BAT-Rothmans merger

[Robert Weissman <rob@essential.org>]

To: Tobacco control allies
From: Robert Weissman, Essential Action
Re: BAT-Rothmans merger
Date: January 14, 1999

The announced BAT-Rothmans merger poses important issues for tobacco
control advocates. In this memo, I outline some of the ways the merger
might undermine or promote tobacco control efforts, concluding that the
merger will be harmful to our work. I then suggest some ways that tobacco
control advocates may want to consider intervening to block the merger. 

Essential Action and some colleague groups have some experience in working
to block mergers, and we would be happy to work with any group
(outside of the United States, where the merger will have little
effect on competition) that wanted to try to stop the BAT-Rothmans merger. 

THE MERGER AND COMPETITION

The merger between the number two (BAT) and number four (Rothmans) tobacco
companies in the world would bump BAT nearly to the size of Philip Morris.
There seems to be a consensus among market analysts that this merger will
spark others, soon.

In Australia, New Zealand, Canada and South Africa, it appears the merged
entity will have extremely high market share, above 60 percent in all
cases, and above 90 percent in Canada and South Africa.

The merger will have no discernible effect in the United States, and
therefore there seems no role for U.S. antitrust authorities in reviewing
the merger. I don't know market share in Europe or in specific European
countries, nor do I know how much overlap there is in developing
countries. 

These are the countries where the two companies have affiliates, according
to Tobacco Reporter (June 1998):

Rothmans: Australia, Belgium, Canary Islands, Canada, China, Congo,
Cyprus, Czech Republic, Denmark, Fiji, France, Germany, Ghana, Greece,
Hong Kong, Hungary, India, Indonesia, Italy, Jamaica, Japan, Malawi,
Malaysia, Malta, Myanmar, Netherlands, New Zealand, Pakistan, Papua New
Guinea, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, South
Africa, South Korea, Spain, Switzerland, Taiwan, Thailand, Turkey,
Ukraine, United Kingdom, United States, Vietnam, Zambia, Zimbabwe.

BAT: Angola, Argentina, Australia, Bangladesh, Barbados, Belgium, Brazil,
Bulgaria, Cambodia, Cameroon, Canada, Chile, China, Congo, Costa Rica,
Cyprus, Czech Republic, Denmark, El Salvador, Fiji, Finland, France,
Germany, Ghana, Guatemala, Guyana, Honduras, Hong Kong, Hungary, India,
Indonesia, Kenya, La Reunion, Malawi, Malaysia, Malta, Mauritius,
Netherlands, New Zealand, Nicaragua, Nigeria, Pakistan, Panama, Papua New
Guinea, Poland, Romania, Russia, Sierra Lone, Singapore, Slovak Republic,
Solomon Islands, South Africa, Spain, Sri Lanka, Surinam, Switzerland,
Trinidad, Uganda, Ukraine, United Kingdom, United States, Uzbekistan,
Venezuela, Vietnam, Zimbabwe.

THE EFFECTS ON TOBACCO CONTROL

The merger should be considered both for the direct effect of the
BAT-Rothmans combination and in terms of its likely effect in triggering a
more general industry consolidation. If there are problems from
consolidation, then this merger is especially troubling because of the
subsequent mergers that seem sure to follow. 

1. CONCENTRATED POLITICAL POWER

The most worrisome element of market concentration is that it will further
strengthen the tobacco industry's political power. In general, the
combination of two major industry players creates a single company that is
more powerful than the sum of the political influence of the pre-merged
parties.

There are a few ways to think about this. One is in terms of straight
industry influence -- the ability to lobby parliamentary activity, or to
affect regulators. In most cases, we can expect BAT-Rothmans will be a
stronger adversary than BAT and Rothmans were as two separate companies.

Another way to look at this issue is from the industry-wide perspective.
We benefit when there are more competitors -- heightened competition makes
it harder for the companies to coordinate and increases the possibility
that companies will divide on policy issues (as, for example, Liggett has
done in the United States, breaking from the industry pack and admitting
the health effects of smoking). Where the number of competitors in a
country goes from four to three, or three to two, the chances of this
happening diminishes.

