TOKYO (Reuters) - Japan Tobacco Inc (2914.T) plans to spend $500 million to quadruple its smokeless tobacco production capacity by the end of 2018, as it races against bigger rival Philip Morris (PM.N) for a larger share of the Japanese vaping products market.

Japan Tobacco Inc (JT) President and CEO Mitsuomi Koizumi smokes the company's smokeless tobacco Ploom TECH during an interview with Reuters at the compnay's headquarters in Tokyo, Japan May 29, 2017. REUTERS/Toru Hanai

Global tobacco firms see Japan as a fertile test ground for vaping products since e-cigarettes using nicotine-laced liquid are not allowed under the country’s pharmaceutical regulation. While the Marlboro maker’s heat-not-burn “IQOS” tobacco device is already enjoying strong demand in Japan, Japan Tobacco’s launch of its “Ploom Tech” product has run into delays.

“It’s embarrassing for a tobacco company top to say this, but I did not expect this,” said Japan Tobacco CEO Mitsuomi Koizumi, referring to the popularity of IQOS, which had about a 10 percent market share in April, from 7.6 percent in January.

Japan Tobacco is looking for mergers and acquisitions (M&As;)in emerging markets, such as Southeast Asia, Africa and Latin America, as well as opportunities to invest in startups that have patents and technology for alternative tobacco products, the CEO of the world’s No.3 tobacco company said.

With more people shifting to smokeless products such as IQOS due to health concerns, Japan Tobacco’s domestic cigarette sales volume is likely to fall 9.6 percent this year.

“It’s shocking. I am doing this business for more than 35 years but I have never experienced losing 10 percent in volume in one year,” said Koizumi, a career insider who took the top job at the company in 2012.

Demand for traditional cigarettes may come under further pressure given the prospect of tougher regulations as Japan tries to introduce an anti-smoking law ahead of the 2020 Summer Olympic Games in Tokyo.

Koizumi said he expects vaping products, including Ploom Tech and IQOS, to grab as much as 25 percent of Japan’s cigarette market by the end of 2018.

Philip Morris’ IQOS is a battery-powered device that heats cigarette-shaped sticks packed with tobacco leaves. Ploom Tech, also a battery-powered device, generates vapor that goes through a capsule packed with tobacco leaves.

Koizumi said his company was aiming for the top share of Japan’s vaping market in three years.

Japan Tobacco plans to ramp up the annual output capacity of tobacco capsules used for Ploom Tech to the equivalent of 20 billion cigarette sticks in 2018, from 5 billion planned at the end of this year, the CEO said, adding the company was also developing other tobacco vaping products.

The former state monopoly - still a third owned by the government and whose top brands include Winston, Mevius and Camel - last week announced it would start selling Ploom Tech in Tokyo on June 29, later than initially expected.

There has been speculation Japan Tobacco, which has a market capitalization of 8.4 trillion yen ($75.3 billion), is ripe for major M&A;, especially after British American Tobacco (BATS.L) agreed a $49.4 billion takeover of U.S. rival Reynolds American Inc RAI.N, creating the world’s biggest listed tobacco firm.

Some analysts speculate Japan Tobacco could even potentially acquire Britain’s Imperial Brands (IMB.L)

But Koizumi said the BAT-Reynolds deal was unlikely to have a direct impact on his company’s business and that Japan Tobacco was not interested in large-scale acquisitions.

“Specific names aside, deals that would be potentially problematic in terms of anti-monopoly regulation are not realistic,” he added. </s> Philip Morris said it has so far sold more than 3 million iQOS, a battery-powered device that heats tobacco leaves packed in cigarette shape. The company began nationwide sale in Japan in April last year after test marketing in major cities.

The product has become an instant hit and a severe supply shortage has persisted. It is priced at 9,980 yen ($88.30), but traded at 12,000 yen or more on Internet auction sites.

Paul Riley, president of Philip Morris Japan, told reporters the company has more than doubled its supply of iQOS since February and is ramping up the production to meet the demand. "But the question is what is the demand? We continue to increase the production but they get sold out as soon as they hit the stores," he said. Philip Morris, known for Marlboro, Lark and Parliament cigarettes, has said its market share in Japan rose 1.7 points to 27.1 percent in 2016, helped by the popularity of iQOS. Marlboro HeatSticks, cigarette-like tobacco used for iQOS, accounted for 7.6 percent of Japan's cigarette market in January, the company said. It said it will add two flavours in March to existing four.

iQOS is currently sold in 20 markets, including most notably Japan, and will be in as many as 30 by the end of this year, Philip Morris has said.

