M&As among smaller tobacco companies seen

MANILA, Philippines - Grappling with slower growth and higher taxes, the local tobacco industry may soon become a fertile area for M&A (mergers and acquisitions) activity.

Industry observers said tobacco takeovers may be about to catch fire again as small players with meager market share struggle to grow amid intensifying competition in the multi-billion peso sector.

The industry is abuzz with speculation that Bulacan-based cigarette manufacturer Mighty Corp. might partner with a global tobacco player which is striving for a firm foothold in the Philippine market currently dominated by Philippine Morris Fortune Tobacco Corp. (PMFTC).

PMFTC, a joint venture between LT Group Inc. of billionaire Lucio Tan, and global tobacco giant Philip Morris, has seen its market share dip after the government raised taxes on cigarettes forcing it to raise the prices of its Marlboro and Fortune brands while its rival Mighty held back its P1 per stick pricing in the low-end brand.

As price competition heats up, consumers turned to lower priced brands due to budget constraints. The biggest beneficiary was Mighty, whose market share jumped to over 20 percent last year.

Mighty, however, may find itself partnering with a bigger market player to deal with its problems, which include the company’s alleged illicit trade practices.  

The BIR has closed down Mighty’s customs bonded warehouse, pending completion of its investigation.

An initial report of a DOF task force showed that Mighty committed serious violations of tariff and customs laws, rules and regulations, resulting in huge revenue losses for the government.

In a chance interview, Tan reiterated that the government should act on alleged smuggling practices employed by some local cigarette players that allowed them to sell their products at extremely lower prices.

When asked whether it had plans to acquire Mighty, Tan said: “It has a partner.”

Mighty, however, declined to comment.

Japan Tobacco International (JTI), maker of Winston, Camel, Mild Seven, Benson & Hedges, said it was unlikely for the company to partner or purchase Mighty as it recently concluded an agreement to acquire Zandera Ltd., a leader in e-cigarettes in the United Kingdom.

British American Tobacco, which industry players are speculating as a potential partner of Mighty, likewise refused to comment.  The company, which has re-established itself in the Philippines after pulling out in 2009, has been struggling to expand its less than one-percent market share.

BAT, which produces Lucky Strike and Pall Mall brands, is the world’s second largest tobacco company by sales after Philip Morris.  It has committed to invest at least $200 million in the country over a five-year period.

An industry observer said BAT might need to enter into partnerships with other small players if it wants to see significant gains in its market share.

Mighty is a small company owned by the Wongchuking family which was established in the 1940s. It was the producer of La Campanilla, Magkaibigan, Campana Ringing Bell and other local brands.