A More Settled Landscape

Imperial Tobacco may expand to U.S.

LONDON -- Imperial Tobacco Group PLC, the maker of West and Davidoff cigarettes, may sell tobacco products in the United States for the first time as legal risks there decline and U.K. consumption slows, CEO Gareth Davis said, according to a Bloomberg report.

The British company is considering ways of expanding in America, Davis, 56, told the news agency. Imperial has ruled out acquisitions to avoid involvement in lawsuits, he said. It is a highly attractive market with highly attractive margins, Davis said. The potential problems there are significantly [image-nocss] less than three or four years ago, he added.

U.S. courts have reached decisions in two of the three biggest lawsuits against the American tobacco industry. Altria Group Inc.'s Philip Morris, the maker of Marlboro cigarettes, and Reynolds American Inc. would face the first new major competitor in years if Imperial does expand in the United States, where it currently only sells Rizla rolling papers.

U.S. consumers smoke 7% of the world's cigarettes, yet account for 30% of the tobacco industry's profit, Davis said. Imperial is seeking new markets after forecasting that the number of duty-paid cigarettes sold in the U.K., its biggest market, will probably fall 3% to 4% this fiscal year. Sales volumes are declining as taxes rise and the government prepares a national ban on smoking in public places next year.

Shares of cigarette makers have risen to records in 2006 as investors speculate that the end of the biggest legal issues against the U.S. tobacco industry may lead Philip Morris units to start making acquisitions.

Philip Morris USA won the reversal of a $10.1 billion damage award in December when the Illinois Supreme Court ruled the company didn't need to pay smokers of light cigarettes who accused it of misleading them about health risks. Last month, a Florida court upheld a decision to throw out a $145 billion payout by cigarette makers, and in a pending case, the U.S. Department of Justice is seeking $14 billion of damages, down from $280 billion previously.

It all points to a more settled landscape in the United States, Davis said, adding he would consider expanding any of Imperial Tobacco's existing businesses there. I would see, going forward, more participants in the U.S. market.

Imperial was formed in 1902 when a group of U.K. tobacco companies banded together to fight off American Tobacco's entry into the U.K. market. Imperial Tobacco and American Tobacco eventually agreed to stay out of each others' markets to avoid a price war, Bloomberg said.

Davis has enlarged Imperial into the world's fourth-largest publicly-traded cigarette maker by volume from No. 22 when he became CEO in 1996. His biggest acquisition was the $6.6 billion purchase of Germany's Reemtsma in 2002.

Imperial Tobacco's profit rose 28% to a record 570 million pounds in the year ended September 30, 2005.

The company has been gaining market share in Africa, Asia and the Middle East to offset declining consumption in its two biggest markets, the U.K. and Germany, where it gets about half its operating profit.

Davis said Imperial may make an acquisition bigger than Reemtsma before he retires in four years, as he aims to expand the company into new markets. Imperial sells cigarettes, cigars, roll-your-own tobacco and snuff in more than 130 countries. I'd love to see us do another significant acquisition before I go, he said. We have an appetite for most tobacco products.

Davis didn't exclude Imperial eventually surpassing Japan Tobacco Inc. as the world's third-largest traded tobacco company. To become No. 3, Imperial would need to double the number of products it sells each year. The company, whose brands include Lambert & Butler, sells 220 billion cigarettes and roll-your-own equivalents a year. Altria, the biggest, makes 990 billion cigarettes, while British American Tobacco PLC makes 678 billion as European industry leader. Japan Tobacco Inc. makes 431 billion.

It would take a very major acquisition and very significant organic growth for us to overtake them in volume terms, but you know, we'll go for it, Davis said.

Newspapers have reported for years that Imperial may buy its smaller rival, Spain's Altadis SA. Michael Smith, an analyst at JPMorgan Chase & Co., has said a takeover of Altadis, the maker of Gauloises cigarettes, is more likely now than at any time in the past.

The U.K. company will consider significant takeovers as well as smaller bolt-on acquisitions, Davis said.