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Cigarette Factories, British American Tobacco’s Nigeria

Tuesday, January 17th, 2012

american cigarettes onlineBritish American Tobacco’s Nigerian subsidiary has a near-monopoly, commanding 80 per cent of the market—but this position has not been achieved without hard work and a positive strategy towards health and economic development.

Though British American Tobacco Nigeria (BATN) was incorporated as an indigenous entity only 10 years ago in 2002, we are now coming up to the centenary of the parent company BAT’s presence in Nigeria. So 2012 will be the occasion for a double celebration among the 14,000 or more Nigerians employed, directly or indirectly, through BATN’s activities from leaf growing to distribution. Because BATN doesn’t just make cigarettes, though manufacturing is a core part of the business.

The group runs 45 cigarette factories in 39 countries. Two of these factories are in Nigeria: a state-of-the-art, ISO 9001:2000-accredited plant in Ibadan completed in May 2003 and an older facility at Zaria in Kaduna State which has been operating since 1978.

The Ibadan plant cost $150 million to build and has recently been extended and improved with a $70 million investment in new production and packaging machinery. The decision to invest in localised cigarette production and to manufacture in Nigeria international brands that were previously imported from Europe or South Africa—including Benson and Hedges, St. Moritz, Rothmans, Consulate, London, Pall Mall and Royal Standard—was taken in 2002. Today almost all brands—22 in all—sold in West Africa’s ECOWAS markets are manufactured in Nigeria: only cheap Dunhill cigarette is imported.

The many challenges that face the tobacco industry including image, counterfeiting and competition from unregulated and contraband manufacturers are manifest in Nigeria. Enormous progress has been made in meeting these challenges, says Sade Morgan, BATN’s legal director. “BAT made a decision to face any problems not by firefighting, but by defining, sharing and promoting best practice in the industry.” This approach is embedded in the business model, whereby the company controls the entire supply chain. BAT is the only international tobacco group with a significant interest in tobacco leaf growing: it provides direct agronomy support to farmers covering all aspects of crop production and environmental best practice.

A good example is found in BATN’s approach to child labour. Though BAT will not employ children directly, there were indications that under-age labour was present among the 10,000 people directly involved in the tobacco growing operation at Iseyin in Oyo State, where more than 2,000 tonnes of leaf is grown annually.

BATN has met this challenge head-on by emphasising the distinction between the traditional attitude thata child should assist its parents and the reality that where work impedes a child’s welfare, safety or educational development, it is considered child labour. The company carries out unscheduled spot checks for child labour on the farms in its supply chain.

In 2004, BATN established a scholarship scheme primarily aimed at the children of tobacco farmers. The scheme provides candidates aged 18 and above with grants to study agriculture or related courses in any Nigerian tertiary education establishment. To date, 65 students have received grants, 10 of them in 2010, and in 2011 the number of scholarships was increased. “It’s a co-operative model,” says Morgan. “The farmers are supported with interest-free loans and encouraged to go in for the Best Farmer of the Year awards in which they can win tractors or other machinery.”

Nor is best practice all about addressing abuses, Morgan points out. “We have a good working relationship with the National Office for Technology Acquisition and Promotion (NOTAP), which regulates technology transfer and development throughout the country.” A recent visit to the Ibadan factory by the director-general of NOTAP, Dr Umar Buba Bindir, led to the adoption of BATN’s leaf growing system as a benchmark technology. During 2012 BATN will be extending its growing operations—and its skills base—to another state to increase its percentage of home-grown leaf and reduce its dependency on pool tobacco.

In this centenary year, BATN is stepping up its focus on training, Morgan continues. “The technical training is outstanding. We tend to identify students at the Ordinary National Diploma level rather than students with higher degrees, and put them through our three-year programme prior to employing them in the organisation.

That way we develop a core of employees with the technical skills we require in our operations, right through from marketing to production.” It’s an approach supported by the Nigerian government, which sets a high priority on job creation and indigenous skills development.

