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CIGARETTE GIANT ALTRIA IS NOW IN THE CIGAR BUSINESS |
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 Plus: Even more Montecristos!
Los Angeles, November 5 – Altria Corporation is the world’s largest tobacco company. It had annual revenues of $74.9 billion and a gross profit of $32.8 billion last year. It has cash on hand of $7.31 billion. Its business is primarily cigarettes, with a minor share of Miller Brewing Company, and sells well-known cigarette brands including Marlboro, L&M, Parliament and Virginia Slims.
Now it’s in the cigar business. Big-time.
Altria announced on Friday that it would buy John Middleton, Inc., makers of Black & Mild cigars for $2.9 billion in cash.
Altria chief executive Michael Szymanczyk told reporters that “It fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category.”
It also shows Altria’s regard for the profit potential of cigars and for the solid position of John Middleton and especially its Black & Mild brand. In Altria’s filing with the Securities & Exchange Commission, the power of that brand was demonstrated:
• Middleton’s operating revenues are expected to reach $360 million on sales of 1.2 billion cigars. Its net income is expected to be about $182 million for a profit margin of 50.6 percent!
• Over the five-year period from 2003 through 2007, Middleton’s annual growth rate in revenues and income have been 10 percent and 13 percent, respectively. That’s impressive.
• Black & Mild has, according to Altria, 23 percent of the U.S. machine-made cigar market, estimated at 5.3 billion units annually. Remember that the premium – handmade – segment is only about 300 million units a year, or just 5.7 percent of the size of the machine-made market.
• Altria noted that the Black & Mild brand is the second-largest-selling brand in the category (Swisher Sweets is the leader), with most of its strength in the South where it has a 55 percent market share.
If you’re not familiar with Black & Mild, it’s a machine-made cigar with a homogenized wrapper and binder and a pipe-tobacco filler made in two sizes: a five-inch by 30-ring version offered with and without plastic tips and in natural, mild, apple, cream and wine flavors and a (2) smaller, 4-inch by 30-ring size called the Fast Break, offered in natural, mild and apple flavors. Both are sold mostly in packs of five found in convenience and drug stores across the country.
Middleton makes Black & Mild and its other brands (Cherry Blend, Gold & Mild, Price Albert) in factories in King of Prussia and Limerick, Pennsylvania. It has about 550 employees, 90 percent of whom are in the manufacturing end of the business.
Szymanczyk said in the company’s statement that “the real appeal of this acquisition is to capitalize on [Philip Morris USA]’s sales, distribution and marketing infrastructure and expertise.” Translation: while the Black & Mild franchise is already strong, look for its famous five-pack to start appearing in a lot more places thanks to Philip Morris USA’s marketing muscle.
Financial analysts reported that Altria paid about 12 times annual earnings for John Middleton, so the question is well asked what else they might buy. Consolidation has been the theme in the tobacco industry of late with the largest cigar company in the world, Altadis, S.A., purchased by British cigarette giant Imperial Tobacco in a deal which is likely to close in early 2008.
That makes Swedish Match the largest independent cigar company in the world. Headquartered in Stockholm, it owns General Cigar and is a major player in the emerging snuff and snus markets worldwide and is no longer in the cigarette business. It had annual earnings of approximately $561.5 million (converted from Swedish Kronor) in 2006. If Altria were to try to buy it at the same level it paid for Middleton, it would have to come up with about $6.74 billion, a much larger proposition. However, Swedish Match has ingested a considerable amount of debt in the past year and has been criticized in some financial circles because of it.
Altria’s situation is also in flux. The company is expected to spin off the very-highly-profitable Philip Morris International division as a separate entity in 2008 and the Miller subsidiary is being merged with Molson Coors to create a competitor large enough to pressure beer-segment leader Anheuser-Busch.
Also worth considering: would any other cigar acquisition be large enough to make an earnings difference in a company that makes $32.8 billion a year? Altria has the cash to buy all the boutique cigar makers it wants, but to what end? With Altadis off the market, Swedish Match is perhaps too expensive and any acquisition attempt of privately-held machine-made cigar giant Swisher International could be difficult to get past the U.S. government’s anti-trust regulators.
What about Davidoff?
More Montecristo!
Several readers called our attention to an under-count of the number of Montecristo brands on the U.S. market in our story last Monday about the planned introduction of a Honduran-made Montecristo to be distributed by Cigars by Santa Clara.
We missed the new, limited-production Montecristo Cabinet Seleccion made and distributed by Altadis U.S.A. That brings the total of Montecristo lines in production to 12 (!), of which seven are distributed by Altadis.
Like they say in the ballparks, you can’t tell the players without a program! Thanks to everyone who wrote in to make sure we got things right.
~ Rich Perelman
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