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Group Investment Strategy 1983
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Introduction
1. The purpose of the Group investment Strategy paper is to propose
strategies for achieving B.A.T Industries' long term objectives.
2. After discussion and agreement by the Board, the paper will be used as the
basis far developing B.A.T Industries' Guidelines for each Operating Group
and for the other business units reporting directly to the centre. A
draft of these Guidelines will be presented for discussion and agro t
at the October meeting of the Board.
3. In addition to the strategies that will be implemented through Operating
Groups there will also be a need for action to be Initiated and progressed
La the Centre. This aspect of B.A.T Industries' strategy in also
considered in the paper presented here.
4. The information base for the Investment Strategy has already been
presented to the Board in the Future Business Environment paper in June
and in the Group Financial Forecast and Group 10 Year View papers in
July.
.5. The main conclusions from these papers ran be summarised as follows:-
(a) There can be cautious optimism about the prospects for world economic
growth and, although the underlying financial Imbalances will
restrict the abilities of governments to achieve rapid growth, the
present modest recovery is ezpacted to be sustained. Rowever, it
will still be necessary to prepare for a normal cyclical downturn in
worldwide activity in 1985. In addition, there will be continuing
vulnerability to major crises which could erupt, especially In Latin
America and the MM* East. Rence, B.A.T 'Industries' strategies and
plant need to be sufficiently robust to be able to withstand these
adverse factors.
(b) Although considerable progress has boom made in formulating plane to
improve current levels of performance, the strategic review of the
Tobacco activities and of the existing non-Tobacco activities bive so
far failed to show prospects for sustained profitable growth on a
scale sufficient to meet B.A.T Industries' objectives.
(c) Tz addition, the studies of potential new B.A.T Industries'
activities, which were initiated last year, have not yet reached a
stage where it is possible to identify specific alternative
opportunities for investment.
(d) The review of resource availability suggests that rigorous action
will be needed to provide B.A.T Industries with the capability to
make the major investments which are thought to be necessary to lay
the foundations for satisfactory long term development.
6. It Is against this background that the strategy proposals have been node.
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Group Investment Strategy: Overview
I. The strategies proposed in this paper reflect a view that there is a
need to reshape the Group and that the main moves in this reshaping
should be completed over the next 2-3 years.
2. The aim will be to move towards a Group consisting of a small number of
major interests, each made up of activities which are closely related
and which have complementary strengths.
3. It will also be a requirement that each of the businesses within the
Group should have satisfactory c4sb characteristics and that a high
proportion of the Group's activities should be in leadership positions
in profitable growth markets or market segments.
A. In order to achieve the portfolio of activities that is required it
will be necessary co accelerate the identification of suitable
investment opportunities both in activities related to existing
businesses and in new are" of activity.
5. At the same time it will also be necessary to improve the availability
of the resources required to fund Investment. Particular emphasis will
be given to:-
(a) Increasing the net cash flow from Tobacco;
(b) Divesting unprofitable businesses;
(c) Divesting other businesses which do not fit with the long term
plans for the Group.
6. In addition to providing an additional source of funds, the divestments
will also result in a reduction in the total number and disparity of
the businesses within the Group.
7. It is proposed that there should be a reversal of the previous policy
which aimed to obtain a broad spread of activities in each element of
the Group. In future, the aim should be to put most emphasis on
expanding the more successful activities within an Operating Group even
though this may result in some businesses, or even whole Operating
Groups, becoming dependent on a narrow range of products or
activities.
S. Geographically, a high priority will continue to be given to improving
the returns in the UK and European based businesses.
9. In the US&, priority will need to be given to cash generation and to
the : long term strategy for B&TUS, including
accelerated investment in retailing.
10. There will be continuing emphasis on broadening the industrial base in
Latin America and the East Asia/Pacific Basin region by identifying
suitable non-Tobacco investments. However,' it may be necessary to
carry out more work at the Cent re to determine which industrial sectors
ibould be preferred before pressing for the identification of specific
investment opportunities at regional level.
11. Investment opportunities in Africa and in the Indian sub-continent will M)
be dealt with an an individual basis. He a GhOWS Sh-111A US-AS6 CD
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Strategies for the Existing Businesses
Tobacco
1. Although there should be a continuing objective to develop
International Brands and to maintain and expand domestic market shares,
rigorous cost/benefit analysis should be applied to all expenditure.
