Japan Tobacco Inc sparked takeover speculation yesterday by naming a new chief executive who wants the world’s third-largest international tobacco maker to do more overseas acquisitions to offset falling cigarette sales at home.
Shares in British tobacco company Imperial Brands, long seen as a likely target, rose as much as 4% after Masamichi Terabatake, the CEO-designate, told reporters: “If there are good deals, we would like to actively pursue them”.
Terabatake, who has a background in deal-making, said after his promotion was announced that he was willing to take risks, adding that the scale of acquisitions “does not matter”.
Two big issues facing Japan Tobacco are a geographic footprint too concentrated in low-growth markets Japan and Europe and competitive weakness in vaping.
Buying Imperial would help both issues, analysts at Jefferies have long argued.
Terabatake, who will replace Mitsuomi Koizumi in January, is currently deputy CEO at JT International, the Geneva-based headquarters of the company’s overseas operations, where he has spent more than a decade.
The 51-year-old, who worked on Japan Tobacco’s $7.8bn purchase of RJR Nabisco’s non-US tobacco business in 1999, did not give any details of possible targets but said: “There are still many regions we have not entered. There are many markets left for cigarette business to grow.”
Consolidation is widely expected in a global tobacco market that is shrinking as more people quit.
British American Tobacco’s July purchase of Reynolds American ignited expectations that a takeover of Imperial or Altria could follow, as Japan Tobacco and Philip Morris International seek to bolster their position against a newly enlarged rival. Imperial’s shares had fallen 23% since April on concerns about its competitive position and lack of a vaping device that heats tobacco without burning it.
It was trading at less than 12 times earnings before interest, tax, depreciation and amortisation (EBITDA), whereas BAT, Philip Morris and Japan Tobacco are at between 15 and 20 times EBITDA.
That discount, and Japan Tobacco’s troubles, have some sources seeing a deal as more likely, though huge market overlap, such as in Britain, makes a takeover complicated.
Sources have suggested that Japan Tobacco and British American could split up Imperial, but warn that BAT may still be digesting its $49bn purchase of Reynolds.
A spokesman for Imperial, the maker of the Davidoff and Golden Virginia brands, declined to comment
Japan Tobacco’s domestic cigarette sales have been hurt by more smokers quitting than expected and the popularity of heat-not-burn (HNB) tobacco vaping devices.
It has forecast 92bn cigarette sales in Japan for 2017, down 13.4% from a year ago. That would be 1bn less than what it had projected in August and 4bn below an estimate given at the start of year. Despite commanding more than 60% of Japan’s cigarette market, the former state monopoly has ceded some of its home turf to Philip Morris, which launched its IQOS HNB product in Japan in 2014 and expanded nationwide in April last year.
Japan Tobacco rolled out its Ploom Tech smokeless tobacco product in central Tokyo in July after production delays.
Terabatake said it was still too early for any company to solidify its lead in this category.
“(The) tobacco vapour war has just begun,” he said.
Japan Tobacco headquarters building is seen in Tokyo. The firm’s domestic cigarette sales have been hurt by more smokers quitting than expected and the popularity of heat-not-burn (HNB) tobacco vaping devices.
