[Intl-tobacco] Italy privatization

[Robert Weissman]

 All eyes on Italy - TJI

 February 2003
 ETI is up for sale and is attracting intense interest. As well as
obtaining a 'new' and dynamic company, the buyer will also gain
 access to Europe's second largest tobacco market after Germany.

 The sale is part of the Italian government's privatisation process,
which will also eventually account for Enel, the electricity giant,
 the airline company Alitalia, and the remaining shares held in Eni, the
oil and gas group. It is the sale of the former Italian Tobacco
 Authority, however, that is most advanced, and the government hopes to
raise an estimated E 1.5 billion.

 In 1998 the Italian State Monopolies Authority (AAMS) had taken the
decision to sell the monopoly, and a four-year
 restructuring plan was put in place.

 Since then, ten cigarette factories have been closed. Cigarette
production is now concentrated in just five factories, cigar production
 in two plants.

 Other changes to the former monopoly's working practices took place
during the four-year transformation period, too. Salt
 production was transferred to ATISale, previously only responsible for
its distribution and marketing, ending ETI's interest in salt
 altogether. Then, shares in the Filtrati filter-producing subsidiary
were sold to UK company Filtrona, and Aticarta S.p.A. was sold
 to the Italian paper and packaging enterprise, the Reno de Medici
Group.

 In 2001, ETI formed Etinera S.p.A., a wholly-owned subsidiary, which
controls the distribution of tobacco products in Italy,
 including foreign trademarks owned by Philip Morris, BAT, Japan Tobacco
International etc. Etinera owns a supply chain that
 includes 14 deposits and 550 wholesale warehouses. In 2002, Etinera
signed new distribution contracts with producers and
 warehouse operators. It now provides all tobacco manufacturers
operating in Italy with openly competitive conditions, as required
 under EU law, which allow non-discriminatory access to Italy's 58,000
tobacco shops.

 New image, new brands

 The company's image has been modernised, too. New product launches,
including light cigarette MS 821, Sax Light and Sax
 Special, as well as new cigar brands, have also taken place and have
succeeded even in the absence of advertising, which is banned
 by the Italian government. Just one year after their launch, the new
products already hold strong positions in the domestic market
 and the decline in ETI's sales owing to foreign competition have been
reduced from around 5 per cent per annum during the
 previous ten years to just 1.5 per cent in 2002.

 Recent figures released by ETI show that their pre-tax income for the
2001/2002 financial year, which ended on 30 September,
 rose from E 47 million in 2001 to E 92 million in 2002, although part
of the increase can be accounted for by the spin-off of the
 distribution division. Compared to 1999, however, when pre-tax profits
were E 26 million, the turn-around in the fortunes of ETI
 is obvious. By 2003, they are aiming for a turnover of over E 1
billion, with an operating income of E 340 million.

 In 2002, ETI also signed a contract with Philip Morris, which means
that 30 per cent of their total production will be PM brands.
 The contract gives whoever acquires ETI the rights to produce and
distribute Philip Morris products in Italy until 2005.
 And although ETI is concentrating very much on the Italian market,
export opportunities have not been neglected. Around fifteen
 markets have been opened up, including Spain, the USA, the Balkans and
Japan, and 238,000 kg of cigarettes were exported in the
 first five months of 2002 alone, 63 per cent up on the same period of
2001.

 Not surprisingly, therefore, the sale of ETI has attracted interest
from some of the world's largest tobacco companies, as well as
 from outside interests. Last September, eight groups expressed an
interest in buying the ex-monopoly, including British American
 Tobacco and Japan Tobacco International. With 60 per cent of the
current market, the world's largest manufacturer, Philip Morris,
 is excluded from bidding on anti-trust grounds. Swedish Match is
thought to be interested in at least the Tuscan cigar sector.

 An alliance between the French-Spanish Altadis, the world's leader in
cigars, and the Equinox Fund, which has a capital of around
 E 258 million, is also interested, as are Tabacci Associati 2001, a
group of five joint-stock companies controlled by the Italian
 Tobacconists Federation and the Tobacconists Consortium for the Defence
of Exclusive Sales.

 Among those groups without any previous ties to the tobacco industry is
TNT, a Dutch shipping company that is a sister
 enterprise to the Royal Dutch Postal Service. Italian company Aurelia
and a consortium of Italian businesses under the title of
 Imprenditori Associati, including the Benetton family and De Agostini
publishers, are also involved in the bidding.

 By early December 2002, the Italian Economy Ministry confirmed that it
had admitted all eight interested groups to the second
 phase of the sale process. These groups have now been given detailed
accounts of ETI's activities and are preparing their tenders.
 Reports in the Italian press have suggested that BAT and Swedish Match
will prepare a joint bid, although neither company is
 willing to confirm or deny this at present.

 Whichever bid the Italian government accepts, it is likely to raise the
E 1.5 billion it expects. For this, the 'winners' will get open
 access to Italy's E 13 billion tobacco market.

 Peter McGrath

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