Tobacco giants’
$200bn tie-up
fails to light up
the markets
F
alling income. Hankering
after faded glory days. An
effort to stay relevant amid
changing trends. In the
music industry, getting a
band’s original line-up back
together is one of the oldest tricks in
the book but often says more about the
lack of fresh ideas than a promise of
new success.
So it may prove for two of the big
beasts of the near-$900bn (£735bn)
cigarette industry, which this week
revealed plans for an altogether
different type of reunion. Philip Morris
International (PMI) and Altria – the
international and US makers of
Marlboro cigarettes, respectively –
said they are exploring a merger little
more than a decade after splitting.
The pair hope to shield themselves
from regulatory and litigation risks in
the US. A deal would create a tobacco
titan worth about $200bn with sales of
almost $1bn a week. It would
consolidate PMI’s position as the
world’s second-largest cigarette maker
by market share by combining it with
the sixth biggest, according to data
from Euromonitor International. But
the deal is hardly risk-free.
Given the New York-listed
companies’ shared history, and the
case made for their separation a
decade ago, the deal’s detractors have
a ready-made arsenal of arguments
against the tie-up. “A reunification is a
pretty huge call,” says Eamonn Ferry,
analyst at Exane BNP Paribas.
Details are so far in short supply.
The pair announced only that they are
in talks over “a potential all-stock,
merger of equals”, though multiple
reports state that PMI shareholders
will be somewhat more equal, getting
about 58pc of the shares in the
combined group. The companies offerno assurances that a deal will take
place, though having voluntarily
blown their cover may well be
confident of thrashing out terms. “It is
rare for transactions to fail after
companies start formal talks”, says
Adam Spielman, an analyst at Citi.
Certainly, consolidation in the
sector has been on the cards for some
time. British American Tobacco, the
FTSE 100 maker of Dunhill and Lucky
Strike, and Reynolds, which makes
Camel and Pall Mall, sealed a $49bn
deal in 2017. Faced with declining sales
in mature markets such as the US, “Big
Tobacco” has scrambled for alternative
money spinners.
A merger would allow PMI and
Altria to share the expense of
developing and marketing new
products as the industry shifts to
alternatives that are potentially less
harmful. These include vaping and
heated tobacco products, which,
unlike cigarettes, do not burn.
In addition to possible cost savings,
a deal would give PMI and Altria
exposure to each other’s portfolio of
cigarette alternatives. The former has
a strong position in the heated tobacco
market through its ownership of IQOS
“heatsticks” that are available in
markets such as the UK, France
and Germany.
Altria, meanwhile, has ploughed
almost $2bn into Canadian cannabis
outfit Cronos to capitalise on a wave of
regulatory relaxation. It is a market
that PMI has so far eschewed. Altria’s
stable also includes a 35pc stake in
leading e-cigarette maker Juul.
Together PMI and Altria would pool
the risk of potential bans or regulatory
restrictions on some of their new lines,
reducing uncertainty for their
investors. But for PMI, in particular,
sharing risk with Altria may not be
altogether comforting.
In acquiring Altria’s $13bn stake in
Juul, it would become exposed to a
company that Ferry argues makes
“little profit” and “may not even exist
next year”. Juul is waiting to receive
retrospective approval from the US
Food and Drug Administration (FDA),
which could crack down on the
company in a bid to snuff out vaping
by teenagers. The non-competeMitsubishi
invests $50m
in UK solar
firm Bboxx
By Matthew FieldA BRITISH solar power start-up bring-
ing off-grid energy to homes in Africa
has raised $50m (£41m) from Mitsubi-
shi to expand.
Bboxx, which provides solar installa-
tions in pay-as-you-go instalments, was
founded in 2010 and spun out of Impe-
rial College London by Mansoor Hama-
yun and two fellow graduates.
Its technology helps people in areas
with very little energy infrastructure to
gain access to local power and pay for it
from an app on their smartphone.
The company, now based in Chis-
wick, west London, was named after its
technology, which takes the form of a
small “battery box”. One end plugs into
a solar panel, while the other end
makes contact with electrical sockets.
Bboxx has installed 200,000 home
systems and plans to use the funds to
expand its product in Asia. Almost
500 million people in Africa lackaccess to regular grid power, but the
falling cost of solar has made it an in-
creasingly attractive energy source for
remote areas.
