[Intl-tobacco] Japan's Government Sells 244 Bln Yen of Tobacco Stock

[robert.weissman@essentialinformation.org]

Japan's Government Sells 244 Bln Yen of Tobacco Stock
Bloomberg
June 7, 2004

Japan raised 244 billion yen ($2.2 billion) selling shares in Japan Tobacco
Inc., the most it sought, supported by overseas investors attracted by a
return to growth in the world's second-largest economy. The Ministry of
Finance sold 289,334 shares, or 14.5 percent of the maker of Mild Seven and
Winston brand cigarettes, for 843,000 yen a share, a 2.09 percent discount
to today's close. The ministry planned to offer a discount of as much as 4
percent in Japan's third-largest share sale this year.

Overseas investors bought a record 14 trillion yen of Japanese stocks in the
year to April 30 attracted by a growing economy and fueling a rally in the
Nikkei 225 Stock Average that allowed the government to revive the Japan
Tobacco sale after a two-year delay. Overseas investors bought a net 234
billion yen of stocks in the week to May 27, the latest figures available.

"The final size of the international tranche reflects continued interest in
Japanese equities among international investors,' said Alex Woodthorpe,
head of the equity capital markets in Japan at Merrill Lynch & Co., which
handled the sale. Daiwa SMBC Securities Co. also arranged the sale.
Overseas investors ordered as many as eight times the amount of stock
reserved for them, according to a government official involved in the sale.
Investors overseas got 12 percent more than originally planned, or 91,000
shares, of the total. Japanese investors, who subscribed to more than two
times the stock available to them, got 68.5 percent of the total.

Rising Economy

Japan's economy grew at a greater-than-expected 5.6 percent annual pace in
the first three months of the year as lower unemployment boosted consumer
spending, according to the Cabinet Office. The Japan Tobacco sale, the
second multibillion-dollar government offering since March, comes after the
Topix Index rose 50 percent from a two-decade low in April 2003 and turnover
on the Tokyo Stock Exchange more than doubled to $12 billion a day.

While investors who follow the Topix had to buy the stock, the Tokyo-based
company's sales prospects don't justify its price compared with R.J.
Reynolds Tobacco Holdings Inc. and other overseas rivals, said Meiji
Dresdner Asset Management Co.'s Hideaki Kurimoto. "It will take up a larger
portion in the Topix index so fund managers who keep track of Topix
weightings had to buy the shares,' said Kurimoto, who helps manage the
equivalent of $2.7 billion. Still, "its main source of revenue -- tobacco
sales in Japan -- is falling and its unclear if the company's overseas
tobacco business will succeed.'

Falling Shares

Shares of Japan Tobacco fell 1.9 percent today in Tokyo to 861,000 yen, or
22.08 times forecast earnings. R.J. Reynolds, the second-largest U.S.
cigarette maker, trades at an estimated price to earnings ratio of 10.96,
while British American Tobacco Inc. trades at 15.65. Daiwa and Merrill
split fees of 1.125 percent for handling the sale, the lowest for a Japanese
government offering.

Japan Tobacco, which last year failed to buy Turkey's cigarette monopoly
Sigara Sanayi Isletmeleri AS, is facing falling sales of cigarettes in Japan
as stricter anti-smoking laws and higher taxes are discouraging consumers
from smoking. Japan Tobacco in April reported sales rose 3 percent last
fiscal year to 4.62 trillion yen, driven by a 24 percent increase in revenue
from Russia and other countries outside Europe to 472.4 billion yen.

Closing Plants

The company announced plans to close a further six cigarette plants in Japan
in addition to eight closures announced last year. Japan Tobacco will cede
its right to make Marlboro, the world's best-selling cigarette, to Philip
Morris International Inc. in 2005, denting its core cigarette revenue.
Japan is selling stakes in some of its state-owned companies to increase
their managerial independence and cut national debt. Public debt will reach
719 trillion yen in March 2005, the equivalent of 144 percent of the
nation's gross domestic product, the finance ministry forecast in December.

The Japan Tobacco share sale was the first of three government sales
scheduled for this fiscal year. The government is planning to sell shares in
Electric Power Development Co., which sells electricity to Japan's major
utilities, and Japan National Oil Corp., which will be liquidated by March
2005, will sell part of its stake in Inpex Corp., which explores for oil
overseas. Shares of Japan Tobacco gained 4.4 percent in the past month,
while the broader Topix index rose 6 percent, signaling the offering won't
derail the government's sale plans, investors say.

"There hasn't been a negative reaction to the sale as the ministry was very
careful about the timing of the sale,' said Hiroyoshi Nakagawa, who helps
manage $3.5 billion yen of Japanese equities at SG Yamaichi Asset Management
Co. "I don't see any problems for the government to sell those shares if the
market maintains its daily trading volume.' Some 1.28 trillion yen of
shares changed hands on an average day on the Tokyo Stock Exchange in the
past six month, more than double the year earlier period.