WHY is Philip Morris International Buying Swedish Match South Africa? The Story Behind the Press Releases…

WHY the Swedish Match South Africa sale to Philip Morris International is a win for SMAB, PMI, and their Joint Venture Partnership on Swedish Snus.

On the morning of July 2nd 2009 (GMT 1), both Swedish Match AB (SMAB) and Philip Morris International (PMI) had issued press releases confirming that SMAB had agreed to sell their South African operations in the form of  Swedish Match South Africa (Proprietary) Limited (SMSA) to Philip Morris International [NYSE/Euronext Paris: PMI] for a purchase price amounting to 1.75 billion ZAR (the South African Rand.)

According to Forex Rates on July 3, 2009 11pm GMT, this would translate into $226,390,500 USD, slightly more than “roughly $222MM most often quoted in the press.  Regardless; in either Rand, Dollar, or Krona, not a small chunk of change.

In browsing follow up articles to the Press Release on both the wire services and in other media, I was disappointed to find they provided little more than rehashes of the SMAB and PMI press releases.

The all-important WHY would SMAB sell SMSA, WHY would PMI be interested in buying SMSA, and most importantly to me, HOW does this affect Swedish Snus…..they were never addressed or even speculated on in the canned wire reports.  More lazy journalism.

Fortunately for all of us, the SnusCENTRAL Intelligence Agency (SnusCIA) does have feet on the ground in South Africa, Stockholm and Switzerland.

So in yet another of my exclusive and insightful articles (for which I have yet to win a Pulitzer for some unknown reason…probably political), I can provide you with not only the WHAT, but the WHY, and HOW the sale of SMSA affects PMI, Swedish Match Snus and the SMAB/PMI Joint Venture targeting Snus and Smokeless Tobacco..

First, the WHEN:

The transaction is subject to approval by the South African Competition Authority and is expected to be completed during the second half of 2009; most likely, 4th Quarter.

WHAT (officially) does SMSA represent from a value standpoint:

SMSA is the South African leader in OTP (other tobacco products), with a No. 1 position in the pipe tobacco category and the No. 2 position in the nasal snuff category.  It owns the well-recognized Boxer, Best Blend, and Taxi brands.

SMSA is the market leader in the South African pipe tobacco and snuff categories, which represent an estimated 31% of total tobacco consumption. In 2008, SMSA reported net revenues of  687 million ZAR or 88,874,442 USD.

WHY (officially) would Swedish Match AB want to sell it’s South African operations in the form of SMSA to PMI, anyway?

From Lars Dahlgren, President and CEO of Swedish Match AB (who I had the misfortune of not having had the opportunity to meet on my recent trip to Sweden.  Someone must have forgotten to tell him I was visiting.  Or he could have been out of the country, I suppose.)

“This agreement with Philip Morris International is in line with Swedish Match’s strategy to focus on smokefree tobacco, cigars and lights products. SMSA will continue to be a strong player in South Africa and we believe that PMI will benefit significantly from its deeply-entrenched and highly-recognized brands and its dedicated people”

It was also stressed that SMSA will continue to distribute lighters, matches and cigars for Swedish Match after the sale is complete.

WHY (officially) would PMI be interested in acquiring SMSA in the first place?

“This financially attractive acquisition represents an excellent strategic fit for our business in South Africa,” said Jean-Claude Kunz, President of PMI’s Eastern Europe, Middle East & Africa Region. “We firmly believe that merging the two businesses will provide us with the talent, infrastructure and expertise to further build and grow our portfolio of strong brands in this important market.”

There is also one of the official reasons why PMI and SMAB entered into their February Joint Venture Agreement:

Philip Morris International, the world’s largest non-governmental cigarette seller, hopes to boost sales of smokeless-tobacco products to offset decreased demand for cigarettes because of concerns about health, smoking bans and price increases.

The above may be true, but it isn’t really relevant to why PMI purchased SMSA.

WHY (REALLY) would PMI be interested in acquiring SMSA?

In a word:  cigarettes.  South Africa is one of the world’s toughest (and very lucrative) cigarette markets to break into.  British American Tobacco PLC (BAT) has a 95% market share, mostly with just one brand of cigarettes;  Peter Stuyvesant.

There is also a snus by the same name sold in South Africa and made by Fiedler & Lundgren AB.  It’s no coincidence that BAT purchased Fiedler & Lundgren in July of 2008 from Skandinavisk Tobakskompagni A/S (ST).

The reality is, one of the driving reasons PMI acquired SMSA was because PMI wanted to branch out into cigarettes in South Africa.

In a reverse of what BAT did,  PMI is using the Boxer and/or Taxi brand to gain converts for its new Cigarettes.  According to SnusCIA sources, PMI South Africa has already begun the initial market test phases and is very pleased with the results.

