NEW YORK -- Philip Morris International Inc. said it has entered into an agreement with Rothmans Inc. to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans. The agreement and related offer have the full support of the board of Rothmans.
Rothmans' sole holding is a 60% interest in Rothmans, Benson & Hedges Inc. (RBH). The remaining 40% interest in RBH is currently owned by PMI and, as a result of this transaction, RBH will become wholly owned by PMI. PMI and Rothmans have been joint shareholders of RBH since 1986.
PMI agreed to make the offer [image-nocss] following Rothmans' and RBH's finalization of the $550 million (Canadian) settlement with the government of Canada and all 10 provinces. The settlement resolves the Royal Canadian Mounted Police's investigation relating to products exported from Canada by RBH during the 1989-1996 period.
"This proposed acquisition is a win-win for both Rothmans and PMI shareholders," said Louis C. Camilleri, chairman and CEO of PMI. "Rothmans shareholders will receive a significant cash premium and PMI consolidates its presence in a market that we deem financially attractive and of strategic importance going forward. The transaction is projected to be modestly accretive to PMI's earnings per share in 2009. We look forward to welcoming the talented management team and employees of RBH into the PMI family and building upon their solid track record of growth."
Under the terms of the agreement, PMI will launch a public tender offer to purchase all of the outstanding common stock of Rothmans for $30 (Canadian) per share in cash, for an aggregate transaction value of approximately $2 billion (Canadian) on a fully diluted basis. The all-cash offer represents a premium of approximately 16.9% over Rothmans' 20-day volume-weighted average trading price on the Toronto Stock Exchange through July 30, 2008, prior to the public disclosure of the $550 million settlement.
The Rothmans board, based on the recommendation of a special committee of independent directors and upon consultation with its financial and legal advisors, has determined that the offer is fair to Rothmans shareholders, is in the best interests of Rothmans and that Rothmans shareholders should accept the offer and tender their shares. Rothmans has also received an opinion from its financial advisor, BMO Nesbitt Burns, that the offer is fair from a financial point of view.
Successful completion of the transaction will allow the Canadian business to fully benefit from PMI's global infrastructure. Cost savings and productivity improvement opportunities are expected through purchasing synergies for tobacco and raw materials, participation in supply contracts with PMI's global suppliers, increased investment in state-of-the-art manufacturing equipment and processes, lower financing costs, administrative cost savings associated with Rothmans ceasing to be a standalone publicly traded company and the use of PMI's shared service infrastructure.
Total cigarette volume is estimated to have reached 38 billion units in 2007. The tax-paid market of approximately 30 billion units is mainly supplied by three major manufacturers. RBH has been the only growing major manufacturer in the highly profitable Canadian market and its share reached 33% in 2007, the company said.
The Canadian tobacco market consists primarily of Virginia-type cigarettes which account for approximately 99% of the overall market. In addition to cigarettes, a key feature of the Canadian market is the presence of a sizeable segment of fine cut tobacco, estimated to represent a cigarette equivalent of 2.8 billion units in 2007. According to the latest available data, RBH's share of the fine cut market in 2006 was approximately 57%.
A notable development in the Canadian market in recent years has been the emergence and subsequent growth of the value category which has grown, at the expense of the premium segment, from approximately 16% of the tax-paid market in 2003 to approximately 54% in 2007. RBH is the market leader in the value category with an approximate share of 47% and holds a 17% share of the premium segment.
Brampton, Ont.-based Rothmans manufactures and distributes a range of tobacco products, but primarily cigarettes. Its premium brand portfolio includes Benson & Hedges, Craven A, Rothmans and Belmont. Its value brand portfolio includes Accord, Number 7, Canadian Classics and Mark Ten. In addition, the company has various fine cut and roll-your-own products. RBH's cigarette volume has grown at a CAGR of 1.2% over the 2004 to 2008 fiscal year period. Operating income has grown at a CAGR of 6.0% over the same period to reach an estimated CAD $ 327 million in the 2008 fiscal year ended March 31, 2008.
Philip Morris International Inc. has seven of the world's top 15 brands, and its products are sold in approximately 160 countries. In 2007, the company held an estimated 15.6% share of the total international cigarette market outside of the United States.Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.