Global tobacco companies see Japan as a fertile test ground for "Heat but not burn" tobacco products, since e-cigarettes, which use nicotine-laced liquid, are not permitted under the country's pharmaceutical regulation.

British American Tobacco (BAT) has said initial results were very encouraging for a new tobacco heating device called glo it launched in Sendai, Japan in December, which takes aim at iQOS.

Japan Tobacco Inc, which commands over 60 percent share in domestic cigarette market, said last month it expected its domestic cigarettes sales volume to decline by 9.6 percent this year partly because of the growing popularity of tobacco e-cigarettes.

Japan Tobacco has said it will begin selling Ploom Tech tobacco-based electronic cigarettes in some parts of Tokyo from June. ($1 = 113.0300 yen) (Reporting by Taiga Uranaka) </s> Indonesia's tobacco industry employs millions of workers and contributes almost 10 percent to government revenues through taxes, but has faced a backlash from the health ministry and anti-smoking organizations.

Health Minister Nila Moeloek said her ministry "definitely" opposes the tobacco bill as it has the responsibility to "safeguard the health of the people".

The bill, which covers production, distribution and excise taxes, has to be approved by President Joko Widodo.

Indonesia's industry minister, Airlangga Hartarto, said the government has to assess how the tobacco bill would affect existing regulations for the industry.

Firman Subagyo, the parliament member who initiated the bill, played down health concerns, saying tobacco is a "strategic" commodity that can increase the prosperity of Indonesian farmers and state revenues.

"Health should not be used as an excuse to destroy people's livelihood," Subagyo, who comes from Indonesia's second-biggest political party, Golkar, said in an interview on Wednesday.

Under the draft law, manufacturers of tobacco products have to use locally sourced tobacco for at least 80 percent of their production, while imports of ready-to-use cigarettes may be subject to an excise tax of 200 percent.

Abdus Setiawan, a board member at the Indonesia Tobacco Growers' Association, said he welcomed the draft law as it could help to protect farmers. But an increase in production should be balanced with "rational pricing", he said.

Indonesia was the world's fourth-biggest cigarette producer with an output of 269.2 billion sticks in 2015, according to the latest data from research firm Euromonitor International. The market was valued at 231.3 trillion rupiah ($17.3 billion).

Nearly two-thirds of men are smokers in Indonesia, where an average pack of cigarettes costs less than $2.

Major cigarette companies operating in the country include Phillip Morris-controlled PT Hanjaya Mandala Sampoerna Tbk, Djarum Group and PT Gudang Garam Tbk.

Sampoerna, through its tobacco suppliers, has partnered with about 27,000 tobacco farmers in Indonesia and gets almost three-quarters of its tobacco domestically, said Elvira Lianita, Sampoerna's head of fiscal affairs and communications.

However, the industry's total tobacco requirements have outpaced the domestic growth in tobacco output, Lianita said. Restricting access to raw materials through import regulations or taxes would disrupt the "overall economic stability", she said.

"Partnership programs, not risky restrictions, would be the solution to bridging this gap and increasing farmer prosperity," she added. </s> It looks like the end of a months-long, will they-won’t they saga is finally drawing to a close: North-Carolina based R.J. Reynolds American has finally agreed to let British American Tobacco buy out the remaining part of the company it doesn’t already own for $49 billion.

The deal, the companies announced, will give British American full ownership of Reynolds, instead of just the 42.2% stake in the company it already owns.

British American first tried to buy out the rest of Reynolds in October of last year, offering $47 billion for the rest of the company. However, less than a month later Reynolds reportedly rejected that offer.

At the time, reports suggested that the two companies remained in negotiation, and that BAT would likely increase its offer slightly and try again. And while $2 billion is hardly pocket change to the likes of most of us, the jump from $47 billion to $49 billion is only about 4%, give or take. In other words, small potatoes for giant international corporations.

In a press release, BAT CEO Nicandro Durante said the merger “will create a stronger, global tobacco and N.G.P. business with direct access for our products across the most attractive markets in the world.”

He added, “We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future,” which is exactly the sort of thing that CEOs say.

