[Intl-tobacco] Japan Tobacco Seeks Europe Acquisitions in Bid for No. 1 Spot (fwd)

[Robert Weissman]

Japan Tobacco Seeks Europe Acquisitions in Bid for No. 1 Spot
by Hanabusa Midori
EUROPE;
Source: Bloomberg News, Thursday, 6/15/00

 Tokyo, June 16 (Bloomberg) -- Japan Tobacco Inc., which bought RJR
Nabisco Holdings Corp.'s international operations last year, is seeking
acquisitions or alliances in Europe to move closer to its goal of becoming
the world's largest tobacco company, JT's new president said.

The world's third-largest tobacco maker paid $7.8 billion for the RJR
business, which gave it the right to sell RJR brands such as Camel,
Winston and Salem outside the U.S. Now it's looking at Europe for assets
ranging from factories to license agreements to acquisitions, said
Katsuhiko Honda, who will become JT's president next month.

``The tobacco industry has been undergoing a global realignment of a
once-in-a-century magnitude,'' said the 58-year- old Honda, who smokes
more than 50 of his company's Cherry brand cigarettes a day. ``About 80
percent of that is now over, leaving Europe as the last remaining
market.''

At the same time, Japan Tobacco is stepping up efforts to change laws in
Japan that require two-thirds of its shares to be owned by the government.
That restriction limits the company's ability to finance acquisitions and
otherwise grow, Honda said.

Global Realignment

Japan Tobacco has annual cash flow of roughly 100 billion yen $939
million), which it hopes to double over the next five years. While it
doesn't have any specific acquisition targets at the moment, it's prepared
to move swiftly on any opportunities that may arise, Honda said.

Japan Tobacco completed its purchase of RJR International last September,
the biggest foreign acquisition by a Japanese company. RJR added
production sites in 70 countries for Japan Tobacco, which until then had
made cigarettes only in Japan.

The acquisition also more than tripled the Japanese company's overseas
sales to 378.7 billion yen ($3.6 billion) in the year ended March 31, from
117.1 billion yen a year ago.

The transaction marked the former state monopoly's first step in building
a global empire and moved it closer to No. 1 Philip Morris Cos. of the
U.S. and British American Tobacco Plc of the U.K.

As competition intensifies in maturing markets, and as some holding
companies reduce their stakes in tobacco businesses amid growing
litigation, the industry is in the final rounds of a global realignment,
analysts said.

In Europe, top Spanish tobacco maker Tabacalera SA acquired Seita SA, the
No. 1 French tobacco company, forming Altadis SA, Europe's third-largest
tobacco company, in December.

South Korea, China

Yesterday, Gallaher Group Plc, the U.K. maker of Silk Cut and Mayfair
brand cigarettes, announced its purchase of the Russian tobacco business
of Vector Group Ltd. for $390.5 million to expand outside the declining
U.K. market.

Apart from Europe, there are opportunities in South Korea, where the
government may sell as much as 20 percent of its stake in Korea Tobacco &
Ginseng Corp, Japan Tobacco's Honda said.

China, the world's largest tobacco consumer with 320 million smokers, is
another market that promises future growth. However, that will have to
wait until China joins the World Trade Organization and opens its market
to foreign competition, analysts said.

``If JT is interested in expanding further into Europe now, it's probably
because they are focused on profitability,'' said Tsutomu Matsuno, an
analyst at Daiwa Institute of Research.

In underdeveloped markets like China and Russia, where Japan Tobacco
already has footholds, it's the low-priced local brands that are selling
well, not the international brand cigarettes with higher profit margins,
he said.

Legal Obstacle

In addition to making acquisitions, Japan Tobacco is expected to sell or
liquidate some overseas operations as it weeds out overlaps created when
it merged Japan Tobacco International and the RJR business. The company
plans to quit a Spanish joint venture that came with the RJR acquisition,
Honda said.

Back home, Honda has to grapple with a different task, of persuading the
Japanese government to sell its two-thirds stake, which thwarts Japan
Tobacco's efforts to operate as an ``ordinary'' company, he said.

``The government's two-thirds stake prevents us from issuing convertible
bonds, providing stock options to employees or offering stock swaps,'' he
said.

The timing of an additional sale of the government's stake has surfaced on
the political agenda from time to time. However, in the 15 years since
Japan Tobacco's first public stock sale, the government has opted to
retain its stake and use price increases on cigarettes to boost tax
revenue.

The wants parliament to revise law that requires the government to
maintain a ``temporary'' two-thirds stake and a permanent stake of at
least 50 percent stake, Honda said. Japan Tobacco wants a gradual
reduction in the government's stake to nothing.

Changing Times

The ``two-thirds'' clause was passed as an assurance to tobacco farmers
and small retailers who feared losing government protection when the
initial public offering took place in 1985. However, times have changed,
and now ``most farmers understand that you need to be competitive to
survive in times of liberalization,'' Honda said.

Honda's ascension to the top post is itself a sign of change.

A 35-year Japan Tobacco veteran who was lured to the company by the
challenge of working in a business that spanned the spectrum from
agriculture to manufacturing to retailing , Honda will be the first
company president who didn't come from government bureaucracy.

Japan Tobacco shares rose 42,000 yen, or 4.4 percent, to 36,000 yen in
midmorning trading. The shares are up 9.0 percent for the year, compared
with a 12 percent fall in the TOPIX index of all shares listed on the
first section of the Tokyo Stock Exchange