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NEWS UPDATES 19 June 2009

Tobacco giant takes $494m stake in Indonesian firm

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British American Tobacco (BAT), the world’s second-biggest cigarette maker, is buying a controlling stake in Indonesia’s fourth-biggest tobacco firm for $494 million, according to a report in UK-based

After the acquisition of 85 percent of Bentoel Internasional Investama, BAT would be seeking to take full control, the company was quoted as saying.

The deal gives BAT its first taste of kretek, a kind of cigarette made with tobacco and cloves. Indonesia, where 93 percent of all cigarettes smoked are kretek — thanks, in part, to their favourable tax treatment compared with traditional “white” cigarettes — is seen as one of the world’s most promising emerging markets for tobacco.

About a third of the country’s 248 million people smoke, making it the world’s fifth-biggest tobacco market by volume and among the ten most profitable.

The Indonesian market, which has grown by 13 percent in the past two years, is also seen as attractive because of its light regulation, compared with other Asian countries.

BAT, whose top brands include Lucky Strike, Dunhill and Pall Mall, expects to take full control by the end of August for a total of £356 million. It is also expected to take on Bentoel’s debts of around £101 million.

“This transaction represents an excellent strategic opportunity to enter the very large and growing Indonesian kretek market and will provide a platform for future growth,” timesonline quoted John Daly, BAT’s Asia-Pacific director, as saying.

Bentoel sells the Star Mild brand of kretek and has a 7 per cent share of the Indonesian tobacco market. BAT Indonesia, the British company’s existing operation in the country, has a 2 per cent share but dominates in white cigarettes, which, because of their higher price, are seen as upmarket.

Philip Morris International, the American maker of Marlboro, has been in Indonesia for several years and became its biggest cigarette manufacturer four years ago with the $5 billion takeover of Sampoerna. Gudang Garam and the Djarum Group, the country’s second- and third-biggest tobacco firms, remain Indonesian-owned.

Kretek cigarettes, which take their name from the crackling sound made by cloves when they burn, are said by researchers to contain double the nicotine and almost triple the tar of normal cigarettes. They have been banned in some parts of the United States.

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