That “NGP business” Durante referenced in his statement is likely the key to the whole deal. While cigarettes remain a lucrative item in some areas, increased legislation, taxation, and consumer education have changed their perception in developed nations like the U.S. and UK. But electronic cigarettes and the entire world of vaping and liquid nicotine are new and growing markets for existing Big Tobacco companies — including Reynolds, which sells the Vuse vaping system.

E-cigarettes are now subject to some FDA regulation, but still have experienced skyrocketing growth — especially among kids.

The tobacco industry, meanwhile, has been going through all kinds of contortions in recent years. Reynolds bought up competitor Lorillard in 2015, after agreeing to divest the Salem, Kool, and Winston brands. That merger made Reynolds a strong competitor to the top tobacco company in the U.S., Altria — probably best known to consumers as Philip Morris, the maker of Marlboros.

Now, it will be BAT competing with Altria both here and abroad — at least, provided the deal clears both companies’ boards and gains regulator approval. </s> British American Tobacco PLC agreed to take full control of Reynolds American Inc. in a $49.4 billion deal that marks renewed interest among international players in the U.S. tobacco market.

BAT, which already owned 42.2% of Reynolds before Tuesday’s announcement, said it saw the U.S. as the largest tobacco profit pool outside of China—with affordable pack prices, high disposable income and a burgeoning market for e-cigarettes and... </s> Jan. 17 (UPI) — British American Tobacco announced it will buy out other Reynolds American shareholders for $48 billion, taking full control of the company and creating the world’s largest publicly traded tobacco company.

Three months ago, BAT offered to buy the remainder of Reynolds American for $47 billion. The deal values Reynolds American at $79.8 billion, based on market capitalization, and BAT at $107.4 billion.

“It will create a stronger, global tobacco and NGP [Next Generation Products] business with direct access for our products across the most attractive markets in the world,” Nicandro Durante, the BAT chief executive, said in a news release. “We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future.”

The London company has been a part owner of Reynolds since 2004.

“We look forward to bringing together the two companies’ highly complementary cultures and shared commitment to innovation and transformation in our industry,” Debra A. Crew, the Reynolds American president and chief executive, said in a news release. “British American Tobacco is the best partner for Reynolds American’s next phase of growth, and together the two companies will create the leading portfolio of tobacco and next-generation products for adult tobacco consumers.”

British American Tobacco, based in London, would pay $59.64 a share for Reynolds American — a 26 percent premium over the company’s closing price before the initial offer.

Reynolds, with headquarters in Winston-Salem, N.C., has a 34 percent cigarette market share, with Newport the leading brand in menthol; Pall Mall the leading value brand and Natural American Spirit the fastest-growing premium brand, according to the company. Reynolds’ American Snuff subsidiary also has a 33 percent share of the growing moist snuff segment, led by Grizzly. Its Camel brand was introduced in 1913.

Reynolds had before-tax profits of $6.4 billion in 2015. The company has 4,000 employees. and is the No. 2 cigarette maker in the United States behind Philip Morris.

BAT employs more than 50,000 people worldwide and has more than 200 brands in its portfolio. It generated $6.2 billion adjusted profit in 2015.

More than a decade ago, British American Tobacco merged its Brown & Williamson operations in the United States with R.J. Reynolds.

BAT shares were down 0.3 percent to $57.25 in Tuesday trading in London after rising earlier. Reynolds shares were up 4 percent to $55.97 in pre-market trading in the United States.

The deal is subject to $1 billion breakup by either company should its board fail to recommend the transaction to shareholders or withdraw its recommendation. BAT might be required to pay a $500 million breakup fee if there are antitrust authorities. </s> Tobacco giant British American Tobacco has today agreed a $49.4 billion takeover of US rival Reynolds American.

The deal will create the world's biggest listed tobacco company after it increased an earlier offer by more than $2 billion.

BAT, which already owned 42% of Reynolds, will pay $29.44 in cash and 0.5260 BAT shares for each Reynolds share, it said.

This marks a 26% premium over the price of the stock on October 20, the day before BAT's first offer was made public.

Reynolds, the maker of Camel and Newport cigarettes, rejected the approach a month later, according to sources, although the two sides remained in talks.

The deal values the whole of Reynolds at around $86 billion.

It will mark the return of BAT to the lucrative and highly regulated US market after a 12-year absence, making it the only tobacco giant with a leading presence in American and international markets.