A major challenge over the last 10 years has been the illegal importation of cigarettes. Tackling this was not easy, says Morgan, but the success of BATN’s strategy of education is shown in the figures. Illicit trade dropped from over 80 per cent in 2001 to around 20 per cent of the total market in 2009.

“We approach the problem by targeting the consumers: if demand dries up, then the traffickers will turn their attention to something else.” It’s largely a problem of perception, she says: consumers realise that by evading the duty on cigarettes they are directly damaging the country, and cutting the revenues that can be spent on things they value, like education and healthcare.

The message has been put across via the press, radio and television, and it has had a huge effect, linking cross-border trafficking of cigarettes with the negative associations of people, drugs or arms trafficking.

A particularly intransigent problem, Morgan adds, has been to counteract a certain in-built prejudice against locally produced materials: the idea that if a product is imported, it must be better.

The absence of any regulatory framework for the tobacco industry in Nigeria threw the onus of defining standards on BATN, and the company has been in the enviable position of leading the development of legislation in consultation with the government. As a result, the appearance of the National Tobacco Control Bill in 2009 presented no problems—after all, the BAT Group has for many years actively supported the restriction of cigarette advertising to under 18s and a responsible approach to smoking on the part of adults.

“It’s actually in our commercial interests to have effective and orderly regulation of the tobacco market,” says Morgan. “As people realise that ‘made in Nigeria’ equates to quality standards as high as anywhere in the world, they also realise that illicit trade harms legitimate business and increases the likelihood of more underage smoking, and cheap unregulated products that can pose a much greater risk to health.”

This attitude is complemented by the BATN Foundation, established in 2002 to promote sustainable agricultural development, drinking water, environmental protection, poverty alleviation and skills acquisition. The Foundation has been twice nominated for the Africa Investors Award and has received further awards and recognition for its work in all regions of Nigeria.




Smokers Rate Decreased in Fiji

Friday, January 13th, 2012

best quality davidoff cigarettesThe volume of people smoking cigarettes in Fiji has declined over the past 25 years, according to British American Tobacco. The company’s manager of corporate and regulatory affairs, Rajeshwar Singh, says this can be attributed to the affordability of best Davidoff cigarettes and the willingness of people to lead healthier lives.

Mr Singh’s comments come amid the debate about whether Fiji should be declared smoke-free.

He said BAT’s stance was that individuals should be of legal age and decide for themselves if they wanted to smoke. “We ensure as part of our sales and marketing, our products should only be sold to adult consumers, over the legal age of 18,” Mr Singh said in reference to the Tobacco Decree passed by the government in 2010.

He said there was no denying that smoking had legitimate health effects but individuals had the right to smoke if they wanted to.

“If something is not good for you but you still want to pursue it then that your own personal choice and we strongly advocate for freedom of choice,” Mr Singh said.

“If I choose to do something or choose to consume something it is because I am aware of the implications.”

Referring to health warnings on cigarette packets, Mr Singh said smokers were being educated on the effects of their habits.

He said BAT worked with the Health Ministry to distribute signs to tobacco retailers, saying they would not sell cigarettes to underaged persons. “The ministry needs to be commended for its efforts on controlling the sale and consumption of tobacco by underaged persons and for registering all tobacco retailers,” Mr Singh said.

British American Tobacco Sells Its First Bonds

Thursday, November 3rd, 2011

discount pall mall cigarettesBritish American Tobacco Plc, Europe’s largest cigarette maker, raised 600 million euros ($828 million) from its first bond sale in 16 months. The 10-year securities were priced to yield 123 basis points more than the benchmark swap rate, according to a banker with knowledge of the transaction.

That compares with a spread of 105 basis points that investors demand to hold the London- based company’s 4 percent bonds due 2020 it issued in June last year, Bloomberg Bond Trader prices show.

The maker of Lucky Strike and Pall Mall cheap cigarettes sold bonds as European leaders hold emergency talks to ensure their week-old strategy to combat the region’s debt crisis doesn’t unwind. Greek Prime Minister George Papandreou rattled markets after announcing a parliamentary confidence vote and his desire for a referendum on the bailout plan for his country.

