Australian watchdog snarls tobacco merger

[Robert Weissman <rob@essential.org>]

Watchdog snarls tobacco merger

By ANDREW WHITE
The Australian News Network
1Apr99

THE competition watchdog has outlined serious concerns
that could stymie the local merger of cigarette makers British
American Tobacco and Rothmans International, warning it
was not obvious how they could be overcome.

The Australian Competition and Consumer Commission said
 yesterday the proposed merger was likely to substantially
lessen competition in the Australian cigarette market.

Such a result would place the deal in breach of the merger
provisions of the Trade Practices Act, allowing the ACCC to
block it locally.

The ACCC said the merged group would control "nearly all"
of the major Australian cigarette brands and would have an
overall market share of 62 per cent.

It said the prospect of competition was low as there were high
barriers to entry to the market and limited prospects for increased
imports.

ACCC chairman Allan Fels said the commission's concerns
"are not necessarily insurmountable".

"But nor is it obvious that there are ways that the companies
can overcome these concerns," Professor Fels said.

The commission would, however, carefully consider any proposals
put to it by the companies.

BAT earlier this month unveiled plans to sell the Canadian operations
of Rothmans to appease the Canadian Competition Bureau.

The companies have so far declined to canvass such options in
Australia, although analysts have suggested they could assuage
the ACCC by divesting some of their brands.

BAT has 67 per cent of WD&HO Wills, which has the Horizon and
Benson & Hedges brands, while Rothmans has 50 per cent of Rothmans
 Holdings, which makes Dunhill, Winfield and Holiday.

A merged BAT-Rothmans would control both companies and have
 dominant market shares across the three major market segments
with 96 per cent of premium cigarettes, 49 per cent of mainstream
brands and 61 per cent of value brands, the ACCC said.

Rothmans Holdings said the Australian companies and their foreign
 parents had discussed the implications of the global merger.

But it said there were no agreements about local transactions that
would flow from the deal.

The ACCC stance would not affect Rothmans' ongoing Australian
operations, the company said.

Independently distributed imports have just 0.6 per cent of the market,
with 0.5 per cent of that accounted for by the only other major
competitor, Philip Morris.

The tobacco companies had argued that changes in the tobacco
tax regime from a weight-based to a per-stick formula, due to come
into force in November, would promote import competition.

But the commission said market inquiries indicated competition was
restricted by barriers to distribution, advertising and marketing.

The existing trading arrangements would restrict opportunities for the
new entrants to gain brand visibility, brand recognition and loyalty
from smokers.

Advertising restrictions would limit opportunities to build brand
images, the commission said.

Wills shares tumbled 10.5c to $4.35.

Rothmans closed steady at $14.10.