BAT's chief executive Nicandro Durante said bringing the two companies together would create a market leader with brands including Newport, Lucky Strike, Camel and Pall Mall.

"It will create a stronger, global tobacco and NGP (next generation products) business with direct access for our products across the most attractive markets in the world," he said today.

Analysts have said the takeover could spark further deals as Philip Morris International and Japan Tobacco jostle for market share in an industry that is shrinking in the West as more people quit smoking.

Durante said the combined group would have the largest global footprint of any tobacco group, with strong positions in both fast-growing emerging markets and lucrative Western countries. </s> British American Tobacco has offered to buy U.S. tobacco company Reynolds American Inc in a $47-billion deal that would bring together Newport, Kent and Pall Mall cigarettes in the world’s biggest listed tobacco company.

The British group, which has a 42-per-cent stake in Reynolds, said its offer valued the company’s shares at $56.50, of which $24.13 would be in cash and $32.37 would be in BAT shares, representing a premium of 20 per cent over the closing price of Reynolds stock on Thursday.

The total price for the remaining 57.8 per cent of Reynolds would be $47-billion, of which approximately $20-billion would be in cash and $27-billion in BAT shares.

BAT Chief Executive Nicandro Durante said the deal would create the U.S. market leader and the world’s largest listed tobacco company by net turnover and operating profit.

A spokesman for Reynolds was not immediately available outside U.S. business hours.

Shares in BAT have traded at all-time highs since Britain voted to leave the EU in June, a shock decision that sent the pound tumbling and boosted the stock prices of companies that make most of their revenue outside the United Kingdom.

BAT shares, which reached a high of 5,135 pence in July, were trading up 2.3 per cent at 4,913 pence at 0722 GMT. If successful, the takeover would be one the biggest this year by a British company.

The tie-up is also one of the only mega deals left in a global tobacco industry which is already dominated by six companies, and it would create the only player with a major presence in both U.S. and international markets.

Reynolds, which bought Newport-maker Lorillard in 2014, and Altria Group dominate the U.S. market. It has so far not responded to the offer.

Smoking rates in the United States and other western markets are declining, due to increasing health consciousness and greater regulation and taxes. All big tobacco firms are investing in e-cigarettes and other vapor-based products, to diversify.

BAT has in recent years focused on international markets such as Ukraine, Bangladesh, Russia, Vietnam and Turkey where smokers are increasingly choosing premium cigarettes like its Dunhill, Lucky Strike, Pall Mall and Rothmans brands.

Its brands are sold in more than 200 markets, with market-leading positions in at least 55.

Reynolds’ stock fell to a 12-month low on Wednesday after its third-quarter earnings came in 6 per cent short of market forecast, Jefferies analysts said, on the back of a disappointing 1.5 per cent fall in domestic cigarette volumes.

BAT also said on Friday it had performed well in the first nine months of the year, growing both revenue at constant rates of exchange and cigarette volumes, driven by its focus Year-to-date revenue grew 8.1 per cent at constant rates of exchange, it said, as its biggest brands sold 9.8 per cent more cigarettes.

BAT was advised by Centerview, Deutsche Bank and UBS on the deal. </s> British American Tobacco Plc (NYSEMKT: ) has agreed to acquire Reynolds American, Inc. (NYSE: ).

Two of the world’s largest tobacco companies are joining forces, creating a behemoth of a corporation that will include Camel, Lucky Strike, Newport, Kent and other brands under the same company.

The merger makes sense as traditional tobacco companies are facing a reduction in their business due to the rise of vaping and e-cigarettes. British American Tobacco already owned a stake of Reynolds American and initially offered $47 billion for the remaining 57.8% of the company.

The new company will be “stronger,” according to British American Tobacco CEO Nicandro Durante, who said the move will offer customers direct access to products from both companies. “We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future,” he added.

The combined company will result in annual savings of about $400 million. Reynolds American CEO Susan Cameron also praised the move as the new British American Tobacco will have a strong presence of traditional tobacco products, as well as vapor and tobacco-heating products.

Reynolds alone has a 34% of the cigarette share in the U.S., while the combined company has a large presence around the world, including the Middle East, South America, Africa and Asia.

BTI shares fell 2.1% Tuesday, while RAI stock gained 3% on the news.
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Japan Tobacco announces plans to quadruple its output of smokeless tobacco by the end of next year.