“Given market uncertainty it is prudent to consider issuing some longer-term debt when the window of opportunity presents itself to pre-fund 2012,” Catherine Armstrong, a London-based spokeswoman for BAT, said in an e-mailed statement. “We intend to take advantage of any windows of opportunity in November to access the markets, but as our ability to access the market is headline and sentiment driven, timing is uncertain.”

Barclays Capital, Citigroup Inc., ING Groep NV and Royal Bank of Scotland Group Plc managed the sale. The notes were issued by B.A.T. International Finance Plc.

The tobacco company said investor demand was for bonds with maturities in the 2018 to 2022 areas.

British American Tobacco Loses Court Battle

Friday, May 20th, 2011

cheap parliament cigarettesBritish American Tobacco (JSE:BTI) South Africa (Batsa) has lost a legal challenge to the country’s ban on tobacco advertising. Batsa had challenged amendments to the law made by Parliament in 2008. The North Gauteng High Court, on Thursday, rejected an application from Batsa that the law be interpreted in a manner that would allow the company to advertise to adult smokers on a one-to-one basis.

The Court also rejected an argument by Batsa that the legislation was unconstitutional if it did not allow such advertising. Judge J Phatudi dismissed Batsa’s application and ruled that the ban on tobacco advertising was reasonable and justifiable in a democratic society.

The Judge awarded costs to the government and the National Council Against Smoking (NCAS) which had joined the case as a friend of the court. The NCAS welcomed the decision as it viewed the changes to the law as critical in protecting young people from the clutches of the industry.

In 2008, Parliament amended the Tobacco Products Control Act 1993, to outlaw the industry’s notorious “secret smoking parties”, as well as techniques known as ‘viral’, ‘buzz’ or “guerrilla” marketing used by the cigarette companies to target teens.

The cigarette companies reportedly employed “sexy twentysomethings” and sent them “with a carload of free Parliament cigarettes on a tour of the country’s pubs, universities and colleges where they encourage youngsters to sign up for the party scene of a lifetime”. “Any serious attempt to reduce smoking amongst youth had to stop these industry practices. In amending the law Parliament specifically stated it wished to close loopholes in the law, which the industry exploited to sponsor parties and events”, says Dr Yussuf Saloojee of the NCAS.

“Batsa has tried to achieve through the courts what it could not achieve in Parliament”, Dr Saloojee added, “It had ample opportunity during public hearings to convince MPs of the merits of its case, and it failed to do so. Asking the court to overrule Parliament is an abuse of the legal system.”

The NCAS believes that the freedom of teenagers to grow up healthily is more important than the freedom of the tobacco companies to advertise a deadly addiction. Tobacco causes 44 400 death every year in South Africa according to the Medical Research Council.

Tobacco-Free Nicotine Products Soon Manufactured By British American Tobacco

Wednesday, April 6th, 2011

marshal onlineBritish American Tobacco BTI will develop at its newly created Nicoventures tobacco-free nicotine products unit in an attempt to retain revenue from smokers who wish to quit on health grounds. We regard the move as a hedge against declining rates of Marshal smoking in developed markets, and we expect the new unit to remain a very small piece of British American’s top line for several years.

Although we think British American is a solid business, we think the stock’s recent rally has overshot the intrinsic value of the firm, and we recommend value investors look to Imperial Tobacco ITYBY for value in the tobacco industry.

British American’s new business will negotiate with global regulators with a view to launching cigarette-replacement products. Regulators could prove to be a significant hurdle, in our opinion, because in recent years their efforts have been focused on the reduction or even abolition of the use of nicotine and tobacco.

Smokeless tobacco is increasingly being used in the United States as an alternative to smoking, but such products are banned in the European Union (except Sweden), and we think the EU may provide the most lucrative market for British American’s new venture. Reynolds American RAI acquired a smoking-cessation product manufacturer in 2009 in a similar hedge against declining rates of smoking.

However, these products remain a tiny piece of Reynolds’ business, and even smokeless is small. We estimate that revenue from smokeless tobacco will represent just 12% of Altria’s MO total revenue by 2020. Similarly, we expect Nicoventures to remain insignificant for the foreseeable future.