Bboxx has struck deals in Nigeria
and Rwanda and is also supplying solar
energy to thousands of people in rural
Togo with French energy giant EDF.
“The funding is further evidence of
Japanese interest in Africa and in pay-
as-you-go solar energy globally,” said
Mr Hamayun. He added the deal would
help Bboxx reach more people “lacking
reliable access to modern utilities” and
expand its global footprint.
The investment from Mitsubishi is a
major endorsement for the UK start-
up. Despite concerns that Brexit could
hamper investment into UK tech,
start-ups have received a record $6.7bn
in foreign investment this year.
More than half the total is from US
and Asian investors, including major
deals from Japan’s SoftBank for finance
start-ups, including $800m in Green-
sill and $390m in OakNorth Bank.
Bboxx is not the first UK energy firm
that has attracted Mitsubishi’s interest
this year. The Tokyo giant also invested
£200m in UK alternative energy pro-
vider Ovo, valuing it at more than £1bn.
The deal will help Mitsubishi boost
its own power division, which has
around 6,100MW of generation capac-
ity in wind, solar and other renewable
energy sources.Cautious consumers blamed for
profits drop at Pizza Express
By Laura Onita and Chris JohnstonTHE casual dining crunch has taken
another bite out of the bottom line for
Pizza Express.
A mix of rising business costs and
customers tightening their belts
pushed underlying profits down 7.7pc
to £32.4m for the six months to June.
A string of popular chains such as
Prezzo, Carluccio’s and Byron have
either closed sites or sought rent cuts
as they struggle with higher rents,
business rates and wage bills, while 22
out of 25 of Jamie Oliver’s restaurants
closed earlier this year.
Jinlong Wang, Pizza Express chief
executive, said the company “was not
immune to the cautious consumer
environment”.
However, he struck an upbeat note
saying it has remained “resilient”
despite “sector-wide challenges”.
Group sales were up 2.6pc, mostly
driven by sites outside Britain. The
international business, which accounts
for a fifth of profits, posted a 1.9pc risein like-for-like sales, but UK sales were
broadly flat.
The first Pizza Express restaurant
opened on Wardour Street in London’s
Soho in 1965 and now it has more than
600 sites globally. The chain was gob-
bled up for £900m in 2014 by Hony
Capital, a Chinese private equity firm.Its most recent accounts show the
chain had net debt of £1.1bn in 2018 and
made an annual pre-tax loss of £55m.
Pizza Express is now taking a cau-
tious approach, focusing on revamping
existing sites rather than opening new
locations. Mr Wang said: “We are creat-
ing more sociable pizzerias with a
greater focus on our kitchens.” He isalso banking on low-calorie pizzas and
vegan options to lure more customers.
“While we expect the markets to
remain challenging,” he said, “we
believe that we will continue to deliver
a resilient performance across the
remainder of 2019.”
The business is also facing challenges
from smaller, more nimble rivals such
as Franco Manca, whose owner Fulham
Shore is chaired by David Page, the for-
mer Pizza Express boss. The company
said in a trading update yesterday that
group revenues for the first 21 weeks of
its financial year were higher than the
same period last year.
Fulham Shore, which also owns The
Real Greek chain, opened five Franco
Manca outlets in the period in Green-
wich, Birmingham, Exeter, Leeds and
Edinburgh, with the 50th under con-
struction in Manchester. It also has a
summertime outlet on the Italian
island of Salina. More sites for both
chains are planned.
Shares fell 1.3pc, valuing Fulham
Shore at about £63m.44pc
The fall in revenue, to $280m, from
diamond sales at De Beers in the
company’s seventh ‘sight’ of the yearDiamonds lose their sparkle
as sales at De Beers plunge
By Jon YeomansA GLOBAL slowdown in the diamond
market is catching up with industry
leader De Beers, after it reported a
44pc tumble in its latest sales round.
De Beers sells diamonds to accred-
ited buyers 10 times a year at events
called “sights”. Sales of diamonds fell to
$280m (£228m) in the company’s sev-enth sight of the year, down from
$503m the year before and marginally
higher than the $250m for the previous
sight this year.
Diamond pricing is notoriously
opaque with much of the market con-
trolled by De Beers and its major Rus-
sian rival Alrosa, although both have
become more transparent in recent
years. Sales of smaller diamonds havestruggled for some time but analysts
warn the malaise is now spreading to
larger, more valuable stones.
