JAKARTA – Philip Morris International Inc. (search) said on Monday it is bidding $5 billion to buy Indonesian tobacco firm PT Hanjaya Mandala Sampoerna Tbk (search) to expand in the world's fifth-largest cigarette market.
Philip Morris, the tobacco arm of Altria Group Inc. (MO) and maker of Marlboro cigarettes, is looking for growth in emerging markets as consumption falls in the United States and other developed countries due to increased taxes, smoking bans and restrictions on advertising.
The deal marks the biggest foreign takeover in Indonesia — a country that has struggled to win investment — and is a booster for the five-month-old government, analysts said. Corruption and legal wrangles caused foreign investment approvals to fall 27 percent in 2004.
"When someone is willing to pay $5.2 billion in a country like Indonesia, it's a vote of confidence," said Laksono Widodo, head of research at Macquarie Securities in Jakarta.
Philip Morris set a deal to buy a 40 percent stake in Sampoerna and is tendering for the remaining shares at a 20 percent premium to their closing price on March 10. Shares of Sampoerna — the country's third-largest tobacco company — closed up 18 percent, driving the stock market to a record high.
Philip Morris, which is paying cash and expects to complete the tender in 90 days, put the total value of the deal at $5.2 billion, including $160 million of debt. It expected the transaction to contribute modestly to Altria's earnings this year.
The deal will add close to one percentage point to Philip Morris' share of the world market and will give the company an internal rate of return in the double digits, Louis Camilleri, Altria's chairman and chief executive, said on a conference call.
Altria's main interest is in Sampoerna's core domestic and international tobacco businesses, so it will be evaluating Sampoerna's other businesses, including its grocery store chain, Camilleri said.
Philip Morris is bidding for outstanding shares of Sampoerna at 10,600 rupiah a share, a 20 percent premium from the Thursday close of 8,850 rupiah. Sampoerna closed up 18.1 percent at 10,450 rupiah, pushing the benchmark index up 1.4 percent to 1,123.482.
The deal values Sampoerna at 20 times expected 2005 earnings, a premium to the ratio of 15 for PT Gudang Garam Tbk, the country's largest tobacco company. Unlisted PT Djarum is the second-biggest producer.
"The Third World environment typically presents a lot of opportunity for growth," said Manny Goldman, a U.S. consumer products industry consultant. "When you are Philip Morris, and you are going into a country like Indonesia, you have a very long time horizon."
Indonesia — the fifth-largest tobacco market after China, the United States, Japan and Russia — is a prime growth target for Philip Morris International.
Sampoerna, which has almost 20 percent of the Indonesian market with clove-cigarette brands like Dji Sam Soe and A Mild, had operating income of $360 million on revenues of $1 billion in 2004, Philip Morris said. That compares with a $6.6 billion operating profit for Philip Morris International in 2004.
Cigarettes made with tobacco and cloves, called kreteks, account for more than 90 percent of the Indonesian market.
"It is clear that without kreteks, (Philip Morris) would not have been able to have a meaningful presence in Indonesia," Camilleri said on the call.
More than 62 percent of Indonesian men smoked in 2001, up from 53 percent in 1995, according to the latest official data. More than 200 billion kreteks are sold each year in a country where cigarettes are an important source of budget revenue.
The government expects excise taxes — mostly from cigarettes — to account for 7.61 percent of budget revenue this year, up from 7.05 percent last year.
"Excise tax on tobacco in Indonesia is among the lowest (in the region). It has no other way to go than up. I believe the outlook will not be so good for the sector," said Adrian Rusmana, the head of research at BNI Securities.
U.S. tobacco industry growth is slowing because the market is mature and the government is restricting smoking. U.S. cigarette prices are rising due to higher taxes and payments tobacco companies agreed to make to U.S. states.
"Our investment in Sampoerna is a great opportunity to significantly expand our business in the world's fifth-largest, and growing cigarette market," said Andre Calantzopoulos, chief executive of Philip Morris International, in a statement.
Philip Morris said the 40 percent stake it's buying includes shares owned by Putera Sampoerna, the president commissioner of the company and part of the third generation of the Sampoerna family.
Altria's shares rose 65 cents, or 1 percent, in New York.