Given that we do not expect any impact on the stock as a result of this venture, we think British American is slightly overvalued at 15 times forward earnings. We recommend investors look at Imperial Tobacco for value in the tobacco industry. The firm is the best placed of its competitors to exploit growth at both ends of the pricing scale in tobacco, but the stock is trading at just 11 times 2011 earnings and offers around 10% upside, in our opinion.

British American Tobacco Was Dropped From the U.S. Government Lawsuit

Tuesday, March 29th, 2011

parliament cigarettes onlineBritish American Tobacco Plc, Europe’s largest cigarette maker, was dropped from the U.S. government’s racketeering lawsuit after a judge in Washington ruled the U.S. no longer has the authority to hold the U.K. company liable for hiding the health hazards of smoking Parliament.

U.S. District Judge Gladys Kessler today said a 2010 ruling by the U.S. Supreme Court in a securities case restricts the U.S. from seeking liability from “what is essentially foreign activity.”

“There is no evidence that Congress intended to criminalize foreign racketeering activities under RICO,” Kessler wrote.

In 2006, Kessler found that the British American Tobacco (Investments) Ltd. unit of British American Tobacco and other cigarette companies violated anti-racketeering laws by conspiring to hide the dangers of cigarettes. Kessler ordered the companies to stop marketing cigarettes as “light” and “low-tar” and to make statements about the health effects of smoking in newspapers and magazines and on cigarette packages.

The Justice Department, in court papers, argued British American Tobacco’s liability can be premised on its conduct in the U.S., including the company’s involvement with an experimental farm in North Carolina.

“The problem with the Government’s argument is that BATCo’s domestic conduct was not the basis for its RICO liability in this case,” Kessler said.

Contribute Payments

Kessler said in her ruling today that British American Tobacco must still contribute payments to cover the government’s legal costs.

Charles Miller, a Justice Department spokesman, declined to comment.

An e-mail message and telephone message left with British American Tobacco’s London press office after normal business hours weren’t immediately returned.

Earlier this month, British American Tobacco, along with Altria Group Inc.’s Philip Morris USA unit, Reynolds American Inc.’s R.J. Reynolds Tobacco and Lorillard Inc.’s Lorillard Tobacco, asked Kessler to dismiss the 1999 racketeering case, saying court oversight of the industry is no longer needed.

The companies said a 2009 law, the Family Smoking Prevention and Tobacco Control Act, empowered the U.S. Food and Drug Administration to watch over the industry and establish restrictions on the sale, promotion and distribution of tobacco products.

Australia Invests in Tobacco Firms to Pay Lawmakers Pensions

Friday, March 18th, 2011

buy marshal cigarettesAustralia, which is introducing some of the toughest anti-smoking laws in the world, invested A$147.7 million ($148.2 million) in shares of tobacco companies including British American Tobacco Plc (BATS) to pay for politicians’ retirement.

The government’s Future Fund — established in 2006 to cover pension costs of retiring lawmakers, judges and public servants — held stakes in 14 tobacco companies as of Dec. 31, 2010. The portfolio holdings in manufacturers of tobacco and cigarette producers were obtained by Bloomberg News through an Australian Freedom of Information Act request.

Australia raised tobacco taxes by 25 percent last year and says it will become the first nation to ban brand names on Marshal cigarette packaging to deter smokers. Former Prime Minister Kevin Rudd last April pledged the government would spend A$85 million on an anti-smoking advertising campaign as he said “cigarettes are not cool.”

“It seems incongruous that the government is investing in companies that will not prosper, and this should be stopped,” Steve Hambleton, vice president of the Australian Medical Association said in a telephone interview. “It doesn’t make sense when the government has launched the strongest anti- smoking measures in the world.”