“Official” reasons aside, WHY is Swedish Match Selling Swedish Match South Africa Ltd to PMI?

Read between the lines of of Mr. Dahlgren’s statement ““This agreement with Philip Morris International is in line with Swedish Match’s strategy to focus on smokefree tobacco, cigars and lights products.”

Notice that pipe tobacco is not mentioned in the new corporate strategy.  Snus and smokefree tobacco make up almost half of SMAB’s total revenue.

Cigars are also a huge piece of SMAB’s total portfolio.  Sales continue to grow in the United States, a market of great interest to Swedish Match on a number of fronts.   Swedish Match is not only the largest cigar distributor around, but also owns among others, the hugely popular Cohiba premium cigar brand name.

WHAT do Cigars have to do with Swedish Snus and Swedish Match Snus?

Everything.

Keep in mind the big picture vision of both SMAB and PMI.  Their Joint Venture represents to Swedish Match new non-Swedish, non-American markets and the clout, distribution network and brands of Philip Morris International.

Under the Joint Venture, SMAB will take over production and distribution of Philip Morris 1847 Snus.  I can already hear you muttering, “wow, big win for SMAB.  Is 1847’s market share even visible?”  Critically, it is to me personally because I like Philip Morris 1847 White Portion Snus a lot.

For the rest of you, THINK BIGGER.  Altria/Philip Morris USA owns the Marlboro brand name in the United States.  PMI owns it pretty much everywhere else that matters.  PMI already produces non-US versions of Marlboro cigarettes.  Who do you think will produce non-US Marlboro Snus when the time is right?  Swedish Match.

Additionally, PMI’s world-wide distribution market will directly and positively affect SMAB’s smokefree portfolio regarding expansion into new markets.

That covers a piece of Swedish Match’s new strategy and direction for outside the United States.

Back in the USSA……

The American smokeless tobacco and Swedish snus potential market is another focus point for SMAB.  Based on current and future expectations and extrapolations, here is why cigars and snus go together.

Cigars are exempt from both the Family Smoking Prevention and Tobacco Control Law (commonly known as Kennedy/Waxman) and equally if not more importantly, from  H.R 1676 which has already passed the House of Representative and S. 1147 which as of this date is still in Committee.

H.R. 1676 and S. 1147 combined are the infamous PACT Act: ‘Prevent All Cigarette Trafficing Act of 2009″.    PACT, allegedly based on Homeland Security and ‘tobacco smuggling’ by Terrorists Groups (meaning Hezbollah, Al Qaeda, and American citizens who buy tobacco over the internet) in order raise funds, affects all tobacco products purchased over the Internet or by phone….except cigars.

Everyone knows the true purpose of PACT is to ensure collection of Federal and State Sales Taxes on all mail-order and Internet tobacco purchases (except cigars)….to start with.

Soon after PACT becomes law, it will be expanded to include ALL Internet and mail-order purchases; tobacco or otherwise.

• Add into the mix President Obama’s tentative weakening of the antiquated Cuban Embargo and Congressman Charlie Rangel’s (D-NY) very recent statement that he sees the entire US/ Cuban Embargo being lifted by the end of 2009.

• Add to that SnusCIA sources in Cuba confirming that Habanos,  the Cuban Cigar Monopoly, has warehouses filled with cigars labeled for US sale which it rotates for freshness on a regular basis to ensure they will be ready to attack the American market when the Embargo is lifted.

• Habanos owns 50% of Imperial Tobacco.

• Cigar and tobacco distribution sources in Canada privately state that once the US lifts the trade embargo against Cuba, they will be effectively out of business.  The overwhelming number of Cuban cigars sold by Imperial Tobacco in Canada are for US cigar consumers.  Good thing cigars are exempt from PACT.

• Mix in the fact the cigars are not covered by either Kennedy/Waxman or PACT and why:  Washington and the rich and powerful love Cuban cigars; whether they are labeled or arrive in plain unmarked boxes and always have.  The day before President Kennedy imposed the Cuban Embargo, he dispatched Press Secretary Pierre Salinger to buy 1,000 Cuban-made Petit Upmanns, according to an account Salinger himself wrote in 2002.

If you were Swedish Match, would you be more interested in pipe tobacco and nasal snuff in South Africa…. or Cuban tobacco Cohiba Cigars in the United States….and maybe even a Cohiba line of Snus?  (Swedish Match also owns the Punch and Macanudo cigar brands, but Cohibas were my favorite, so I’m using them as an example).

So here is the Bottom Line for Swedish Match: SMSA is a profitable business entity which doesn’t fit particularly well with the current SMAB Corporate strategy and vision.  SMSA does, however, fit quite nicely with PMI’s plans for that region.