Still another consideration is that, in smaller countries, it may not be
worth it for a competitor with, say, one third market share to invest
heavily in shaping the political climate. A competitor with a larger
market share may be more inclined to work hard to control political
events.

Against these claims, it could be argued that the companies already
coordinate their political activities so much that things canUt get much
worse. But while the tobacco industry does function with an unusually high
degree of cohesiveness, I think it would be overstated to say they always
agree, and totally. In addition to the Liggett example, it is worth noting
that the tobacco papers released in connection with litigation in the
United States demonstrate a significant amount of intra-industry
disagreement.

Another argument sometimes made by proponents of consolidation is that
bigger and fewer companies are easier to regulate. The oil majors, for
example, generally though not always adhere to higher environmental
standards in developing countries than do smaller, independent companies.
But this example on the production side doesn't seem to have much
relevance to the tobacco industry, where the focus is on the marketing
side, and where the big companies have always been the most aggressive in
hawking product, and in undermining, circumventing and blocking tobacco
control laws and regulations. 

2. CONCENTRATED MARKET POWER

When thereUs less competition, companies raise prices. The tightening of
the tobacco industry oligopoly around the world will enable companies to
raise prices, although in many developing countries limited purchasing
power and a desire to take market share from cheap national brands may
deter the companies from exerting their market power to raise prices.

Still, it would be fair to assume some price increases will follow from
the merger. Price increases are obviously something that tobacco control
advocates favor, so the merger-induced price increases are arguably
desirable.

There are good reasons to be cautious about viewing these potential price
increases favorably. First, there is something disturbing about this kind
of "tax" winding up in industry coffers, rather than in the public
treasury. Second, industry profiteering strengthens companies financially,
and positions them to engage in still more marketing, promotion and
political schemes. Third, and perhaps most importantly, a tight oligopoly
is likely to have the ability to impose price increases in such a way
(gradually) so as to blunt the effect on reduced consumption.

On balance, I don't believe the price effect counteracts the likely
harmful political consequences of the merger.

WHAT TO DO

There is a potentially significant role for tobacco control advocates who
find the merger worrisome. Competition and antitrust authorities
traditionally review mergers based on technical grounds (calculations of
market share and effects of the merger on competition), but they are
always affected by the political context. If tobacco control groups
publicly denounce the merger and call for it to be blocked, then the
competition regulators are more likely to intervene and act to stop the
merger.

Tobacco control advocates also have important insights to contribute to
regulators' assessment of the merger. 

First, we can make arguments about the political effects of the merger,
and urge the authorities to take these issues into account. Based on
organizations' extensive experience and historical knowledge about
fighting the companies, we can describe in precise ways how the industry
subverts the democratic political process and government efforts to
protect the public health, and why things would be worse with a
consolidated industry. 

Second, based on news accounts, it appears likely that BAT and Rothmans
will propose in some countries where the combined companies would have
high market share that the merger be permitted, but that the BAT and
Rothmans subsidiaries be operated independently. We can offer lots of
information based on our knowledge of how the tobacco companies operate to
argue that any formal autonomy between the subsidiaries is likely to be a
sham, and that BAT will coordinate all activities between the supposed
independent subsidiaries.

Finally, the tobacco control movement is a repository of an enormous
amount of information about how the industry works. Individuals or groups
that arrange meetings with competition authorities may find that the
regulators ask lots of questions in areas where we have knowledge and the
regulators don't. We may be able to help bolster competition authorities'
case to block the merger. 

This is an effort that could potentially stop the merger. If competition
authorities in enough countries, or in the European Union, were to
prohibit the merger in their market, the entire effort could collapse.

Although it is unlikely that many tobacco control groups have much
experience dealing with mergers, we all have experience in campaigning and
advocacy. In that sense, merger issues are no different than tobacco
control. First steps in trying to stop the merger would be to issue a
statement criticizing the merger; write opinion pieces or send letters to
prominent newspapers criticizing the merger; send a letter to competition
authorities asking that they not allow the merger to proceed in your
country; and arrange a meeting with competition authorities to make your
case, provide information, cultivate relationships and, if they seem
sympathetic, ask for ideas on how you can most effectively make the case
that the merger should be stopped.