[Intl-tobacco] Altria May Merge Indonesian Units to Compete With Gudang Garam

[robert weissman]

[snip]

"Their brands are popular and while Philip Morris can use Sampoerna's
network to market its products, Sampoerna can use Philip Morris's
distribution network overseas."

[snip]

Altria May Merge Indonesian Units to Compete With Gudang Garam

May 19 (Bloomberg) -- Altria Group Inc., owner of the world's biggest
tobacco company, may combine its two units in Indonesia in a bid to
overtake PT Gudang Garam as the country's biggest cigarette maker.

Philip Morris International, a unit of New York-based Altria, yesterday
completed its $4.9 billion acquisition of PT H.M. Sampoerna, Indonesia's
third-biggest cigarette maker. Philip Morris expects to complete the
merger of PT Philip Morris Indonesia, which makes Marlboro cigarettes in
the country, and Sampoerna in two years, Sampoerna Chairman Matteo
Pellegrini said.

``Our first target will be to overtake Gudang Garam as the number one
cigarette company in Indonesia,'' Pellegrini said in an interview in
Jakarta yesterday. ``We will leverage the strength of the combination''
to achieve that goal.

The merger of the two companies would increase Sampoerna's market share
to about 25 percent in the world's fifth-biggest cigarette market,
making it the second-largest tobacco company in Indonesia. Cigarette
makers including Philip Morris and British American Tobacco Plc are
expanding in countries such as China and Indonesia as rising taxes and
health concerns cut the number of smokers in the U.S. and Western Europe.

Philip Morris's acquisition of Surabaya, East Java-based Sampoerna is
the biggest in Indonesia by an overseas investor.

The company spent $2 billion in March to buy a stake in the Indonesian
cigarette maker from Putera Sampoerna, a grandson of the company's
founder, and raised its stake to about 97 percent through a tender offer
that ended yesterday. The company yesterday named Martin King as
president director of Sampoerna.

Capacity

``They have the capacity and the money to overtake Gudang Garam,'' said
Michael Tjoajadi, who helps manage the equivalent of $1.2 billion in
Indonesian assets, including Gudang Garam and Sampoerna, at Schroders
Investment Management in Jakarta. ``Their brands are popular and while
Philip Morris can use Sampoerna's network to market its products,
Sampoerna can use Philip Morris's distribution network overseas.''

Gudang Garam's Signature Mild and Nusantara brands, introduced in 2003,
have failed to dent demand for Sampoerna's A Mild brand.

``The mild brands so far are not selling well,'' Gudang Garam's
Corporate Secretary Heru Budiman said in December. ``It takes a while to
build brand awareness, so we have no plans of introducing any new
product'' this year. Budiman couldn't be reached at his office for comment.

`Salt Warehouse'

Kediri, East Java-based Gudang Garam, which means ``salt warehouse'' in
the Indonesian language and was set up in 1958, controls a third of the
``kretek'' cigarette market.

``Kretek'' cigarettes, which dominate the market, contain a mixture of
tobacco and clove. Sampoerna, which was set up in 1913, is the nation's
oldest cigarette company. Unlisted PT Djarum is Indonesia's
second-largest cigarette maker.

Gudang Garam's shares rose 0.8 percent to 13,500 rupiah yesterday on the
Jakarta Stock Exchange, while Sampoerna's shares gained 1.6 percent to
9,550 rupiah.

Sampoerna's products sell for as little as 53 U.S. cents a pack. Clove
cigarettes account for about 90 percent of sticks sold each year in
Indonesia, according to industry association Gappri, which estimates 141
million of the country's 238 million people are smokers.

Philip Morris's international cigarette shipments climbed 3.5 percent in
2004, while shipments declined 0.1 percent in the U.S., where
consumption is declining and some smokers have switched to discount
brands. Americans smoked 400 billion cigarettes in 2003, down 4 percent,
according to the U.S. Department of Agriculture.

The acquisition of Sampoerna would add almost 1 percentage point to
Philip Morris's share of the global cigarette market, currently 14.5
percent, Altria Chief Executive Officer Louis Camilleri said in March.

Still, profit margins at Sampoerna and Philip Morris may shrink as
Indonesia's government prepares to raise excise taxes. The country's
Vice President Jusuf Kalla on April 29 said the government still has
room to raise retail cigarette prices to help fund its spending plans.
Indonesian cigarette prices are among the world's lowest, Kalla said.

To contact the reporters on this story:
Soraya Permatasari in Jakarta at  soraya@bloomberg.net;
Arijit Ghosh in Jakarta at  aghosh@bloomberg.net.

Last Updated: May 18, 2005 21:19 EDT