The industry is under pressure from
changing consumer tastes and the rise
of synthetic diamonds. India, a major
centre of diamond cutting and polish-
ing, has been hit by the devaluation of
the rupee, while tighter lending crite-
ria from banks means some producers
have been unable to raise finance.
Alrosa blamed global trade tensions
for hitting demand in the Chinese con-
sumer market, after reporting a 22pc
slump in sales for the second quarter.
Bruce Cleaver, chief executive of
De Beers, said that retailers were con-
tinuing to work down their stockpiles
of polished diamonds and noted
“reduced levels of manufacturing in
the key cutting centres”.
Last month, Mr Cleaver said demand
for diamonds was “not fantastic but it’s
by no means awful”, adding that the
company would step up advertising in
the rest of the year to boost sales.
De Beers is majority owned by FTSE
100 giant Anglo American, whose boss,
Mark Cutifani, admitted: “We do think
the second half will remain tough.”The Wardour Street
outlet in London’s
Soho, the first ever
Pizza Express,
established in 1965Business
Mansoor Hamayun
said the funding is
‘evidence of Japanese
interest in Africa and
in pay-as-you-go
solar energy globally’restrictions in Altria’s deal with Juul,
which reportedly preclude the former
from selling other e-cigarettes, are
another potential stumbling block.
Would PMI’s IQOS fall foul of this
stipulation? Then there are the
internal risks. Can meaningful
efficiencies be gained from two
businesses with no geographic
crossover? And while the move is
being billed as a merger of equals,
reaching a compromise on folding two
management teams into one “would
certainly make for interesting times”,
says Ferry.
Many of the factors that prompted
the 2008 break-up appear to remain in
play. The parting allowed PMI to focus
on international sales while Altriaconcentrated on the US, where
regulation is far tighter, lawsuits are
more common and there is acute
awareness of the consequences
of smoking.
News of the possible reunion failed
to light up the New York Stock
Exchange. Altria fell 4pc on Tuesday
while PMI shed almost 8pc. “We
haven’t spoken to one [PMI]
shareholder who supports it,” say
analysts at Citi.
While both stocks regained some
ground yesterday, weary investors
could pose a problem for management
given approval of shareholders in both
companies is required. The deal could
be stubbed out before it has even
caught on.$900bn
Approximate value of the global
cigarette market in 20188 million
Number of people killed by
tobacco every year, according
to WHO estimates1.1
billion
Global smokers,
80pc of whom
live in low or
middle income
countries, says
World Health
Organisation1,000
Number of
cigarettes
consumed per
person in the US
in 2015, down
from more than
3,500 40 years
earlier (BMJ)Philip Morris-Altria
deal would create a
titan, but we’ve been
here before, reports
Michael O’Dwyer
‘We haven’t
spoken to
one Philip
Morrisshareholder
who
supports it’Marlboro man
was the iconic
advertising of the
tobacco industry’s
heyday but
cigarette
consumption is now
down dramatically
and the sector’s
giants are looking
to consolidate$200bn
The approximate
value of Philip
Morris and Altria
once merged.
It would have
almost $1bn in
weekly sales35pc
Altria’s stake in the e-cigarette
company Juul58pc
Approximate
stake to be held
by Philip Morris
shareholdersToyota takes stake
in Suzuki in drive
to combine costs
By Alan ToveyTOYOTA is taking a 5pc slice of its
smaller Japanese rival Suzuki in the lat-
est tie-up in the global car industry.
It will pay 96bn yen (£740m) for the
stake, while Suzuki will fork out 46bn
yen for 0.2pc of Toyota.
Carmakers face huge costs to de-
velop electric and self-driving models,
amid forecasts that global demand for
vehicles will fall as consumers look to
new forms of transport and shared
ownership. As a result companies are
seeking partnerships to cut costs.
Toyota and Suzuki said that the car
industry is “experiencing a turning
point unprecedented in both scope
and scale, not only because of en-
hanced environmental regulations, but
also from new entries from distinct in-
dustries and diversified mobility busi-
nesses.
“The two companies intend to
achieve sustainable growth by over-
coming new challenges surrounding
the automobile sector by building and
deepening co-operative relationships
in new fields while continuing to be
competitors.”GETTY IMAGESThe Daily Telegraph Thursday 29 August 2019 *** 31
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