WSJ: European Tobacco Companies In Talks About Possible Merger

[Robert Weissman <rob@essential.org>]

European Tobacco Companies In Talks About Possible Merger by AMY BARRETT
and CARLTA VITZTHUM /Staff Reporters of THE WALL STREET JOURNAL
Source: The Wall Street Journal Interactive Edition, Tuesday, 10/5/99

France's Seita SA and Spain's Tabacalera SA said they are discussing a
closer alliance, which observers expect to take the form of a merger that
would create the world's fourth-largest tobacco company.

Seita said it and Tabacalera are "in the midst of negotiations aimed at a
closer alliance between the two companies." It added that remaining points
of contention include "rules governing the shareholding structure of the
new company."

While a Seita spokeswoman declined to use the word "merger," she noted
that Seita Chairman Jean-Dominique Comolli had spoken, at a presentation
of the company's results earlier this year, of the need to constitute a
European tobacco group, and said this was the basis for the talks.

A Tabacalera spokesman said talks are "in an advanced stage, although
there is still no agreement." He declined to give more details, saying
only that "negotiations didn't start last week; they've been going on for
some time now."

Global Competitor

Analysts applauded the possibility of an alliance that would create a
European contender able to compete globally. With combined market
capitalization of about 6.7 billion euros ($7.18 billion), the merged
company would rank a distant fourth behind Philip Morris Cos., British
American Tobacco PLC and Japan Tobacco.

The advantages to be gained by joining forces are many, analysts say,
citing increased clout as a tobacco buyer, cost savings, and the fact that
a merger would unite the world's two largest producers of cigars.

A merger "would make enormous sense from an industrial point of view,"
said Javier Valverde, an analyst at Santander Investment SA in Madrid. "It
isn't only a question of size," he said, adding that a union would enable
the two companies to implement a far more aggressive restructuring program
than each is undertaking on its own.

For instance, by concentrating the production of brown tobacco cigarettes
at Seita's factories and that of Virginia blonde cigarettes at
Tabacalera's, the new company would be able to sharply improve efficiency,
he said.

A merger would also help the companies boost exports. Tabacalera aims to
increase exports to 25% of sales from the current 3%. Half of Seita's
sales are exports, fueled by the Gauloise Blonde brand, whose foreign
sales are growing at double-digit rates. Faster international development
is one of Seita's two main strategic objectives, the company spokeswoman
said.

The other is to "defend our position in our core French market." Until
recently, Seita had a monopoly in cigarette distribution in France, and it
remains the leader, distributing the brands of its competitors through
regularly renewed commercial contracts. But those competitors have
launched aggressive price wars recently, compelling Seita to cut prices of
its brands as well.

A merger would facilitate acquisitions by increasing financial capacity,
which has proved a handicap for each of the prospective partners in the
past when faced with deeper-pocketed competitors. In 1996, for example,
the two placed separate bids during the privatization of Portugal's
Tabaqueira SA, but lost out to Philip Morris.

Government Roles

Observers say talks between the French and Spanish companies began in
February 1998 -- after the two signed a strategic alliance to coordinate
international development --but were sidelined by the Spanish government's
sale of its remaining 52% stake in Tabacalera in April of the same year.

The Spanish government retains a 3.2% stake in Tabacalera, and the right
to veto a takeover or merger. While it has declined to comment, the
government is widely seen as favoring the prospective merger.

Seita, which makes Gauloise and Gitane cigarettes, was privatized in 1995.
The French government retains a small stake, but without any special
rights. It doesn't appear to intend to get involved in merger talks, as
suggested by remarks by Finance Minister Dominique Strauss-Kahn on Monday
indicating that any tobacco merger would be between two private companies.

Write to Amy Barrett at Amy.Barrett@wsj.com1 and Carlta Vitzthum at
Carlta.Vitzthum@wsj.com2

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