BAT Industries formed as a new holding company including the tobacco interests held since colonial times in the early 1900s. Other businesses include Wiggins Teape pulp and paper, Yardley and Lentheric cosmetics, Gimbles department stores, Saks Fifth Avenue and Kohls supermarkets.
1978 Appleton Papers acquired for pounds 153m
1979 Argos acquired
1982 US retailer Marshall Fields acquired for $368m
1984 Exits food retailing with sale of International Stores
1984 Eagle Star acquired, pounds 968m
1985 Hambro Life acquired for pounds 664m and renamed Allied Dunbar. Britain American Cosmetics sold to Beecham. Mardon Packaging sold.
1988 Farmers Group of the US acquired for pounds 2.9bn
1989 Hoylake consortium launches pounds 13.2bn hostile bid
1990 Argos de-merged
Marshall Fields, Saks Fifth Avenue and other US retail businesses all sold. Paper business de-merged as Wiggins Teape Appleton
1994 American Tobacco acquired for $1bn Threadneedle Asset Management formed
1997 CLM of La Moderna $1.5bn
1998 Demerges financial services business to Allied Zurich
1999 Announces pounds 5.2bn takeover of Rothmans
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