Production, Distribution, Regulation, Trade...

Imperial Tobacco Group to buy Altadis S.A.
Fate of Current Altadis/Habanos Joint Venture Remains Uncertain

London - Britain’s Imperial Tobacco Group PLC has agreed to buy Franco-Spanish rival Altadis S.A. for $17.4 billion in a deal that will see it become the number two European cigarette company.

Imperial is currently ranked number four in cigarette production, while Altadis is ranked number five. The deal would close the gap with the world’s top three: Altria, British American Tobacco, and Japan Tobacco. In Europe, Imperial will become No. 2 behind market leader and Marlboro-maker Altria. It previously trailed Altria, BAT, and Altadis.

The combined company would produce 312 billion cigarettes a year, including Imperial’s Lambert & Butler and Richmond brands in Britain and West and Davidoff in Germany. Altadis makes Gauloises, Gitanes, Ducando and Fortuna cigarettes and is the world leader in premium cigars.

Imperial’s offer of 50 euros in cash per Altadis share matches a rival offer from CVC Capital Partners, one of Europe’s largest private equity groups. Altadis said its board would recommend the offer to shareholders unless it received a higher bid.

The Imperial bid, which includes acquired debt and the purchase of a minority stake in an Altadis subsidiary is worth $22.4 billion, will be funded by a rights issue of up to $11 billion.

The deal will yield cost savings of around 300 million euros a year and be earnings enhancing in its first full year.

The deal follows Japan Tobacco’s purchase of Britain’s Gallaher in a $15.3 billion deal earlier this year and is expected to be the last big deal for a while as regulatory concerns are likely to prevent another one, analysts said.

Altadis’s chairman Jean-Dominique Comolli and Chief Executive Antonio Vazquez will join the Imperial board.

In October, the European Commission extended its antitrust review of the deal, on commitments offered by Imperial. Although not specified by the regulator, commitments usually mean divesting parts of the company which would have led to excessive concentration in the markets.

The takeover would also bring Imperial into the highly profitable cigar markets. Altadis S.A.’s domestic subsidiary, Altadis U.S.A., is the market’s leading premium and mass market cigar company and the U.S. trademark owner of numberous Cuban brands.

Gareth Davies, chief executive of Imperial Tobacco, hopes to secure Cuban government support for the deal and persuade it not to exercise a change of control clause that it holds over Corporacion Habanos, a 50-50 joint venture which Altadis operates in Cuba that owns the country’s most famous cigar brands, including Montecristo, Cohiba, Romeo y Julieta, and Partagas.

Davies says he sees considerable opportunities to market Habanos “luxury brands” in the Far East, Eastern Europe, and the former Soviet Union, and predicted that there would be “considerable upside” in the event of an end to a US trade embargo against Cuban products.

TSA Removes Aircraft Cabin Lighter Ban

Washington, DC - In July, the Transportation Security Administration (TSA) removed its ban on common lighters in the cabins of domestic commercial airplanes. According to a TSA statement, “lighters no longer pose a significant threat” to airport and air travel security.

Since December 2004, the TSA has implemented Section 4025 of the Intelligence Reform and Terrorism Prevention Act, which banned all lighters from passenger cabins of commercial airfare. As a result, lighters were also banned in carry-on luggage. Last year, the agency confiscated almost 12 million lighters.

According to the TSA, the U.S. is the only country in the world to ban lighters, and repealing the prohibition is “a common sense, risk-based security decision,” which will allow inspectors to find more dangerous items such as bombs and other explosives.

“We have worked closely with the TSA and the Department of Transportation on this issue and are relieved to see the ban lifted in the United States,” said Greg Booth, president and c.e.o. of Zippo Manufacturing Company, Bradford, Pa. The Federal Aviation Administration (FAA) reminds the traveling public that Department of Transportation (DOT) rules continue to prohibit lighters and matches in checked baggage.

Under the DOT’s Hazardous Materials Regulations (49 CFR, Parts 100-185) passengers and crewmembers may carry one lighter or book of matches in the aircraft cabin, but not in checked baggage. This is also consistent with international air carriage regulations.

Under the DOT rule, passengers and crewmembers may carry one packet of safety (book) matches or one lighter intended for individual use in the aircraft cabin (in carry-on baggage or on one’s person) but not in checked baggage.

Lighter types allowed in the aircraft cabin include both gas and butane lighters - such as Bic or Scripto - and absorbed liquid - such as Zippo. However, torch lighters, grill/fireplace lighters, micro-torches, and lighters with unabsorbed liquid fuel are prohibited in the aircraft cabin and in checked baggage. Lighter refills, lighter fluid, and strike-anywhere matches are also prohibited in the aircraft cabin and in checked baggage.

