Now Tobacco Markets
k meeting was held an 20th May 1992 to review progress on preparing
proposals and progressing investment projects for countries where there are
good opportunities for profitable investment or re-inves twat in tobacco
markets where the Group does not currently have an active associate or
subsidiary company.
?resent: Sir Patrick Sheehy, Mr. U.G.V. Rerter, '.'W. B.D. Bracaey.
14r. R.J. Pritchard, Mr. A. Moriteiro de Castro,
Mr. D.S. Wattercon, Mr. R-A. Tomat, Dr. G. Oltermann,
'Dr. R. Salter (Secretary).
1. The minutes of the previous meeting held on 10th/lIch December
1991 -mre agreed.
General Issues
2. Brand Registration : The Chai-.zan emphasised the importance of
ensuring that the Group's major brands are registered in as many
countries as possible worldwide:-
(a) Mr. Bromley reported that the Soviet Trades 'Mark
Registration office had closed on Ist February. Following the
CIO$=*. it appeared that the relevant registrations were now
valid only for Russia. The position in the other Republics was
unclear and representatives were being appointed in each, to
monitor the situation on behalf of the Group.
W Mr. sorter thought that the Russian registration sight also
apply to the three Ultic republics.
3. Mr. de Castro reported that Hollywood had been registered in
all Central and Eastern tutopeas countries. Elsewhere, problem had
boon experienced in the Middle East where the Indonesian monopoly who
owned the rights in Indonesia bad been selling into other markets.
lowever, action was in hand to stop this.
The Chairman emphasised the importance of worldwide registration
for R*llywood, which mist be pursued actively, everywhere.
4. Pro& : It was noted that the programme to register Tree,
worldwide, was proceeding but difficulties had been experienced in
same markets where Philip vlorris owned similar marks such as Freeport.
arazil had been one of these markets but fortunately, Philip Morris
bad allowed the registration there to lapse.
S. The Chairman reiterated the importance of brand registration which
each company should review with their lawyers an a monthly basis. It
%ras also imporcant for the Group to have local representatives in each
market to monitor changes in the situation and to act an the Group's
behalf. Qhtre it see possible to do so, the practice of covering the
use of brands an other, no*-tobacco, products should also be
continued.
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6. Lassoes from Rungary Mr. Aramley reviewed various "pacts of
tho Group's axp*rien:e in the takeover of Ptcsi Dohanygyar. it was
noted that lessons from the takeover which should be taken into account
in future acquisitions were as follaws:-
J a) Since the upgrading of local brands offers the best imodiste
prospects for significant increases in market share and profits,
priority should be given to this ahead of programmes to introduce
international brands.
(b) The need for unagemant strengthening and training had been
undersstizat*d. Also, the difficulty and cost of simplifying
grade structures and adjusting salaries.
W The business was under-capitalised and needed more capital,
especially to build up loaf *cocks.
(4) Significant expenditure was also required on safety and health
measures but these could be brought in progressively and were not
such an immediate drain on the cash-flow which, because volume had
jean higher and profits lower than expected was not adequate to
supply the additional funds required.
(a) Leaf supply, and quality was a critical issue and needed to be
given a high priority.
M it was important to keep open as many options as possible for
developing future distribution arrangements.
(g) Negotiations on the excise regime should start as early as
possible and the Group should be pro-active in suggesting to
Governments how an ideal system should be structured.
7. Zxcisa Advisory Team : It was agreed that in view of the importance
of excise, Mr. Better would set up a mall team independent of New
Business Development Department, who would offer a service to
Governments, indicating the revenue earning possibilities of tobacco and
other products and advising on the optimum structure for excise raging$.
Discussions which the Chairman had with Mr. A,t and Mr. Freesuin at
EBRD suggested that funds could be available to cover the cost of
specific projects undertaken by the team. It was also suggested that
Doloictes, who are thought to offer a similar service already, might be
called on for advice and help.
PlrioritX Countries
B. Ukraine : It was agreed that the next stage in progressing the
proposal to invest is the Ukraine should be a meeting with Mr. Paliycbuk
to establish:-
(a) The likely procedure for privatisation and the process for taking
the B.A.T Industries' proposal to the next stage.
M The for=la for Conlartiag any inveltmeAC by B.A*T TAdustriss into
an equity stake.
(c) Whether the authorities would be amable co an approach to
discuss and advise on excise structures.
(d) Saw to provide sufficient information to establish B.A.T
Industries as the preferred partner while avoiding the danger that co
che B.A.T Industries' proposal would become the basis for inviting NJ
tenders from ocher companies. __4
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9. It was noted that:-
(a) The initial proposal must be based an a plan to upgrade local
brands. leaving the introduction of American blends to a later
stage.
(b) The plan =at include upgrades for both Chakassy and Priluky,
showing that both factories have an important part to play in the
future.
(c) It is essential that there are excise systems within which we cat
work, and it is strongly preferable that they should provide a
framework within which we can make a prof itt.
(d) The possibility of entering into a joint venture or of taking a
minority stake should only be considered if SAT is the larger
shareholder and would have the option to buy a majority if it war*
to be sold. The strong preference is to acquire a majority
position.
