TABACALERA: Strength sought from tobacco alliance (fwd)

[Robert Weissman <rob@essential.org>]

TABACALERA: Strength sought from tobacco alliance
Spanish group sees tie-up with French rival as key to making more
acquisitions, writes Tom Burns
by Tom Burns
Source: Financial Times, Tuesday, 10/5/99

Shortly after Cesar Alierta was appointed chairman of the then
state-controlled Tabacalera in 1996, Philip Morris beat the Spanish group
to acquire Portugal's Tabaqueira, which was being privatised.

Seita, the French tobacco concern, also lost out in that deal.

The experience convinced Mr Alierta there was a "compelling logic" to an
alliance with the French group, which would enable the companies to bid
jointly for international acquisitions. It was a sign that he was already
on track towards the cross-border transaction that Tabacalera and Seita
were last night discussing.

A former stockbroker, who sold his securities firm shortly before he was
drafted into Tabacalera by the incoming centre-right government, the
54-year-old Mr Alierta has an eye for a good market story.

In February last year, a strategic agreement with Seita to co-operate in
international markets - a 50-50 venture called Global Tobacco - was
announced just two months ahead of the sale on Madrid's Bolsa of the
government's 52 per cent stake in Tabacalera.

Mr Alierta first hinted that his goal was to join forces fully with Seita
in March. Characteristically, he mentioned a possible merger with the
French group when telling analysts about diversification plans that
centred on Logista, a distribution company that had earlier been spun off
from the group's core tobacco interests.

Just a few days before, an attempt by Tabacalera, in association with
Seita, to buy the international business of RJR Nabisco of the US had been
pre-empted by Japan Tobacco. It was a reminder of the failed Tabaqueira
bid, and Mr Alierta became more convinced than ever that his group needed
size to match its acquisitive ambitions.

Since then, two other factors have made a marriage with Seita all the more
attractive.

One is that the French group took over Consolidated, the second ranked
cigar company in the US, at the end of last year. That meant it overtook
Tabacalera - which controls a string of producers in Honduras and
Nicaragua and recently opened a plant in Cuba - as the world's leading
cigar producer.

The other was that during 1998, Philip Morris had for the first time moved
ahead of Tabacalera as the leading seller of Virginia-blend cigarettes in
Spain. The Spanish group remains the biggest domestic cigarette company,
with a 48 per cent market share in terms of volume.

At the halfway stage Tabacalera reported a 29 per cent increase in
consolidated net profit to E80.2m ($86m) following improvements in
production and purchasing processes, as well as a sales recovery.

Tabacalera's search for overseas products and consumers is all the more
pressing now that it is beginning to feel the full impact of competition
from overseas rivals in its own back yard.

With their shrinking domestic markets, Seita and Tabacalera share similar
problems, and with their focus on the cigar market they have a common
strategy in a fast-growing segment of the industry.

A deal with Seita gives Tabacalera more muscle at a time when its
diversification plans are about to be tested by the market. Next month the
group is planning to put 30 per cent of Logista on the Madrid stock
exchange in an offering that could be worth in excess of E300m.

Logista has extensive distribution and storage facilities based on
tobacco, stamps, and official documents and a growing business in airport
shopping areas.

Earlier this year it absorbed Spain's leading books and magazine
distributor and it has also taken a 6.7 per cent stake in Iberia, the
national airline due for full privatisation.

Mr Alierta may well be exploring the "compelling logic" of extending the
Logista model to Seita's distribution activities.