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Tobacco giant aims for the East

Philip Morris makes a $5-billion bid to expand in one of the last frontiers of smoking: Indonesia.

NEW YORK - Philip Morris International Inc. has made a $5-billion offer for Indonesia's third-largest cigarette producer, a move that would fatten its share of the country's fast-growing tobacco market while health concerns put a squeeze on smoking elsewhere in the world.

The company, a unit of Altria Group Inc. and maker of best-selling Marlboro cigarettes, said late Sunday that it agreed to buy a 40 percent stake in PT Hanjaya Mandala Sampoerna from its principal shareholders for $2-billion in cash.

It will make a tender offer for the remaining stock at 10,600 rupiah ($1.13) apiece, a 20 percent premium to Sampoerna's closing price of 8,850 rupiah (95 cents) last Thursday.

In all, the deal values the Indonesian company at 46.5-trillion rupiah ($5-billion). Philip Morris will also assume about 1.50-trillion rupiah ($160-million) in debt, the company said in a statement.

Richmond, Va.-based Philip Morris' bid highlights recent efforts to expand its presence overseas as government bans and increased awareness of the health risks from smoking have curbed tobacco use in mature markets in the United States and Europe.

"The market in the United States is not growing at the same rate it used to be. There are beginning to be smoking bans in Western Europe, too," said Argus Research's Erin Smith. "Some of the less-developed countries don't have that threat."

Last year, Philip Morris' domestic tobacco sales rose a mere 3 percent to $17.51-billion; its international sales, on the other hand, billowed 18 percent to $39.54-billion.

An estimated 60 percent of males smoke in Indonesia - the fifth-largest tobacco market behind China, the United States, Russia and Japan - and growing numbers of women are picking up the habit, according to some analysts.

"We think that Indonesia represents a very attractive market, with a growing population that currently stands around 210-million and significant smoking participation rates," Prudential analyst Robert Campagnino wrote in a research report.

With the buyout of Sampoerna, Philip Morris would become Indonesia's second-largest cigarettemaker with more than a fifth of the market and increase its global market share by close to 1 point, Altria chairman and chief executive Louis C. Camilleri said on a conference call with analysts on Monday.

The acquisition will also moderately benefit Altria's earnings this year, Camilleri said. Philip Morris' U.S. and international tobacco businesses make it the largest publicly traded tobacco company in the world.

The deal also gives Philip Morris a way into Indonesia's mainstream market for kreteks, cigarettes made with a blend of tobacco and cloves that dominate the industry there.

Kreteks account for 92 percent of the country's cigarette market, which is estimated at 210-billion cigarettes a year.

"Thus it is clear that without kreteks, Philip Morris International would not be able to have a meaningful presence in Indonesia," Camilleri said, adding that Philip Morris' Marlboro brand represents half of the remaining 8 percent.

In a research report, Michael J. Branca, a Lehman Brothers analyst, noted that Sampoerna's popular Dji Sam Soe and A Mild brands come in smaller packs but sell at a premium to Marlboro.

"For example, Dji Sam Soe sells at 6,900 rupiah (74 cents) per pack of 12, while Marlboro sells at 7,000 rupiah (75 cents) for a pack of 20, making Sampoerna by far the most profitable kretek manufacturer in Indonesia," he wrote.

More than 80 percent of Indonesia's kretek market is controlled by No. 1 PT Gudang Garam, Sampoerna and PT Djarum, Branca said. About 700 smaller manufacturers account for a 17 percent share, he wrote.

Sampoerna had a 19.4 percent local market share in 2004, when its net revenue totaled 9-trillion rupiah ($1-billion) on unit volume of about 41-billion cigarettes. Its operating income grew 20 percent to an estimated 3.1-trillion rupiah ($360-million) for the year.

"Clearly, we are confident in the economic future of Indonesia and its tobacco industry," Camilleri said. "By acquiring Sampoerna's superb brand portfolio and outstanding distribution and manufacturing infrastructure, Philip Morris International capitalizes on an excellent opportunity to generate growth in the very sizeable Indonesian market."

Altria shares rose 3 cents to close at $65.17 on the New York Stock Exchange on Monday.

In a separate matter, Altria's Philip Morris USA division said Monday it was awarded $173-million in damages after a U.S. District Court found Internet cigarette retailer Otamedia of Switzerland had infringed on Philip Morris' trademarks.

The company said it was uncertain if it would be able to collect on the judgment but is exploring "all of its available legal options for enforcement."

"We are pleased with the court's decision," said Virginia Murphy, senior vice president of compliance and brand integrity at Philip Morris USA. "We believe it sends a clear message that the law imposes significant penalties on those who infringe our intellectual property rights through unlawful Internet cigarette sales."

The trademark decision in the U.S. District Court for the Southern District of New York stems from legal action between the Philip Morris USA and Otamedia that began in 2002.

Philip Morris alleged in the lawsuit that Otamedia's revenues from sales to U.S. consumers were in violation of federal and state laws. The company in 2004 received a court ruling that ordered Otamedia to cease sales of Philip Morris brands on its Web site.

However, Otamedia failed to comply and in August was ordered to transfer the domain names Yesmoke.com and Yessmoke.com to Philip Morris in an effort to enforce an injunction. Those Web sites no longer sell cigarettes, but instead direct Internet users to Philip Morris' Web site.

A spokesman for Otamedia could not immediately be reached for comment.

[Last modified March 15, 2005, 01:07:17]