Cigarettes and Tobacco Growing Indonesian Market

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Global Tobacco Giant Pays $494 Million for Bentoel to Expand in a Growing Market

JAKARTA, Indonesia — British American Tobacco PLC paid $494 million for an 85% stake in PT Bentoel Internasional Investama, an Indonesian cigarettes producer, as global tobacco companies look to offset sluggish sales in Western nations through acquisitions in the developing world.

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Bloomberg News/Landov

Packages of Bentoel cigarettes at a shop in Jakarta, Indonesia, on Wednesday.

London-based BAT, the world’s second-largest cigarette producer by sales after Philip Morris International Inc. of the U.S., said Wednesday it hopes to complete a tender offer for the remaining shares by the end of August. The offer is a 20% premium on Bentoel‘s stock price and values the entire company at $580 million.

The purchase is the latest sign of renewed investor interest in Indonesia, the world’s fourth-most-populous nation, which the International Monetary Fund forecasts will achieve between 3% and 4% economic growth in 2009 as solid consumer spending offsets lower exports to the U.S. and Europe. The government expects foreign investment — largely in consumer and resources sectors — to grow 9% this year from $14 billion in 2008.

BAT’s purchase of Bentoel, which has a 7% share of the Indonesian tobacco market, the world’s fifth-largest by volume with 250 billion cigarettes sold annually, brings it into competition with Philip Morris. In 2005, Philip Morris paid $5.2 billion to take over Bentoel rival PT Hanjaya Mandala Sampoerna and has turned the company into the market leader, with a 29% share of local cigarette sales. Cigarette sales in the U.S. and Europe have slowed on heightened concerns over health risks and smoking bans.

[indonesia smoking] Bloomberg News

BAT, formed in 1902 as a joint venture between the U.K.’s Imperial Tobacco Co. and the American Tobacco Co. to trade products outside Great Britain and the U.S., today derives about two-thirds of its sales from emerging markets in Asia, Russia, Latin America and Eastern Europe — though Western markets still deliver the bulk of profit because of higher margins.

The company, whose brands include Dunhill, Kent, Lucky Strike and Pall Mall, has failed to build a large following in Indonesia, where 90% of consumers smoke pungent “kretek” cigarettes, produced by companies like Sampoerna and Bentoel from a mixture of cloves and tobacco.

BAT decided the only way to build sizable market share in Indonesia was to take over a kretek maker, said Simon Millson, a Hong Kong-based spokesman for the company. BAT’s existing local unit in Indonesia, which doesn’t sell kretek cigarettes, has a 2% market share.

The main seller to BAT was Rajawali Group, a diversified Indonesian concern that owned 56% of Bentoel. Deutsche Bank AG and UBS AG advised BAT on the Bentoel deal.

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