[Intl-tobacco] Japan Tobacco Aims To Snuff Govt Stake

[Robert Weissman]

TALES OF THE TAPE:Japan Tobacco Aims To Snuff Govt Stake
by Cathleen Egan / Dow Jones Newswires; 201-938-5289; cathleen.egan@dowjones.com
Source: The Wall Street Journal Interactive Edition, Wednesday, 6/13/01

NEW YORK -- It wasn't until Japan Tobacco Inc. (J.JTB) bought the
international tobacco operations from the former RJR Nabisco Holdings that
the company appeared on the radar screens of American investors.

With the $7.8 billion purchase in 1999, in which the 100-year-old company
secured the overseas rights to cigarette brands such as Camel, Winston and
Salem, Japan Tobacco became the third-largest tobacco company in the
world.

And yet, few investors could have built any significant position in the
stock, which trades on the Tokyo Exchange, because two-thirds of the
company, known as JT in tobacco circles, is owned by the Japanese
government. The company could have issued new shares, but by law it would
have been required to give two-thirds of them to the government. So what
was the point?

Now the company is on a campaign to broaden and diversify its ownership.
It has asked the Japanese government to reduce its holdings to zero. If
given the OK - which may not be known for at least another year - Japan
Tobacco would gain more management flexibility and be able to take such
steps as issuing new shares and stock options at its own discretion,
company spokesman Ryosuke "Roy"  Tsuji said.

Whether investors would bite remains to be seen. JT executives recently
took the company's cause on a road show through Europe and the U.S. to
gauge interest. Foreign investors own about 10% of the company.

The reaction has been mixed. Investors are intrigued by JT's push to
diversify into food and pharmaceutical products. Tobacco makes up 80% of
the company's business, and investors, particularly in the U.S., are
concerned with the litigation landscape in Japan.

"To own a tobacco company, you want to have an understanding of its legal
risks," said Keith Patriquin, buy-side analyst for Loomis Sayles & Co.,
which invests in tobacco companies but does not own shares of JT.

Not nearly as litigious as the U.S., Japan carries a much milder
antismoking sentiment, Tsuji said. There are only two tobacco lawsuits
pending in Japan and age limits on smoking are stricter in Japan than they
are in the U.S. In Japan, a person can't smoke until the age of 20,
whereas in the U.S., there is no law restricting how old a person must be
to smoke, though a person must be 18 in order to buy cigarettes.

Japanese government regulations prohibit cigarettes from containing more
than one milligram of nicotine. And Japan Tobacco, back in the 1980s,
implemented a self-imposed limit on the size and location of advertising
billboards.

But for now, JT's top priority is to gain independence from the
government.

Local Farmers A Concern

The Japanese government has not responded to JT's request. It has
organized a subcommittee - made up of about 30 members of the private
sector, including media people, tobacco leaf growers and professors - to
handle the company's preliminary inquiry. The government's main concern:
local tobacco leaf growers.

Japan Tobacco gets about 40% of its leaf product from domestic farmers.
The remaining 60% is imported. The local blend is three to five times more
expensive than imported leaves. What's more, farmers in Japan are not
subsidized by the government like they are in the U.S., even though there
is legislation that requires JT to buy a certain amount of product from
domestic farmers.

The farmers and the government fear that an independent Japan Tobacco
would longer use local tobacco. Similar concern was raised in 1985, when
the Japanese government sought to pull out of its holdings in JT. Farmers
objected and even though the company insisted it would continue to use
local tobacco, the government ultimately sympathized with the farmers and
withdrew its petition.

Today the concern about the domestic farmers is amplified because it's JT
requesting that the government retire its ownership in the company. Japan
Tobacco insists that its interests are aligned with the concerns of the
farmers.

"Anyone concerned about their future," Tsuji said, "we would honor that."

Future Cash Flow Pillars

In the meantime, Japan Tobacco seeks to build its other, smaller
operations.

JT gets about 12% of its sales from food and 4% from pharmaceuticals. But
tobacco is the company's only source of cash flow, though Tsuji said the
other two segments are "future pillars for cash flow." By next March, JT
expects its food business to break even on earnings before interest,
taxes, depreciation and amortization; the same for pharmaceuticals by
March 2006.

Although diversification is not a new corporate tactic, it is being viewed
unfavorably by U.S. investors. Procter & Gamble Co. (PG) was and is still
shunned by some analysts for trying to build its pharmaceuticals business,
which accounts for less than $1 billion of the company's $38 billion in
annual sales. Ever since P&G's failed attempt to acquire the old
Warner-Lambert, the concern has been that beefing up pharmaceuticals would
divert management's attention from core businesses and be a financial
drain. Although pharmaceutical products are highly profitable, the
research and development costs leading up to a product launch can be
exorbitant.

Japan Tobacco, however, sees a payoff. It hopes to become the largest
pharmaceutical company in Japan, Tsuji said. At present, it's a small
player.  Its only marketed product is the successful anti-HIV drug
Viracept, which is sold in North America, though drugs to combat obesity
and high-blood pressure are under development.

Bigger food and pharmaceutical positions go along with JT's stated mission
to change itself and adopt almost a more Western way of thinking. And that
means less government.


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