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25 February 2010

Philippines’ tobacco giants to merge, control 90% of market

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Philippines’ two biggest tobacco-manufacturing firms have agreed to merge into a single entity that will end up controlling about 90 percent of the lucrative cigarette industry in the Philippines, the Philippine Daily Inquirer reported.

According to an Inquirer source, Philip Morris Philippines Manufacturing Inc. (PMPMI) will merge with Fortune Tobacco Corp. to create a firm called Philip Morris-Fortune Tobacco Co. (PMFTC).

“This will be a merger of equals since both sides recognize the strengths of the other in their respective market segments,” according to the source, who was familiar with the details of the deal.

PMPMI is the local unit of Philip Morris International, one of the largest tobacco manufacturers in the world. While it controls the upper-tier market with its Philip Morris and Marlboro brands, PMPMI has struggled against Lucio Tan-owned Fortune Tobacco, which dominates the lower-end segments with its flagship Hope brand, among others.

Pre-merger, PMPMI held a local market share of about 28 percent, while Fortune Tobacco held a 60-percent share.

The source, who declined to be named, explained that the union would be executed through a share-swap agreement between both firms, with the resulting PMFTC having 10 million outstanding shares after the merger.

Of this, the Philip Morris side will own “five million shares plus one,” while Fortune Tobacco will end up with “five million shares minus one.”

“The difference between both groups will only be 0.0000001 percent, and that difference is just there in case there is an impasse on anything, which is unlikely,” he said, dispelling rumors that had been circulating since last week about Lucio Tan’s supposed sale of his crown jewel to its foreign rival. “There is no sale involved.”

The source pointed out that nowhere along their range of products does Philip Morris and Fortune Tobacco compete, thus raising the potential “synergy” between both firms and reducing opportunities for friction.

“We are not direct competitors,” the source said. “Philip Morris has the high-end brands but they can’t penetrate the medium- to low-end market, which Fortune holds.”

According to the source, early negotiations between both tobacco giants had centered around creating a jointly owned marketing firm that will be in charge of distributing and selling cigarettes manufactured by the separate companies. Wednesday morning, however, plans shifted and both firms agreed on a merger.

Tan—who also has interests in the airline, real estate and alcohol industries—will head PMFTC as its chair. The Fortune Tobacco group will be in charge of the merged firm’s finance, audit and marketing and sales units. Philip Morris, meanwhile, will be in charge of operations, manufacturing and overall management.

Meanwhile, a separate industry source said that Fortune Tobacco’s market capitalisation before the merger stood at around P3 billion.

“A merger of equals, if that’s what it is, may result in the new firm being valued at close to 6 billion peso,” the source pointed out. (1$=46 peso)


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