WSJ: Tabacalera, Seita Deal Creates Power, But With Little Room forExpansion

[Robert Weissman <rob@essential.org>]

Tabacalera, Seita Deal Creates Power, But With Little Room for Expansion
by AMY BARRETT, CARLTA VITZTHUM and ERNEST BECK /Staff Reporters of THE
WALL STREET JOURNAL

EUROPE; Source: The Wall Street Journal Interactive Edition, Thursday,
10/7/99

In these pragmatic times, most mergers are seen as marriages of reason.
But to hear the chairmen of French and Spanish tobacco giants Seita and
Tabacalera tell it, their planned 3.08 billion euro ($3.31 billion) union
almost sounds like it's built on love.

"Not only our core activities, but also our corporate cultures, are
similar," said Seita SA Chairman Jean-Dominique Comolli after a news
conference in Paris Wednesday announcing the deal. "We speak a common
language."

"We're both Latin," echoed Tabacalera SA Chairman Cesar Alierta. "We smoke
the same brown cigarettes, the same cigars."

But for all the talk of cultural similarity and a merger of equals at
Wednesday's joint press conferences in Madrid and Paris, observers say
Latin love won't be enough to ensure the success of Altadis, as the new
company will be known. In fact, in the stagnant and besieged global
tobacco industry, some analysts say the deal is too focused on Europe and
not enough on pushing into new markets.

"There isn't much potential here for selling more cigarettes," says
Michael Smith, an analyst at Morgan Stanley in London.

The merger, which would create the world's fourth-largest tobacco group,
is meant to create a European tobacco giant with the financial weight and
critical mass to participate in further consolidation of the industry on
the Continent. It's also a defensive move: Management at both companies
realized that they had to get bigger to avoid being gobbled up by the
industry giants such as the top three, Philip Morris Cos., British
American Tobacco Co. and Japan Tobacco Inc.

To be sure, the new company will wield considerable clout. With a combined
market capitalization of 6.7 billion euros, annual revenue of nearly 2.4
billion euros, and a 25% share of the global market for cigars, Altadis
aims to be among the hunters rather than the hunted. With that in mind,
Messrs. Comolli and Alierta outlined an ambitious set of hard-nosed
targets for cutting costs and boosting profits. By 2001, they said, the
combined company expected cost savings of 70 million euros a year. They
expect to see earnings growth of 15% a year beginning in 2001.

Trouble is, those goals seemed unrealistic to many investors, who hammered
shares in both companies on Wednesday. Shares in Seita closed down 5.7% at
58.50 euros in Paris trading, while Tabacalera's stock dropped 1.03 euros,
or 5.5%, to 17.69 euros in Madrid. There was some profit taking at work
here, given that shares in both companies had jumped close to 12% in
recent days in anticipation of Wednesday's announcement.

But many analysts see Altadis as a weak player in a sector that is facing
stagnant world-wide volume growth, litigation woes and the prospect of
tighter advertising restrictions in the U.S. and Western Europe. While the
deal creates a large European tobacco company and a potent force in
cigars, it doesn't give the new combination a strong global cigarette
brand or a foothold in vital emerging markets. The new company seeks to
target Latin America, but that region is dominated by BAT, with around 60%
of the market and famous local brands.

"The impact of this deal outside Europe will be very limited," says Tony
Silverman, an analyst at BT Alex Brown in London.

As if to confirm such reservations, the chairmen themselves warned against
expecting too much in the way of additional synergies in most of their
businesses, beyond those expected to result from restructuring plans
already under way at both Seita and Tabacalera. These entail extensive job
cuts and plant closures.

One important exception is the cigar business in North America, the only
market in which the two overlap, and which hasn't undergone restructuring.
By consolidating U.S. distribution and marketing activities and Caribbean
production facilities, Altadis could achieve up to 35% of the total cost
savings announced, says Hernan Cristerna, a banker with J.P. Morgan who
advised both companies on the deal.

The new company will be officially headquartered in Paris, where the
cigarette business will also be located, while Madrid will be home to the
cigar and distribution activities. Messrs. Comolli and Alierta will be
co-chairmen of the new ensemble, with Mr. Comolli also chairing the
cigarette division and Mr. Alierta the cigar and distribution branches.

Unusual for a merger announcement, the two presented detailed
organizational charts identifying who would hold the top 30 posts in the
new structure. The question of who gets what is usually left until after
the financial details have been ironed out and announced, and often causes
serious conflict.

Mr. Comolli, by contrast, said this was one of the first issues they
addressed. "Accelerating the integration of our teams is the best way to
ensure the creation of shareholder value," he said.

The future co-chairmen's emphasis on cultural compatibility is striking at
a time when many international mergers are failing to deliver on financial
promises for reasons directly related to culture clashes and personality
conflicts. According to a study by Andersen Consulting, 70% of all mergers
and acquisitions since 1993 have failed to meet expectations, often for
those very reasons.

'Human Factor'

"Most important is how smoothly a deal is carried out, and the human
factor is key to that success," says Gil Gidron, a partner at Andersen
Consulting.

J.P. Morgan's Mr. Cristerna says he has been "most impressed" by the
working relationship between Messrs. Comolli and Alierta, which dates back
to 1998 when the two companies created a joint venture to coordinate
international development. "Having been involved in many other deals, I
was very impressed with how well the two guys and the two management teams
got along in such a complex transaction, and how effectively they work
together," he says.

Mr. Alierta puts this down to their common Latin culture. "For years,
every time we were both at a tobacco industry gathering, we always ended
up sitting together," he recalls. "We were more at ease among southern
Europeans than with other nationalities."

One region in which cultural and historic affinities could prove useful is
neighboring North Africa, where several countries are planning
privatization of their tobacco industries.

But the willingness of the two companies to find common cultural ground
and share responsibilities may result as much from the fear of running
afoul of the Spanish and French governments as from their cultural
affinities. Despite the privatization of Tabacalera last year, the
government retains a 3.2% stake in the company, as well as a golden share
that gives it the right to block a possible hostile takeover from a
foreign rival.

Question of Chemistry

France, too, has proven wary of unwanted advances on French companies from
international competitors. Earlier this year, it forced Elf Aquitaine SA
into a merger with TotalFina SA in an effort to keep France's oil industry
in domestic hands and avert a crossborder takeover. It also expressed
displeasure with recent moves by Banco Santander Central Hispano of Spain
to increase its minority stake in Societe Generale.

But ultimately the success of the marriage may boil down to chemistry.

"The problem with mergers is that they look good on paper," says Jose
Ramon Pin, a professor of management at Spanish business school IESE in
Madrid. "But in the end the hidden problems of a merger emerge and they
always have something to do with personal relations."

Write to Amy Barrett at Amy.Barrett@wsj.com1, Carlta Vitzthum at
Carlta.Vitzthum@wsj.com2 and Ernest Beck at Ernest.Beck@wsj.com3.

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