By selling SMSA to PMI now while it is strong means a win for both parties.  SMAB receives a very nice return on investment and new funds to pursue its new direction without taking on new debt or draining cash reserves.

PMI receives the infrastructure, brand names, market share and distribution to advance it’s strategy of chopping into BAT’s 95% share of the South African cigarette market.  It is a win/win for both partners as it should be.

Back in the USA, the Cohiba brand and the sooner-than-later revocation of the Cuban Tobacco Embargo will give Swedish Match the opportunity to deploy a “trickle down” snus invasion.

Cuban cigars and tobacco products finally being available for legal purchase in the United States does not mean the price of Cuban tobacco products is going to drop.  Cigars and other tobacco products made with or containing Cuban tobacco are still going to primarily used by wealthier tobacco consumers.

Since Swedish Match owns, makes, and distributes the premium Cohiba brand, they have the distribution network already in place to joint-market Cuban tobacco Cohiba cigars and Cohiba snus.  The two products fit like a glove.

Cohiba cigar smokers would at least try Cohiba Snus for those times they can’t smoke cigars and/or out of curiosity.  Cohiba Snus would have built-in credibility among premium cigar smokers by virtue of its name and the tobacco stores which sell it.  No “cowboy spitting tobacco juice onto his dog’s head” stigma to overcome here.

If I know Conny Andersson of Swedish Match, the Cuban tobacco flavored Cohiba Snus product would have the same unique taste characteristics as Cuban tobacco Cohiba Cigars.  Many of these high-end tobacco consumers will begin using both Cohiba Cigars and Cohiba Snus….politicians in Washington among them.

Since America is now a near-total celebrity-driven culture, what would the affect be on the 46 million American smokers if Top Celebrities and the Movers and Shakers started using Cohiba Snus?

Cohiba Snus would have limited availability at first and would obviously not be priced as an every day snus for the average American.  That would add to the glamour, prestige and mystique.

But General, Etten, Grovsnus, and the rest of the core Swedish Match Swedish Snus brands? As these brands are made by the manufacturer of now-theoretical Cohiba Snus, they would carry a lot more social status for new snus users than “domestic” American snus brands.

Since Cohiba Snus and all the other Swedish Match Snus products taste the way REAL snus is supposed to taste….taste-bud redemption for American smokefree tobacco consumers at all economic levels!

The clock gets turned back to 2006/2007 when Camel SNUS and Marlboro Snus users hadn’t had enough time to destroy their taste-buds and easily upgraded to and appreciated the taste and other virtues of Swedish Snus.

Cohiba Snus and Swedish Match Snus in general will set the new (and original) taste standard, overturning Susan Ivey’s evil plot to pervert snus into a candy flavored low quality abomination aimed at exploiting the nicotine-addicted.  In fairness, pretty much everyone else making snus in the United States is following her lead so she was the catalyst; not the end result. (yes, I have a professional crush on Susan Ivey.  Shoot me.)

Phase Two of the “trickle down” marketing plan would involve expanding the Swedish Match brands available for over-the-counter purchase in their existing US Tobacco Store network.  Those who can’t afford Cuban tobacco Cohiba Cigars or Snus but have a discerning cigar palette will have General Onyx, Ettan, Grovsnus and the rest to maintain their taste-bud integrity.

As the Cohiba “trickle down” marketing plan advances, the “bottom up” strategy kicks in.

Swedish Match North America has a massive convenience store/grocery store/mass market distribution network primarily focused on American smokeless tobacco products like Red Man and their other chew/dip brands already in place.  It is primed, waiting, and available to make other Swedish Match Snus brands; probably starting with General, then Catch, then Probe available and visible to the general smoking public.  The Goteborg’s brand would  ultimately be a shared one between both networks, I think.

Here’s the Multi-Billion Dollar Question: what would the visibility and exposure all the above would give to Swedish Match’s entire smokefree vertical AND not only getting the word out to American Smokers about Swedish Snus, but the prestige of Swedish Snus, be worth be worth to Swedish Match?

Priceless.

Events will dictate timing, but the opportunity for Swedish Match is just staggering.  Reynolds is floundering; giving away much more Camel SNUS than they are selling.  Marlboro Snus?  See my forthcoming story on it.  Grand Prix Snus is a disaster and unless Liggett Vector takes my advice, is doomed to failure.  Truimph Snus? Lorillard should have named it “Newport Snus“:  then maybe they would show some interest it it.

But for Swedish Match and Swedish Snus?  They have the potential to conquer the United States.  American Big Tobacco?  They won’t even have seen it coming.

LARRY WATERS
Swedish Snus Ambassador to the United States
Reporting for SnusCENTRAL.org