View From City Road: BAT is forced further into the smoke

Click to follow
The Independent Online
If BAT Industries was not already a relatively small player in the US cigarette market, it would undoubtedly be avoiding it like the plague. The tobacco industry is under attack all over the world; in the US it has achieved near pariah status. So why is BAT expanding yet further into the muck and mire?

The answer is that it really has no choice. Likewise, American Brands, which is selling American Tobacco to BAT for dollars 1bn ( pounds 670m), had nowhere else to turn. For BAT this is a desperately defensive move. Fortunately, it is not having to pay much for the privilege; there is a dearth of alternative buyers for the US company and anyway no one else in their right mind would touch it.

BAT already owns American Tobacco's premium-priced Lucky Strike and Pall Mall brands outside the US. With minimal exports, American Tobacco has no chance of developing ways of escape from the US. BAT is paying only nine times American Tobacco's 1993 and probable 1994 earnings, a little less than the rating given to Rothmans International.

To anyone else it might seem expensive. Even by the turbulent standards of the US tobacco industry - rocked by price wars and falling consumption - cigarettes are in for a traumatic time. Bombarded by the health lobby - whose latest wheeze is to prove that tobacco is a quasi-narcotic that should be banned altogether - a flat 75-cent excise duty is soon likely to be slapped on a packet of 20, currently selling for between dollars 1 and dollars 1.40.

Margins are going to get shredded. BAT, its critics suggest, is ill-prepared for the onslaught since its cash margins on cheaper cigarettes, which will bear the brunt of the new flat rate tax, are lower than the competition's. By adding American Tobacco's 7 per cent market share to the 11 per cent held by its own subsidiary, Brown & Williamson, BAT can achieve significant cost benefits. Factories can be closed and overlapping sales forces hugely reduced without any damage to volume. The blood may be about to flow in the US tobacco market, but BAT will be in a stronger position to staunch its wounds.