The owner of the Camel and Silk Cut brands is paying $1.5 billion for the second-largest cigarette company in Bangladesh. That a hefty eight times revenue, suggesting Japan Tobacco thinks it can lure new smokers to take up the cancer-causing habit.

July 17, 2015 file photo, Camel cigarettes, a Reynolds American brand, are on display at a Smoker Friendly shop in Pittsburgh.
July 17, 2015 file photo, Camel cigarettes, a Reynolds American brand, are on display at a Smoker Friendly shop in Pittsburgh. (AP Archive)

Japan Tobacco is coughing up for more frontier smokers. The owner of Camel and Silk Cut is paying a $1.5 billion – a hefty eight times revenue – for Bangladesh's second-largest cigarette company. 

Its latest emerging market splurge adds sales, but risks distracting the $50-billion giant from new-generation alternatives to rolled tobacco, where rivals like Philip Morris are forging ahead.

The Japanese heavyweight previously had only a sliver of the world's eighth-largest cigarette market. On Monday it said it would buy the tobacco business of the Akij group, giving it a 20-percent share in one of the world's most populous countries.

Offsetting developed market decline

The deal is part of Japan Tobacco’s effort to offset the decline of cigarette sales in developed markets with bets on places where people are still lighting up. 

It lifts the company’s spending over the past year to almost $5 billion, following previous purchases in Indonesia, the Philippines and Russia. Masamichi Terabatake a deal-making veteran of the international business who took the helm in January has said he sees plenty of “white space,” hinting at more.

The headline price looks high for a business with expected sales of $186 million this year in a market where volumes are growing by two percent. JapanTobacco estimates Akij has a 30-percent operating margin, and the Japanese giant can no doubt improve on that by pushing more of its own brands through expanded distribution networks and by reviving the Bangladeshi company’s Navy and Sheikh brands. It has power to push up prices as well, as the economy grows.

The worry, however, is that the flurry of medium-sized deals distracts Japan Tobacco from its other problem: competing more effectively in the evolving market for cigarette substitutes. 

This is especially true of Japan, where products that heat tobacco, rather than burning it, are popular. The company’s Ploom TECH device, a key to preserving overall market share, has yet to scale up. 

It has also been forced to cut prices, following Philip Morris' decision earlier this year to slash the cost of its more popular iQOS, devices that heat tobacco up, rather than setting it alight. That challenge is as important as finding new addicts in emerging markets to the cancer-causing habit.

Source: Reuters