SECRET
Groun 10 Year View and Conclusions 1982
SUMMARY AND CONCLUSIONS
I. The purpose of the paper is:-
(a) To review the long term prospects for the Group in relation to
B.A.T Industries' Objectives.
(b) To identify issues which need to be resolved in the formulation of
the Group's long term strategy.
2. Although many of the issues will take some time to resolve, it will be
helpful to have Board comments now so that these can be taken into
account in determining imediate priorities both for investment and for
further work. These priorities will be reflected In the Group
Investment Strategy, due to be presented to the Board in September.
3. The main characteristics of the Group's current situation can be
surmrised as follows:-
(a) Thera is still a very high degree of dependence on Tobacco
activities both for profits and, perhaps more importantly, for
cash.
(b) B.A.T.- Industries still has a relatively strong Balance Sheet but,
geographically, there is a much higher level of borrowing in the
USA and Europe than chars is elsewhere. Major new Investments in
1982/3/4 could lead to Debt:Equit-r ratios higher than the limits
previously agreed to be desirable.
(c) Although the Group is wall diversified in the developed countries,
its activities are still largely confined to Tobacco in Latin
America, Asia and Africa.
(d) Returns on Net Assets in no*-Tobacco activities are generally
below the levels required to give satisfactory cash
characteristics in these businesses.
(a) There are very few of the Group's businesses with an identified
potential for sustainable long term growth.
4. Plans to improve current levels of performance are already in hand in
the Operating Groups and Associated Cozpanles and these Plans are not
dealt with here. The main concern in this paper has been to assess the
Group's potential for long term profitable growth and to identify the
issues that will need to be resolved over the next few years if B.A.T
Industries is to meet its long term objectives.
5. In effect, it has been assumed that the Group's existing plans will
provide for adequate performance over the nexc 2-3 years but that a
number of difficult issues will need to be resolved during this period,
if the Group's impetus is to be maintained into the longer term
future.
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6. in Tobacco, the 10 Year Views !or BAT Co, BATUS, Interversa, Amatil and
imasco forecast that the market for cigarettes will grow CnI7 slowly
and that profit margins will be under extreme pressure.
It was agreed in last year's Group Investment Strategy that the first
priority in investment should be the maintenance and, where possible,
the improvement of the competitive position of the Group's
businesses.
The issue which will now need to be resolved is the relative priority
to be gives to invesments in pursuit of different strategies to:- (I)
Reduce Production Costs, (II) Extend Market Share in Domestic Markets,
(III) Expand International Brands, (iv) Make acquisitions to protect
the Group's worldwide position relative to its major competitors (e.g.
in UK/Europe), (v) Establish a position in non-smoking Tobacco.
7. In non--Tobacco activities, the long term plans for establishing new
activities in the higher growth economics in Latin America and Asia are
largely cancred on Printing and Packaging. However, progress to date
has been modest.' A first issue to be resolved in the extent to which
?O@ printing and packaging is still thought to have the potential as the
Group's major development in 3rd World Countries. A related issue is
whether action needs to be taken to accelerate the pace of Group
development within this industry. A separate issue will be the degree
of encouragement to be given to MPI's desire to expand in the USA.
S. The 10 year views of existing activities in Paper emphasise both the
dependence on Carbouless and the doubts about the longer term prospects
for this product group. The proposed expansion and development of
Marchanting and Converping activities in Wiggins Teape will provide
some counterbalance to Carboulass but, if vulnerability is to be
reduced and significant expansion is to be achieved, an entry to
integrated pulp and paper making activities may be necessa--. This
could Involve very large scale investments and the key issues are:-
(a) Whether the Group would wish to invest in these activities and, if
so, in which Geographical areas.
I (b) Whether the Group's total commitment to Paper should b* limited by
effectively using the existing paper activities to purchase a
stake (?refarably a majority stake) In a larger, more broadly
based business.
Although the starting point will be different, these Issues vill need
to be resolved whatever the outcome of the FTC investigation of
Appleton.
9. In Recailins, reasonable prospects are seen in most of the existing
RATUS activities, excluding food retailing and some identified
operations acquired with Marshall Field. However, there are doubts
about the long term future of the retailing operaticas in the UK and
Germany. The main issue to be resolved will be whether retailing is Of
long term interest co the Croup outside the USA.
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3
10. Although -.I see good prospects in Gerzany both for Home
Improvements and for the associated activities, manufacturing plastic
car components, the first objective to 'be achieved must be a successful
turnround in the Ruppe companies. The issues to be determined then
will be t@e extent to which Home Improvements and related activities
can provide the main thrust of non-Tobacco development in Germany and,
following on from this, their potential as a basis for related
investments overseas. B.A.T Industries will also need to indicate the
degree of support Interversa might expect if they went ahead to develop
a proposal to acquire a car component manufacturer in the USA.
11. In Cosmetics, BAC see good prospects for maintaining or improving
profitability but relatively low growth rates are projected for
existing activities. & key issue is the degree of encouragement that
might be given to a potential large scale acquisition in the USA which
would double or triple the scale of BAC. Failing this, the key issue
may be the relevance of BAC to the longer term development of the
Group.
12. The other =ajor non-Tobacco activity is the Imasco interest in East
'Food in the USA. . The issue here is the possible potential for these
activities elsewhere in the Group. Although the major expansion in
Past Food appears to be over in the USA, It may still have a better
potential both in Europe and elsewhere.
13. Taking an overall view, the Group's -existing activities still appear to
have limited long term growth potential. A key issue, therefore, is
the extent to which the Operating Groups' search for other
opportunities needs to be supplemented by a project to identify other
activities in which B.A.T Industries might invest.
14. A preliminary study ba; suggested that certain areas of Financial
Sarvicex could offer a good potential for the Group. Further work is in
hand to extend the study of possible opportunities in this field.
15. Other L33UCS arising from the 10 Year View are:-
(a) The degree to which Group development in particular industrial
activities is tending to be national or regional rather than
worldwide - and the acceptability of this as a long term pattern.
(b) The need for new approaches to developing non-Tobacco activities
in the third world.
(c) The possible need for major sales of assets if it were decided to
embark on a major acquisition to establish a new industrial
activity or a new strategy.
(d) The acceptability of the Group's trend towards greater dependence
on the USA.
16. Although most of the issues raised can be resolved over the next 2-3
years, it may be f elt that there Ls rather *are urgency to taking a
view on the degree of encouragemenc which should be given to Operating
Groups who are intending to develop proposals for further major
investments in the USA.
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23 rd June, 1982
RS/PS
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BAT Industries document for Province of British Columbia 23 April 1999