Further information on the exceptions and limitations on hazardous materials in the aircraft cabin and baggage is available from the FAA Office of Security and Hazardous Materials at: http://ash.faa.gov

Pennsylvania Fails to Pass Cigar, OTP Tax

Harrisburg, PA - Even while such tobacco-centrict states as North Carolina, Kentucky, and West Virginia have levied excise taxes on cigars and OTP recently, efforts to do the same in Pennsylvania stalled in the state legislature this year. But observers belief it’s only a matter of time.

Thanks to a budget surplus of $650 million and a large group of new legislators who were elected on a platform of no tax increases, support for tobacco taxes dwindled and Pennsylvania’s new budget - which was signed 16 days late - included no tobacco excise taxes. Proposed taxes would have raised an estimated $30 million to $40 million, potentially earmarked for biomedical research or the Department of Welfare. Democratic governor Edward Rendell had wanted more money for his sweeping health-care plan.

Industry lobbying also holds considerable sway at the statehouse, says Rep. Dan Frankel, D-Squirrel Hill. "The small minority really commands the political stage" on the tobacco issue, he said. Most polls, he added, show majority support of a smoking ban and expanded tobacco excise tax.

Smokers, collectors, cigar shops, distributors and tobacco farmers in Lancaster and other central and eastern counties all teamed to oppose the tax, said Keith Meir, c.e.o. of Cigars International, one of the largest cigar distributors in the United States.

"Three of the five biggest U.S. cigar companies are in Pennsylvania, and moved here because of the environment," notes Meir, meaning the absence of excise taxes. "That's why we came here. There's no [geographic] reason to be here." Meir told lawmakers that any significant excise tax on cigars could lead to the loss of $20 million worth of Pennsylvania jobs related to the cigar industry - along with Cigars International, Holt's Cigar Co. and the Tinder Box, all headquartered in the state. Tinder Box moved here from California, because of the tax-free sales.

Philip Morris USA Sues Rogue Retailers to Stop the Sale of Counterfeit Marlboros

Concord, NC - Philip Morris USA has filed lawsuits against retailers selling counterfeit versions of the company’s Marlboro brand cigarettes. The company filed three suits against 105 retailers in federal courts in New York and New Jersey. The lawsuits are aimed at stopping the sale of counterfeit cigarettes and the unauthorized use of Philip Morris USA’s trademarks.

“The sale of counterfeit cigarettes undermines the value of Philip Morris USA’s brands and the legitimate channels through which our products are distributed and sold,” said Charlie Whitaker, vice president, compliance and brand integrity, Philip Morris USA. “Selling counterfeit cigarettes is illegal, and we will take action to protect our brands.”

The lawsuits, filed in the Southern District of New York, the Eastern District of New York and the District of New Jersey, name as defendants retailers in both states and are the result of the company’s periodic marketplace purchases of cigarettes. Each of the named defendants sold counterfeit cigarettes during recent purchases in New York or New Jersey. Philip Morris USA shares the results of these purchases and other information with law enforcement at the federal, state and local levels.

“We believe that the vast majority of retailers are committed to selling cigarettes legally and responsibly,” said Ross Webster, vice president, customer service and merchandising, Philip Morris USA. “We hope that these lawsuits protect retailers from unfair competition and encourage others to comply with the law.”

RTDA Changes Name to IPCPR

Atlanta, GA - Following the 2007 trade show and convention in Houston, Texas, the 75-year-old Retail Tobacco Dealers of America (RTDA) changed its name to the International Premium Cigar and Pipe Retailers Association (IPCPR). The association’s officals say the name better reflects the core business of its retail members and has fewer negative connotations. “The board of directors has taken this step to better define what our association and…retail members…represent in the marketplace,” said executive director Joe Rowe in a statement. “The first 75 years of RTDA is the beginning chapter of [the] trade association. IPCPR begins a new chapter in the premium cigar and pipe industry.”

General Cigar Settles Cohiba Infringement Suit

Richmond, VA - General Cigar Co. Inc. announced today that the company has reached resolution of a federal trademark lawsuit which alleged infringement of its Cohiba trademark.

The suit was filed in May 2006 in the United States District Court for the Southern District of Georgia against defendants Southern Smoke LLC; Corner Cigars Distributing Inc.; Big Dog Cigars LLC, Seminole Cigar Factory and others.

