[Intl-tobacco] Philip Morris Trying to Buy Competitor in Indonesia

[robert weissman]

The New York Times
March 15, 2005
Philip Morris Trying to Buy Competitor in Indonesia
By DONALD GREENLEES

International Herald Tribune

HONG KONG, March 14 - Signaling the growing enthusiasm of big tobacco
companies for the lucrative Asian cigarette market, Philip Morris
International said Monday that it would offer $5.2 billion to buy H.M.
Sampoerna, Indonesia's third-largest cigarette maker.

In an agreement with the family-run Sampoerna, Philip Morris said it
would pay 18.6 trillion rupiah, or $2 billion, to buy a 40 percent stake
of the company from the family. It would make a public tender for the
remaining 60 percent, offering a 20 percent premium over last Thursday's
closing price.

Putera Sampoerna, head of the company and grandson of its founder,
recommended acceptance of the offer.

The move to take over Sampoerna, which makes Indonesia's pungent
tobacco-and-clove kretek cigarettes, underscores the importance of Asia
to the future of global tobacco companies.

As cigarette sales stagnate or decline in North America and Western
Europe, Asians are smoking more than ever.

Of the world's 1.2 billion smokers, half are in Asia. China, India and
Indonesia are seen as especially attractive markets because of large
populations and growing affluence. The World Health Organization has
projected that cigarette smoking will increase 6.5 percent in East Asia
in the 10 years to 2008, as it declines 8 percent in Western Europe and
stagnates in the Americas.

In Indonesia, more than 6 out of 10 Indonesians smoke, and nearly all of
them smoke kreteks, named for the crackling sound they make as they
burn. Sampoerna's best-selling brand is also the country's most
expensive smoke, Dji Sam Soe. Among the sprawling archipelago's rural
villagers and urban working class, unfiltered Dji Sam Soes are
considered a special treat, and are smoked more like fine Cuban cigars
than cigarettes.

The government imposes an excise tax on cigarettes, raising 10 percent
of its revenue from them, which has made it dependent in its own way on
the continued habit of smoking. Sampoerna, based in Surabaya in East
Java, said it sold 41.4 billion cigarettes last year, 13 percent more
than in 2003, taking in 16.8 trillion rupiah ($1.8 billion) in revenue.

As incomes rise, cigarette makers hope that Indonesians will smoke more.
Among Indonesia's masses, the ability to buy a pack of kreteks is as
identified with affluence as buying a motorcycle.

Philip Morris's acquisition of Sampoerna would substantially expand its
share of the Indonesian cigarette market, the world's fifth largest.
Based in New York, Philip Morris is a unit of the world's biggest
cigarette maker, the Altria Group, and already has the biggest share of
the non-kretek market in Indonesia through its Marlboro brand.

But kretek sales, dominated by the three big local companies - Gudang
Garam and Djarum, the top two, and Sampoerna - make up 92 percent of the
Indonesian cigarette market.

"Given this is a kretek market, in order to succeed, we have to be in
that market," said David Davies, a Philip Morris International senior
vice president. Sampoerna's "terrific brands give us an opportunity to
grow."

Sampoerna has a 19.4 percent share of the 200 billion cigarettes sold
each year in Indonesia, making it the country's third-largest cigarette
company in terms of sales. The purchase of Sampoerna would make the
combined company the No. 2 cigarette maker in Indonesia, Mr. Davies said.

While analysts say there is huge potential for further growth in
Indonesia, Philip Morris is paying a premium to enter the kretek market.
The company said it was offering 20 percent more than the March 10
closing share price of 8,850 rupiah for 60 percent of Sampoerna.

Timothy Ghriskey, chief financial officer at Solaris Asset Management in
New York, told Bloomberg News that a "20 percent premium is not
excessive" given the high-growth potential of Indonesia.

Cigarette sales in Indonesia are forecast to grow more than 10 percent
in the decade to 2008, according to the World Health Organization.
Kreteks are as addictive as any cigarette, if not more so: each Dji Sam
Soe, for example, contains twice the nicotine and triple the tar of a
conventional cigarette.

At least 57,000 Indonesians die each year because of smoking-related
illnesses, according to Ministry of Health figures.

Authorities on cigarette consumption in Asia say global cigarette
companies are increasing their drive into the region as more countries
in the West tighten laws on smoking in public places and on marketing.

"They have their eyes on the big markets, and that has to be Asia," said
Dr. Judith Mackay, executive director of the Asian Consultancy on
Tobacco Control, an antismoking group in Hong Kong.

Victory in a Lawsuit

By Bloomberg News

Philip Morris USA, a unit of the Altria Group, said yesterday that it
had won a $173 million trademark infringement judgment against Otamedia,
an Internet cigarette retailer based in Switzerland.

Philip Morris sued in federal court in New York in 2002, accusing
Otamedia of infringing on its trademarks by selling illegally imported
Philip Morris cigarettes through the Internet.

"We are pleased with the court's decision," said Virginia Murphy, senior
vice president of compliance and brand integrity at Philip Morris. "We
believe it sends a clear message that the law imposes significant
penalties on those who infringe our intellectual property rights through
unlawful Internet cigarette sales."

Philip Morris said its ability to collect the money from Otamedia was
uncertain. Otamedia's lawyer, Joseph F. Nicholson, did not respond to a
message seeking comment.

Wayne Arnold contributed reporting from Singapore for this article.