BAT to Acquire Mexico’s Largest Cigarette Maker

In a striking example of the tobacco industry’s increasing focus on developing countries, Britain’s BAT Industries announced Tuesday it is paying $1.7 billion for control of Mexico’s largest cigarette maker, Cigarrera La Moderna.

The deal underlines the appeal of smoker-friendly Latin America for big cigarette producers facing declining U.S. sales and the likelihood of billions of dollars in payments in coming years to settle American lawsuits.

The purchase comes just a month after Philip Morris Cos. boosted its stake in Mexico’s other major cigarette producer, Cigatam, from 29% to 50%, in a $400-million deal.

“All the big ones are looking to the emerging markets. That’s the key to growth,” said Alyce Andrews, Latin American food analyst for Merrill Lynch & Co. in New York.

The deal also marks one of the biggest single foreign investments in Mexico in years.

Mexico’s cigarette market is expected to start growing this year as the country emerges from its worst recession in six decades. During the crisis, many consumers had switched from more expensive cigarettes to cheaper brands offered by the country’s two manufacturers, hurting their revenues.

For the first time since 1994, that trend is reversing, said Marco Vera, an analyst at Deutsche Morgan Grenfell, a brokerage house in Mexico City.

La Moderna manufactures and sells brands such as Dunhill, Winston and Viceroy, under license, and its own brands Montana and Boots.

BAT is a big player in the United States through its ownership of Brown & Williamson of Louisville, Ky., whose brands include Benson & Hedges, Kent, Kool, Pall Mall and Lucky Strike.

Mexico is also attractive to cigarette producers because of its young population and few restrictions on tobacco. With one in four Mexicans smoking, cigarettes are as ubiquitous as in Hollywood movies of the 1950s.

BAT could expand cigarette use through its greater marketing and distribution expertise, Vera said. The British company said La Moderna has spare manufacturing capacity for about 15 billion cigarettes, which could be exported.

Even before Tuesday’s announcement, BAT had invested heavily in Latin America, where it accounts for about 60% of the region’s cigarette sales.

“This acquisition offers us the rare opportunity to buy a sizable and very profitable player in a growth market,” said Martin Broughton, chief executive of BAT.

The firm is the world’s second-largest cigarette maker after Philip Morris.

The deal would allow the current owners of La Moderna to either remain as minority partners or leave the company after six months. Under the agreement, La Moderna’s outstanding stock would double. Then, BAT would pay $1.7 billion for half the stock plus two extra voting shares.

If the company’s current owners decide to leave the company, they’ll walk away with the $1.7 billion, said Mateo Mazal, La Moderna’s marketing director. If they stay, the money will remain in the firm, he said.

The company is a subsidiary of Empresas La Moderna, headed by Alfonso Romo, who belongs to one of Mexico’s oldest and most storied industrial clans, the Garza Sadas of Monterrey.

The 46-year-old billionaire bought the cigarette firm in 1986 and gradually built it into an agriculture and biotechnology giant. La Moderna had sales of $1.8 billion last year.

BAT’s purchase of La Moderna also illustrates how the company--and Mexican economic policy--have come full circle. BAT owned the Mexican firm until the 1970s, when it sold control because of legislation that restricted foreign investment in Mexico.

These days, Mexico and other Latin American countries avidly court foreign investment.

La Moderna’s stock soared 5.9% on the Mexican stock exchange, and the company’s American depositary receipts rose $1.50 to $24 on the New York Stock Exchange.

TOBACCO EARNINGS: D3