Combination May End Price War : Top Canadian Cigarette Makers Agree to Merge
Two of Canada’s largest tobacco companies agreed Friday to merge, a move that may end a yearlong price war that has jolted the industry.
The merger will unite No. 2 Rothmans of Pall Mall Ltd. with fourth-ranked Benson & Hedges (Canada) Inc., a wholly owned subsidiary of the American conglomerate Philip Morris. The companies did not disclose the value of the deal.
Rothmans will own 60% of the new company, to be named Rothmans, Benson & Hedges Inc., with Philip Morris holding the remainings 40%. The Canadian Rothmans is a subsidiary of the British firm Rothmans International PLC.
“The amalgamated company will be positioned to respond more effectively in a highly competitive market following a period of declining sales and profits throughout the tobacco industry in Canada,” Rothmans said.
Imperial Tobacco Ltd., owned by Montreal-based Imasco Ltd., is the market leader in Canada. RJR Macdonald, a unit of RJR Nabisco of Winston-Salem, N.C., is ranked third. The four companies have been fighting for the past year over an industry marked by steadily declining consumption prompted by health fears.
Production declined 5.2% to 58.5 billion cigarettes for the year ended March 31, 1986, and market analyst Philip Koven of Richardson Greenshields of Canada Ltd. predicted another 2.5% downturn in the next year.
Imperial has about 53% of the market, Rothmans has 21%, RJR Macdonald has 16% and Benson and Hedges 10%, Koven estimated.
“My bet is that when they merge, they will stop discounting, and on that basis everybody benefits,” Bache Securities analyst Ian Osler said.
The average retail price of a pack of cigarettes is now $2.16. Despite discounting on the wholesale level, retail prices have risen in the past year due to higher taxes.
Rothmans and Benson & Hedges will profit by consolidating their marketing, administration and production facilities, analysts said.
Osler predicted that per-share profit for Rothmans could soar to about $6.12. in the 12 months following the deal, compared to $1.57 for fiscal 1986.
Rothmans, whose brands include Number 7, Rothmans and Craven “A”, reported a profit of $6.98 million in the fiscal year ended March 31, 1986, down from $12.5 million in the previous year. It had fiscal 1986 revenue of $465.8 million, up from $402 million.
Rothmans, which is 71.2% owned by Rothmans International, had fiscal 1986 revenue of $1.12 billion.
New York-based Philip Morris had 1985 revenue of $16 billion. Benson & Hedges Canada is part of its Philip Morris international unit, which had 1985 revenue of $3.99 billion and net income of $434 million. Philip Morris does not break out results of Benson & Hedges.