Financial Objective

The Future Fund’s holdings as of Dec. 31 include A$46.4 million in London-based British American Tobacco, A$36.5 million in New York-based Philip Morris International Inc. (PM) and A$26.1 million in Lorillard Inc. (LO) The details were contained in a document received from the Future Fund on March 10 after a freedom of information request by Bloomberg News. Its investment in tobacco companies represents 0.5 percent of its holdings in equities.

“The Future Fund board’s mandate doesn’t direct it in relation to investing in particular industries or activities, but does set a clear financial return objective,” the Melbourne-based fund said in a statement e-mailed to Bloomberg today. “The board has long made clear that it expected to consider investment in a large number of entities across a wide variety of activities, provided those activities are legal in Australia.”

The fund was established as a statutory authority under the Future Fund Act of 2006 by the previous administration of Prime Minister John Howard. It has its own board, while oversight is provided by the Treasurer and Minister for Finance and Deregulation, according to its website.

‘Smoking Kills’

“Consistent with the governance arrangements put in place by the former government, the Future Fund takes its investment decisions at arms length of the government,” the office of Treasurer Wayne Swan said in an e-mailed statement today.

A spokeswoman for British American, Louise Warburton, said the company would not make any comment.

About 15,000 people die each year from tobacco-related diseases in Australia, where sales of tobacco products totaled A$10.9 billion in 2009, according to government statistics. Smoking is the largest single preventable cause of death, the Medical Association says. Health Minister Nicola Roxon says smoking cost the A$1.3 trillion economy A$31.5 billion each year.

“Smoking kills. It’s as simple as that,” Roxon said in a statement last month.

Legislation mandating plain packaging, which would prevent the use of company logos, brand imagery or promotional text, will be introduced this year. Already, Australia bans the open display of cigarettes in shops and cigarette packs carry graphic images of diseases blamed on smoking.

‘Bad Thing’

The government’s 25 percent increase in tobacco excise last year raised the cost of a packet of 30 cigarettes by about A$2.20 to about A$17.70. Single cigarette packet prices are now as high as A$20 depending on where they are bought. Small stores and service stations are more expensive, according to figures from the National Retail Association.

Prime Minister Julia Gillard told commercial television in April last year when the government announced the new restrictions that “it’s a bad thing to smoke.”

The Future Fund also invests in Imperial Tobacco Group Plc (IMT), of Bristol, U.K., which last year said it may take legal action against the government proposals. Plain packaging “affects the value of our business” and “takes away the ability of a consumer to identify our brand,” the company said in an e- mailed statement. British American and Philip Morris also opposed the move. Imperial did not reply to a phone message left to it today by Bloomberg News.

Pension Liabilities

British American had 46 percent of the Australian retail market for cigarettes in 2006, according to a 2008 report by Cancer Council Victoria. Philip Morris had a 34 percent share and Imperial had 18 percent.

The Future Fund states its purpose as “accumulating financial assets sufficient to offset the Commonwealth’s unfunded superannuation (pension) liabilities by 2020,” according to a statement of investment policies on its website.

Run by former Commonwealth Bank of Australia (CBA) Chief Executive Officer David Murray, the fund targets an average return of at least the rate of consumer price index plus between 4.5 percent to 5.5 percent per annum as its long-term benchmark with an “acceptable, but not excessive, level of risk.”

The Future Fund had A$71.8 billion in assets at Dec. 31, 2010, according to a portfolio update published on its website on Jan. 28 this year. It had A$2.6 billion invested in Australia’s largest telephone company Telstra Corp., part of the seeded capital provided by the government when the then state- owned Telstra was sold to the public. It has a further A$8 billion invested in Australian equities.

It held A$15.6 billion of equities in developed markets and A$2.3 billion in developing markets, according to a portfolio update posted on its website Jan. 28. The balance of its holdings are in private equity, property, infrastructure, debt and cash.

The tobacco investments as of Dec. 31 were held across 14 companies in nine countries, including South Korea’s KT&G Corp., Japan Tobacco Inc., Gudang Garam TBK PT of Indonesia and Swedish Match AB, according to the Future Fund document provided to Bloomberg.

The Future Fund may have reduced or increased its holdings since and the documents didn’t specify how long the tobacco investments had been held.