Growth objectives should be pursued only as long as satisfactory
returns can be guaranteed on incremental as well as total expenditure.
2. Despite the limitations an production and marketing expenditure, R & D
expenditure should be maintained at a level sufficient to at least keep
pace technically with major competitors.
3. Improving or at least maintaining profitability should continue to be
given a high priority. Particular emphasis should be given to
improving asset productivity and there should be a specific objective
to reduce leaf stocks by IOZ over the next 2 years.
Aw I
Priority should be given to improving the returns from the European
Tobacco businesses. &. pien IF_ Vaeftwktotag these activities should
be prepared and Implemented.
5. 7h for thp.-K market should reviewed *Ad, JW the emOo-df 1983,
,-.there should tber be clej strategivwlor imppqlag
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the USA, the first priority should be to improve the returns In the
Isting businesses, with particular emphasis on the Marshall Field
should also atiply to Gimbels, where the aim should
improve performance without major new investment.
S have work in hand to identify the real growth potential in
retailing in the USA. The aim of this work should be to develop firm
proposals for the optimal size and range of activities that should be
established, including entries to new market segments and the
development of new concepts.
3. In Germany, the Horten situation must be resolved by the end of 1993,
either by agreeing a satisfactory long term plan for this activity or
by divestment.
4. In the UK, Argos should continue to be developed to its full Potential.
By the and of 1983, proposals will be developed for a strategy to
develop the Group's interests in UK ton-food retailing to a size where
they can make a siguific4at contribution to Group trading profits (I.e.
5. from Mt-food Retat4ng-
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1. Wiggins Teape should share fully in the expansion of the market for
Carbouless but should seek to achieve this with a minimum of new
investment in base-paper capacity.
2. The achievement of improved levels of performance in the UK should
continue to receive a high priority both in Carbonless and in other
activities.
3. Although there should not be an explicit objective to reduce this
dependence on Carbonless, other investment opportunities should continue
to be sought. The current proposals for expanding Wiggins Teapels
marchantiug and converting activities should be developed further.
4. In the USA, Appleton should also seek to pursue growth in Carbonless
without a major investment in new base-paper capacity, unless this can be
achieved on favourable terms through acquisition. Further consideration
will. be given to the long term future of BATUS within the paper industry,
taking into account the returns that can be earned and the opportunities
open to the Group.
5. Further consideration is being given to expanding the existing paper
operations in Brazil by integration within Souza Cruz, followed by further
investment. Firm proposals will be developed during 1983.
6. The Group should aim to become the major shareholders in Aracruz. If this
is not possible, the desirability of continuing with this investment
should be reconsidered.
Printing and Packaging
1. It was agreed in last year's investment strategy that before the end of
1983, B.A.T Industries needs to determine whether or not the Group has a
future in printing and packaging.
2. ley issues to be considered will be the overall profitability of the
industry and the profit potential and growth prospects of the Group's
existing activities. It will also be necessary to determine whether,
after divestment of businesses which cannot meet the Group's objectives,
HPI has sufficient potential to justify its continuing existence as a
separate Operating Group.
3. The main options to be considered are:
(a) To continue with a reshaped M;
(b) To divest many of the existing businesses but to continue with
certain individual operations (e.g. rigid plastics) which can then be
transferred to other Operating Groups;
To attempt to dispose of the whole of 11PI.
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Cosmetics
1. The current strategy is to consolidate and develop existing activities
but to reinforce these by minor acquisitions where these can be funded
within the existing Debt:Equity limits.
2. BAC is expected to grow slowly and will continue to represent only a
relatively small contribution to the Group's profits. It is proposed
therefore, that there should be a firm Intention to find a buyer for
this business in the early part of 1984.
Rome Improvements
1. The first priority should continue to be the consolidation of the
existing activities in Germany to a stag* where these are adequately
profitable and are able to provide a base for further development in
Germany and overseas.
2. It is still the intention to acquire the outstanding minority in
Petulan.
3. A longer term strategy is being formulated for the development of Rome
Improvements and related activities, including plastics conversion.
