Seita, Tabacalera to Merge
Antitrust Review to Determine Fate of Domestic Cigar Holdings

PARIS, FRANCE - Two leading European tobacco manufacturers - Spain's Tabacalera S.A. and France's Seita S.A. - have agreed to the terms of a proposed merger that will create the world's fourth largest tobacco group.

Described by the partners as a merger "between equals," the deal would create a group with operational headquarters in Paris and legal headquarters in Madrid, and stock market listings in both.

The complex deal would involve the creation of a new company called Altadis, which would bring together Tabacalera and Seita on a 50/50 basis. Tabacalera would then make a takeover offer on terms equivalent to 19 Tabacalera shares for every six Seita shares, valuing the French cigarette firm at $3.3 billion.

Altadis will rank as the fourth-largest tobacco group in the world, excluding China, in terms of product volume after Philip Morris Cos., British American Tobacco PLC, and Japan Tobacco.

Economies of scale in cigarette manufacturing, which represents a vast majority of both firm's activities, is the driving force behind the deal. The famous dark-leaf French cigarette brands Gitanes and Gauloises will come under the same umbrella as Tabacalera's Fortuna and Ducados brands.

But the new company would also be the world's largest manufacturer of cigars, producing 3 billion units per year, with a world market share of 24.7 percent. The company's U.S. cigar holdings could create the only regulatory stumbling block to the merger. Seita, which purchased Consolidated Cigar Co. earlier this year, and Tabacalera, which owns Hollco-Rohr and Havatampa, are expected to face tough regulatory scrutiny from antitrust U.S. authorities, since the group's combined cigar business would account for 36% of the overall cigar market here: 47 percent of the U.S. mass and small cigar markets, and 20 percent of the high-margin premium market, according to analyst estimates.

Although some asset divestments of cigar holdings are possible - Seita president Jean-Dominique Comolli said the new group was ready to sell a few cigar brands if necessary - analysts expect Altadis lawyers to position the relatively tiny cigar market as part of one overall tobacco market.

In the face of rapid consolidation in the world tobacco industry, the two mid-sized tobacco groups had been expected to merge after years of limited cooperation.

Cesar Alierta Izuel, current chairman of Tabacalera, and Seita chairman Jean-Dominique Comolli will be named co-chairmen of the newly-merged group. Comolli will be responsible for the cigarette division while Alierta will take charge of cigars and distribution.

The two companies said the merger should be in place by the end of December, pending approval by competition authorities in both the European Union and the U.S.

Feds Sue Tobacco Companies
WASHINGTON, DC - The Justice Department filed a long-anticipated lawsuit in September alleging that tobacco companies engaged in a conspiracy in violation of the federal law against civil racketeering. The Federal government hopes to recover an estimated $60 billion it claims taxpayers have spent on smoking-related health care.

The lawsuit filed in U.S. District Court alleges the cigarette companies conspired since the 1950s to defraud and mislead the American public and to conceal information about the effects of smoking.

Named in the suit are seven U.S. companies and two British firms which together produce 98 percent of all cigarettes consumed domestically. Included are Philip Morris Inc., R.J. Reynolds Tobacco Co., American Tobacco Co., Brown & Williamson Tobacco Corp.; British-American Tobacco P.L.C., Lorillard Tobacco Co. Inc., and Liggett and Myers Inc.

The Justice Department insists it is not trying to drive the tobacco companies out of business, despite the potentially crippling damages. Tobacco industry spokesmen have questioned whether the government has the authority to bring such a lawsuit, given more than three decades of federal government warnings to the public about the health dangers of smoking.

The prospect of a Federal lawsuit was a surprise element in Clinton's State of the Union speech last January. It followed an expensive settlement by the cigarette makers with most state governments last year, based on their outlays for health insurance. The industry agreed to pay the states more than $240 billion over 25 years. The civil lawsuit follows a stalled Justice Department criminal investigation that the department began scaling back this spring.