In resolving the lawsuit, the defendants acknowledged that the “yellow band” Cohiba cigars at issue constituted infringement of General Cigar’s Cohiba trademark of cigars in the United States. In addition, the defendants agreed to deliver to General Cigar for destruction approximately 10,000 yellow band Cohiba cigars. The defendants also agreed to cooperate with General Cigar in its ongoing efforts to identify sources engaged in infringement of Cohiba cigars in the United States. Finally, the defendants consented to entry of a permanent injunction against the sale, marketing, distribution or other use of the Cohiba name in the United States on goods not manufactured by General Cigar and will pay General Cigar a cash settlement of an undisclosed amount.

Daniel Nuñez, president and chief operating officer of General Cigar, commented, “We are very pleased with the outcome of this case.”

Nuñez continued, “This case is another step in our ongoing efforts to stop the sale and marketing of cigars which infringe upon our federally protected trademark rights.”

In the lawsuit, General Cigar alleged that the defendants infringed the company’s Cohiba trademark in violation of federal and state law by selling and distributing cigars bearing the Cohiba name that were not manufactured by General Cigar. The infringing cigars were sometimes referred to as “yellow band Cohiba” cigars and, like General Cigar’s Cohiba cigars, were manufactured in the Dominican Republic.

The lawsuit was the result of an extensive joint effort conducted by General Cigar’s field sales team and a special task force retained by the company as part of its ongoing, nationwide effort to aggressively investigate, pursue and eliminate such infringing products from the marketplace.

In February of 2005, a federal court confirmed General Cigar’s ownership of the Cohiba mark in the United States.

In addition to the Cohiba base brand, General Cigar manufactures and markets Cohiba XV which was introduced in 2001 and Cohiba Black which debuted last year. All are handmade in the Dominican Republic.

Santa Fe to Double 2007 Organic Tobacco Crop

Santa Fe, MN - Santa Fe Natural Tobacco Company expects to process 600,000 pounds of organic tobacco this year - about double of what it used last year.

“When we first tried to set up an organic growing program back in 1989, farmers laughed at the idea of growing organic tobacco,” says Mike Little, senior vice president for operations at the company. “Now they see it as a way to get a premium price for their crop - almost double the price paid for conventionally grown tobacco - and we are encouraging them to grow other organic crops, like sweet potatoes and lettuce.”

A growing number of smokers, a group usually not portrayed as organic friendly, are turning to the company’s organic styles of its Natural American Spirit brand, says Little. Overall, Santa Fe has captured one-half of one percent share of the U.S. cigarette market for its “all natural, additive-free” tobacco, which includes styles of certified USDA organic tobacco products.

Growing organic tobacco is not easy, says one of the company’s growers. “Fields must be separated from conventional crops; detailed records of planting, cultivation and application of crop dressings must be kept; and more hand labor is required,” says Bill Wyatt, who has been growing organic tobacco since 1998. “But the satisfaction of producing ‘pure’ tobacco is hard to beat. It’s just a pure product, basically what the Indians or the early colonists would have done.”

“Our farmers don’t use yellowing agents,” says Fielding Daniel, the company’s leaf manager. “They don’t use herbicides and they don’t use suckering agents. We sample and test every bale of organic tobacco. We check all the way through three pages of chemicals. Our tolerance level is zero.”

Each bale of the company’s organically grown tobacco is tested for residues of banned chemicals. “We take this very seriously,” adds Fielding. “In fact, we’ve only had to reject two bales of tobacco over the years of our organic growing program. That shows the dedication of our farmers to organic principles.”

While Santa Fe Natural Tobacco Company’s organic crop is expected to be double that of last year, the capacity to grow enough in the United States does not yet exist. For that reason, the company supports organic farming in Brazil, contracting with 40 farmers, all small, family run farms.

“We’re committed to organic and will continue to promote organic tobacco production,” says Little. “In fact, we plan to start transitioning our earth-friendly growers, who already avoid using most synthetic chemicals, fertilizers and pesticides, to certified organic production.”

ProCigar to Host Festival in Dominican Republic

Santiago, DR - Procigar (La Asociación de Fabricantes de Cigarros de la República Dominicana), will hold the first-ever Procigar Festival from March 5–7, 2008 in Santiago de los Caballeros, in the Dominican Republic.

A $595 festival pass includes tours of La Aurora, General Cigar, Tabadom Holdings (Davidoff), and Matasa (Fonseca) factory, tobacco field tours, luncheons with Procigar c.e.o.’s, admission to nightly dinners and parties, tasting seminars pairing drinks with cigars, a festival t-shirt and cap, and a special edition box of cigars to smoke during the event (a $300 value). Attendees may also upgrade their trip with an additional weekend visit to the Altadis Tabacalera de García factory in La Romana and participation in the Procigar golf tournement at Casa de Campo.

Retailers who sign up 10 store customers receive a free festival pass for their own use. Participants may register online at www.procigar.org.

SMOKESHOP - October, 2007