They'd Have All the Brands
|"THEY'D HAVE ALL THE BRANDS"|
Los Angeles, May 5 - One veteran cigar executive was musing last week about the future of Swedish Match, by its own account the U.S. premium cigar-market leader.
Can Swedish Match survive as an independent? If not, which of the tobacco giants will bid for it? It's the next available prize after Altadis - the world's largest cigar company, but also a major player in cigarettes - was acquired by Imperial Tobacco earlier this year.
"I still think Imperial should buy [Swedish]," said the executive, who preferred not to be identified. "Then they'd have all the brands."
Cuban brands, that is.
This is a time when hope for the end of the 46-year U.S. trade embargo runs high. The Bush Administration, which has enforced the embargo with a zeal unseen up to this time, is coming to at end. Democratic candidates Barack Obama and Hillary Clinton have made comments about a more open relationship with Cuba and Republican candidate John McCain is famous for a foreign policy that's built on practicalities rather than ideology. And Fidel Castro, the living icon of Communist Cuba, is in retirement and his brother Raul has shown a willingness to loosen a few of the many restrictions his government places on the Cuban people.
However, even if the embargo ended tomorrow, many of the Cuban brands that American smokers would like to smoke will be unavailable to them because of trademark ownership issues. And that's where Swedish Match comes in. The situation, based on U.S. Patent & Trademark Office records:
If the embargo were to end, Imperial Tobacco - through its Altadis U.S.A. subsidiary - would be able to sell Cabanas, Gispert, H. Upmann, Juan Lopez, Montecristo, Por Larranaga, Quintero y Hermano, Romeo y Julieta, Saint Luis Rey and Trinidad right away as they own the trademark rights in the U.S. The nation's largest cigar seller - J-R Cigars - is owned by a different division of Altadis and would undoubtedly be heavily involved in the marketing of these brands to American smokers.
However, Swedish Match has the U.S. trademark rights to 13 brands: Belinda, Bolivar, Cohiba, El Rey del Mundo, La Flor de Cano, Hoyo de Monterrey, La Gloria Cubana, Los Statos Deluxe, Partagas, Punch, Rafael Gonzalez, Ramon Allones and Sancho Panza.
That's 23 of the 33 brands still produced in Cuba and all of the better-known ones. Five brand trademarks - Diplomaticos, Fonseca, Jose L. Piedra, San Cristobal and Troya - are owned by U.S. companies and the remaining five - Cuaba, Guantanamera, Quai d'Orsay, Vegas Robaina and Vegueros - are owned by Habanos, S.A., although a dispute over Guantanamera with a U.S. company is ongoing.
So if Swedish Match were to be purchased by Imperial Tobacco, it would have essentially a stranglehold on Cuban cigar sales in the U.S. as soon as the embargo ends.
Imperial can probably afford to buy Swedish, even after swallowing Altadis and taking on billions in debt. Imperial paid 14.2 times the 2006 earnings of Altadis for a $22.3 billion purchase price. Applying the same multiplier to Swedish Match, based on 2007 earnings (about $494.1 million U.S.), the price would be $7.02 billion. Imperial had operating profits (not including income taxes, depreciation and amortization) of $2.8 billion and that doesn't include Altadis' operating profits of $1.9 billion!
However, the U.S. Justice Department might have some problems with one company having such a high potential share of the Cuban cigar market in the U.S., although the overall share of Havana cigars in a U.S. market is likely to be small. In addition, by buying Swedish Match, Imperial would also own both J-R Cigars and Cigars International, two leaders in the retail field that might also draw some regulatory scrutiny.
Swedish Match is much more than just a cigar company, of course, and is notably attractive because of its strong position in smokeless tobacco - chew, snuff and snus - and so there are numerous other potential suitors.
Philip Morris International, now independent of Altria, Inc., had operating profits of $8.9 billion in 2007 and has not been a player in the cigar game thus far. Its focus on sales outside of the U.S. might make Swedish Match less interesting to it.
Philip Morris USA acquired machine-made cigar company John Middleton last December for $2.9 billion in cash; Middleton's 2007 operating profits were estimated at $182 million, about 37 percent of what Swedish Match made. Altria has plenty of capacity for acquisitions: it made $4.5 billion U.S. in 2007.
British American Tobacco is in excellent position to make an acquisition. BAT had an exceptional year in 2007 and had operating profits of $5.7 billion. It is also not much of a player in the cigar trade at present.
Reynolds American had a strong 2007 with operating profits of $2.29 billion. Financial analysts have been predicting that it will acquire Swisher International sometime this year and Swisher's wide base of machine-made cigar buyers may be a better long-term bet than Swedish Match. But Swedish offers entry into both the premium and mass-market business, not to mention the cache of Cuban brands once the embargo is eased or ends.
What about Scandinavian Tobacco? The ST Group owns Henri Wintermans, C.A.O. and pocketed $4.1 billion (U.S.) in selling its cigarette brands to BAT earlier this year. This is more of a long shot, but the ST Group is more focused on tobacco products outside of cigarettes and could be a complimentary fit for Swedish Match.
Whether Swedish Match will be sold and who will buy is unknown, but the company - and its solid profitability - are certainly of interest. At stake is a future opportunity to be one of the two major players in the sales of Cuban cigars in the U.S. and a leading role in the next "Cigar Boom." It's a drama worth watching.
~ Rich Perelman