The strategy will cover both Germany and other countries where it is
possible to establish a leadership position in a defined market
segment.
4. An important criterion in determining the direction of future
development will be that Rome Improvements should be restricted to a
limited number of major activities and should have a clear focus in a
few well defined market segments.
Other Existing Activities
1. It will be necessary to review carefully tha performance and potential
of each of the other Industrial activities in the Group. Activities
which do not matt B.A.T Industries' criteria will be considered for
divestment. This will includis businesses which are unprofitable or
which are not in a leadership position in the market segment in which
they operate. However, it will also include businesses which are
profitable but which do not have the potential to reach a size where
they can make a significant contribution to profits.
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strategies ssociates
1. B.A.T Indwfries will Wk to exert theAsximum influeuc&,dr the
et of th: Asspefat:d,Companirjv,-"Oapplying Grow ectiv es
in7ftaent crit r;4'in th ame war ,as to lying Grou
Z. Providing the investments meet B.A.T Industries' objectives for returns an
assets, the intention is to maintain or increase the percentage of the
total equity of the Associated Companies held by B.A.T Industries (i.e. by
participating in rights issues or by purchasing further equity).
Exceptions to this will be those cases where there is either a statutory
requirement or an existing commitment to reduce the total equity stake
LU (e.g. Malaysia).
In cases where the Associated Company is not providing a satisfactory
return, where the prospects are uncertain or where B.A.T Industries is
unable to exert influence on the company, divestment will need
to be considered. DOuring 1983/4, the future of the investments in ITC and
Holins will need to be reassessed.
4. For Imasco
(a) Imasco's strategies for development throughout North America will
need to be reconciled with 3ATCS plans in order that, so far as is
possible, potential conflicts of interest are avoided.
(lb) Within the existing business, particular emphasis will be placed on
the development of strategies for the Retail division and for the
Fast Food operation.
W Further discussions need to be held regarding the possible extension
of Imascols interests in energy/resource based projects.
(d) The agreement to reduce the B.A.T Industries' shareholding to 402 has
been implemented by not taking up share loan" and it is now intended
to maintain the equity holding at this level.
5. For Amatil
(a) It is intended to discuss the longer tam strategy for Amatil during
the Chairman's visit in November.
(b) B.A.T Industries will continue to encourage Amatil to base their
strategy on the development of a major new activity within Australia,
preferably in consumer goods or services this should be combined
with the divestment of those existing operations which are
unsuccessful or whose prospects are suspect. The existing Printing
Packaging operations will be out element of the business that
require a rigorous review.
(c) If suitable investment opportunities are identified, B.A.T Industries
should be prepared to consider co=i extra funds to Australia, to
assist in financing the investment and to maintain the equity holding
in kmatil at 40%.
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Implications of Existing Business Strategies
Profit Implications
1. The Group 10 Year View paper concluded that if the Operating Groups
continued along the lines proposed in their 10 Year Views the progression
of Group Sales and Trading Profit from 1982 to 1992 would be as shown in
the table.
Sales and Profits from Subsidiary Companies 1982/1992
1982 1992 CGR (Z) 1982/92
La (1982 values) Sales Profit Sales Profit Sales Profit
Tobacco -6468 572 6468 572 - -
Non-Tobacco 5039 211 6773 400 3.0 6.6
11507 783 13241 972 1.4 2.2
2. However, aesu:zing that the strategies described above are followed and that
BAC, MPI and International are divested, the progression to 1992 would be
modified as follows:
Sales and Profits from Subsidiary Companies 1982/1992
1982 1992 CGR (Z) 1982/92
Lz (1982 values) Sales Profit Sales Profit Sales Profit
Tobacco 6468 572 6468 572 -
Non-Tobacco 5039 211 4858 324 (0.4) 4.4
11507 783 11326 896 (0.2) 4
3. To achieve a 3% P. a. rate of growth for profits the 1992 requirement is
L1052m or about L160m greater than the figure shown above.
4. The remainder of the paper is concerned with estimating the resources that
could be available for investment and reviewing the progress that has been
made to date in identifying opportunities for investments which could fill
the profits gap that has been forecast to develop.