CANF Campaign Takes Aim at Cuban Coverage
MIAMI, FL - When Cigar Aficionado featured an extensive cover story on Cuba last August, many expatriates within the Cuban community were dismayed at the romanticized portrayal of the island nation and calls to end the U.S. economic embargo.

So dismayed, in fact, that one group responded with a full-page color ad offering an alternative view of modern Cuba in the subsequent issue of Cigar Aficionado. The ad was paid for by the Miami-based Cuban American National Foundation (CANF) in an attempt educate the magazine's readership about the dismal situation in Cuba under the Castro regime.

The ad, designed by Miami's Anthony Baradat Iglesias agency, comes as a response to the earlier, heavily criticized issue of the magazine featuring a glowing, romanticized portrayal of Cuba, which was viewed by many Cuban immegres as patently offensive. According to CANF chairman Jorge Mas, "It is clear that Cigar Aficionado is intent on promoting a completely distorted image of Cuba." The ad is titled "Smoke Screen," and it urges readers to "Lift the smoke screen, not the embargo."

Holts, Peterson Sign Distribution Agreement
PHILADELPHIA, PA - Holt's Cigar Holdings, Inc. has signed an exclusive distribution agreement with Peterson of Dublin, Ireland, manufacturer of Peterson Pipes. The agreement goes into effect on October 10, and calls for Ashton Distributors, Inc., a subsidiary of Holt's, to provide exclusive U.S. sales of Peterson's pipes and other tobacco products to retail tobacco stores nationwide using Ashton's sales force.

Robert Levin, Holt's Cigar Holdings, Inc. president, said the company was very excited about the new agreement, "because it represents growth opportunities for both companies." Peterson Pipes has been manufacturing pipes in Dublin, Ireland since 1865. The company offers one of the widest pipe ranges available.

Cigar Competition Intensifies, Says General
Quarterly Results Remain Off

NEW YORK, NY - General Cigar Holdings, Inc. reported that third quarter sales were down 7.6 percent over last year's same quarter, while total income was down by 34 percent.

Third quarter income from continuing operations, and net income, were $5.36 million on sales of $38.7 million. In the 1998 third quarter income from continuing operations, and net income, was $8.12 million on sales of $41.9 million, including $1.9 from the discontinued operations.

Edgar M. Cullman, Jr., president and c.e.o., stated that, "There are signs that the decline in sales that the company and the industry began to experience in 1998 has begun to level off and the secondary brands that had disrupted the marketplace in the past two years are becoming a less significant factor in the industry. However, competition has intensified among the major brand manufacturers."

The company is pursuing a strategy to increase its market share by expanding its retail shelf presence and leveraging its well-known brands.

"We will continue to pursue opportunities that may arise in the international cigar marketplace and focus on our previously announced expense reduction program," Cullman reiterated.

General is introducing two new extensions of the company's core trademarks in the fourth quarter - Macanudo Maduro and Partagas Serie S, a line of distinctively shaped Figurado cigars. The introductions follow the successful launch of Macanudo Robust in last year's fourth quarter.

Bills Seek Internet, Mail Order Sales Ban
WASHINGTON, DC - The sale of tobacco over the Internet or via mail order would effectively be banned under separate legislative bills filed in July.

U.S. Rep. Edward J. Markey, D-Mass., introduced the "Cigars Are No Safe Alternative Act" in the House of Representatives, and Sen. Richard J. Durbin, D-Illinois introduced a nearly identical bill, the "Cigars Are Not a Safe Smoking Alternative Act" in the Senate.

While both bills target youth access to tobacco products, they outline significant retail restrictions, prohibiting direct consumer access to cigars in retail shops and limiting all sales transactions to face-to-face exchanges, thus eliminating all phone, mail-order, or Internet sales.

In addition, undisclosed health warnings would be required on cigar labels and cigar boxes. The bills also call for government studies and reports to determine the effects of cigar smoking, nicotine dependence, and yields of tar, nicotine, and carbon monoxide. The Secretary of Health and Human Services would be charged.

SMOKESHOP - October/November 99