Resource Availability
1. Based on the figures given in the Group Financial 'Forecast, the Group was
L130m Inside the 50% Debt:Equity ratio at the and of 1982. There were, in
addition, C46Du of cash balances in transferable currency areas mid a
substantial proportion of this could be made available for investment if
required.
Z. The Budget for 1983 showed an increase in borrowing capacity of about C300m
but a reduction La the cash balances of about L50m in the transferable C@
currency areas. Latest forecasts suggest that the actual results will not
be as favourable as this and it may be more realistic to assume a net 00
increase in resource availability of Z150=-L200m. CD
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3 . The proceeds from the assumed divestments could add a further L250u-E300a
to the funds available for investment and could eliminate E502-VOM from
consolidated Group debt. (There would also be an effect an shareholders'
funds but this would be likely to be relatively small and has beat
ignored).
4. The net effect is that by early 1984 B.A.T Industries could have the
capability to invest about Llbn in new activities.
5. This excludes the cash available in such countries as Brazil where the
resources are not available outside the country in which they are held but
where they can be used far local investment.
Strategies for Group Development
1. As reported in last year's Investment Strategy paper, project teams have
been set up at the Contra to identify investment opportunities meeting the
following basic criteria:
(a) -Any investment made should enable B.A.T Industries to establish a
leadership position in a growth market or market segment.
(b) The investment should be in a field where B.A.T Industries can make a
positive contribution to the development of the activity.
(c) Activities complementary to existing businesses or where existing
skills and expertise can be applied will be preferred.
(d) Any new activity must be of a size such that it can make a significant
contribution to Group profits. For a completely new activity this
means that there must be prospects for contributing L100m of trading
profits (at 1982 values) within 10 years (i.e. 7-10% of the expected
Group total). However, for investments which are extensions of
existing activities (e.g. a geographical extension of Home
Improvements) this size criteria could be relaxed.
(a) Any investment must be capable of earning returns on funds employed -
sufficient to meet the Group's objectives.
2. Three of the project tea-- have beet concerned with considering
opportunities on a geographical basis covering:
(a) Brazil
(b) E. Asia/Pacific Basin
(c) UK/Europe
3. Two other project teams have been considering opportunities classified by
activity:
(a) Financial Services
M Biotechnology.
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5. In addition, there has been a study of Plastics extrusion (convf C)
further team has been set up in Wiggins Teape to consider poss :Z
a urtber tea in Office Equipment and Services. %D
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Progress to date in the Project Teams
1. The Brazilian study has special features in that there is a large cash
balance in the country which cannot be used elsewhere. In addition,
retained earnings from financial assets cannot be used to increase the
registered capital which determines the levels of remittances permitted
from Brazil.
2. Work is in hand in Brazil to identify investment opportunities within
consumer goods industries and this is due to be completed during the
Autumn. In addition, a further study which is due for completion in
October will recommend action to incorporate Pirahy within Souza Cruz and
subsequently to expand the paper operations in Brazil to take full
advantage both of the skills of Pirahy and of technology transfer from
elsewhere in the Group. Further consideration will also be given to
opportunities for increasing the Group's involvement in Aracruz by taking
a controlling stake in the business.
3. The and object of the Brazilian study will be to broaden the base of the
business and to introduce more non-Tobacco activities.
4. The East Asia/Pacific Basin study has confirmed the view that the region
as a whole has growth prospects which are probably better than those
anywhere else in the world, at least in the short to medium term.
5. Industrial sectors which have good growth prospects and which could offer
opportunities for B.A.T Industries include Food Processing, Agribusiness,
Leisure/Tourism and Financial Services. Tertiary processing of primary
products (e.g. furniture manufacture) could also offer opportunities,
especially if a strong marketing link can be achieved.
6. Investment directly related to existing Group businesses shows limited
promise and although Carbon-less paper could be a good long term prospect
it Is likely to be some time before local demand will be suf ficient to
Justify a major investment. However it is believed that there could be
more immediate opportunities in plastics conversion and in floor tiles.
7. In considering opportunities unrelated to existing activities, difficulty
has been encountered in identifying suitable investments since individual
national companies are generally too small or too unprofitable to be of
interest to B.A.T Industries.
S. Although the investigation of national and regional opportunities is
continuing, It seems likely that for these to be really successful they
will have to be related to a wider Group activity. This could occur as a
follow on from the strengthening of the Rome Improvements/Plastics
conversion activities. Rowever, it also underlines the need to acquire or
develop other non-Tobacco businesses capable of providing the basis for
overseas development. .
9. The UK/EuroDe project team has carried out systematic studies both on a
national and on an industrial basis.
eon agreed that further work to identify investment opportunities
concentrated on the UK, Germany, Francetand Spain. Particular
will-Fe &'Ivan to identifying opportunities related to Rome r%)
ents/Plastics conversion and to non-Food Retailing. C)l
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11. The Financial Services project team is still of the opinion that financial
services is an activity that could offer a good profit potential for B.A.T
Industries.
12. The studies to date have confirmed that the concept that appears most
attractive in the longer term is a division providing a broad range of
financial services. However, it is believed that the most practical way in
which to enter this field would be through the acquisition of a relatively
large conventional business which could provide a firm base on which to
build in the future.
13. Two types of business are being evaluated further. These are Composite
Insurance and a Clearing Bank. The evaluations should be completed during
the Autumn and could result in a specific proposal for an acquisition.
14. The study of potential opportunities in Biotechnology has suggested that,
although it is unlikely that Biotechnology itself will provide
opportunities on a scale that would be sufficient to make a major
contribution to Croup profits, the establishment of a business based an
Biotechnology could provide a good entry to a much wider business related
to Agriculture.
15. The advantage of developing within this field would be that the Group has
existing expertise and worldwide contacts on which to build. Agribusiness
would also be particularly appropriate to developing countries and, if a
central core of expertise can be built up, there should be good
opportunities for expansion in a wide range of countries.
16. The first requirement in following this line of development is the
identification of potential partners who have an existing technological
base and with whom B.A.T Industries could work to develop a core business
based on Biotechnology. one potential partner which has been identified
appears particularly suitable and the possibilities for co-operation are
being investigated. Should these fail, there are at least two other
companies which might also be considered.
17. At the same time that the feasibility of setting up a Biotechnology based'
business is being investigated, it is proposed that further studies -should
be carried out to define and evaluate the wider potential for B.A.T
Industries in Agribusiness.
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18. Food Processing and Brewing was*-40-sidered as -, 3 J.Mt-J-eqP.-e#
'Veriaego' and, while the results of these evaluations were generally
discouraging, segments of the Food Processing industry may be worth further
consideration, especially if there could be an opportunity to acquire a
company which is a leader in a specific market segment in the USA or Europe
but which has unrealised potential for overseas expansion.
19. Brewing appears to be relatively unexciting but related industry sectors in
wines and spirits, in non-alcoholic beverages and in leisure related
activities could be worth further investigation* 'At*9
for toler Asa-4 as I-'-@ AA&9&asn_
20. The studies of the potential for Office Equipment and Services by Wiggins
Teape are due for completion by the and of 1983. While the main aim of
this project is to consider now opportunities related to existing expertise P0
in Wiggins Teape and MPI, the possible wider implications for the Group as
a whole will be kept under review.
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Conclusions
1. In the Investment Strategy which has been outlined above, the contribution
expected from each of the Group's existing activities has been clearly
defined and can be reflected in the Guidelines to the Operating Groups.
2. Whore further definition may be required, however, is in the work which
cannot be allocated directly to Operating Groups because it involves a
complete divestment, because it covers more than one Operating Group or
because it is concerned with activities which are unconnected with the
existing businesses.
3. This work must be initiated and managed from the Centre. A number a f
specific projects have been identified in the paper and it is proposed to
carry out a review over the next few weeks to ensure, that for each project,
there are clearly defined responsibilities, clear terms of reference and an
agreed date for completion. In addition, it will also be necessary to ensure
that sufficient management resources are available to complete each of the
projects satisfactorily.
4. The underlying purpose of this review will be to consider bow we can
accelerate the formulation and implementation of a Group Strategy which meets
the basic requirements that we should be in fewer activities but that these
should have a greater potential for profits and for growth than our existing
range of businesses.
C:1
27th July 1983 zoo
RS/DJA
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BAT Industries document for Province of British Columbia 22 April 1999