(e) The preliminary draft proposal t* be discussed with Mr. 7&liychuk
will envisage a major upgrading of the primaries in both factories
and a partial upgrading of the secondaries in a first stage, to be
followed by a further upgrading of secondaries in a subsequent
stage.
M The re-equipment will he based an reconditioned equipment ex-Brown
& Williamson, which will be valued at market price.
Mr. Pritchard bas permission to recondition the equipment. A
schedule of equipment available from Brown & Williameou for this
and other projects is attached as am appendix.
(g) It is hoped that the initial investment will be sufficient to
secure a majority in the equity of the Mcraittian factories which
are currently thought to be producing 24 billion out of total
domestic production of 60 billion, serving an 80 billion market.
10. Russia : Ur. Tmat reported that negotiations are continuing to
finalise major contracts for the supply of 12.5 billion cigarettes to
the Russian state importing agency. The major problem, which is being
experienced by all importers, is arranging finance. Priority is being
given to arranging payment from funds available from aid programme*,
including a special sale of Jockey Club from Argentina, financed by
funds from an Argentinian aid programme.
11. The Chairman stressed the need to build-up the Russian business by
supplying from quality sources (US, Brazil, Germany and selected RATCo.
companies and by ensuring that finance is secure. All business
should be channelled through the Group's offices in Russia and
Mr. Irmaley should identify and approve source* of supply from
BATCo. which have regular, high quality supplies. Business must be done
in accordance with this strategy and opportunistic sales must not be
made outside it.
12. In addition to doing business with the official import agency, contacts
were being established with other possible custo=rs operating within
the newly-estabtishad conoodicy exchanges. Mr. Tomat reported that
BAT's own import company, selling in ltottbl*s and then converting the
proceeds, would be established an a pilot operation. N)
C)
13. Kr. de Castro also report*d at enquiry through a Swiss trader for
the supply of 5 billion Rollywood. This would be progressed at a co
meeting arranged for 29th May. N.)
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14. Representation in Russia had been strengthened by further
recruitment and a strategy paper will be produced in July covering plans
for further strengthening both in Russia and in the other Republics.
15. investment possibilities in Russia were still unclear. A proposal
for a grtenfields investment 'sad been pcopared and Mr. Sorter
assisted by Mr. A11ford will continue to probe the Ministry of
agriculture and Food, tlie Miuistry of Trade. the City Councils in Moscow
and St. Petersburg, the Privatisation Fund and Vice-President Rushkov to
show the Group's Willingness to Lavast and to try to obtain a positive
response. The investigation may also be extended further to the
authorities in the oil producing district of Perm.
16. Acquisition possibilities are being investigated by Br. Watterton -
assisted by Goldman Sachs. Mr. Tomat is also arranging for visits-
to all the factories in the former Soviet Union during the autumn,
concentrating an talking to local factory managers rather than central
authorities.
17. Yugoslavia : It was noted that the political situation in Yugoslavia
showed no signs of stabilising and it must be assured that the current
anarchic situation will continue for taany years. Rowevier, despite the
problems, consumption and output were up an last year with the only
significant sufferer being Philip Morris 4hose primary iu Sarajevo had
been bombed.
18. Macedonia : Mr. Wattorton is discussing a letter of intent with
.1akedonia Tabak but further progress a" be delayed until the
privatisation law for 4acedomis is finalised. This is not expected to
emerge until the and of the year. It was noted that because of the
political situation, Macedonia Tabak would be valued as a supplier to
the domestic cigarette market only. 'Ilkwover, it would still be an
important exporter of Leaf.
19. Serbia : It was noted that Serbia is still communist and is not
expected to move towards privatisation. 'Mr. Pritchard visited the
Kant licenc*es NIS and Itarnt that Plailip Morris had offered $115
million for the company. Rowever, this bad been refused by the NIS
management. tt was agreed that the possibilities for investment in NIS
were not worth pursuing at present and Mr. Watterton will cancel his
proposed visit in June. Mr. Pritchard will continue to manage the
licence and will &ttemtpt to prevent KIS from exporting Unt to
Czechoslovakia, in breach of their agreement.
20. Czechoslovakia : Nx. Wattartoo. reported that the progress of the
Resestas acquisition of CTS? and the Philip Morris acquisition of Tabak
would be monitored. '%AT will continue to press for the abolition of the
monopoly laws and if these appear likely to be repealed the project to
sat up a secondary on a greenfiolds site will be reactivated. 'It was
noted that Czechoslovakia was likely to join the European Free Trade
Zone but that toUacco goods will not be covered by this. Full entry to
the W is not expected for 10 years.
2i. The &Aron said that it lust be We clear that the ream UT did
not bid for the Czechoslovak companies was that the tendering process
-tax not transparent. it should also be made clear publicly that UT
believed that this was not in the best interests of the Czechoslovak N4
people. q* would be speaking to the Central European News along these
lines and other opportunities should be sought to keep this issue in the
?ublic eye. 00
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21. Following the acquisitions. ,.zachoslov*kia would !)a removed !-.= the
list of countries .Or priority :onsideration.
Z3. Vietnam : It was agreed that because the market was not a monopoly
and because of the continuing restrictions on US companies, who were not
?et allowed to do business in Vietnam, this was a particularly good
opportunity for a SAX investment. Rowever. it was unclear how
enthusiastic Vietaba were to enter into an agreement, as conflicting
view emerged at different ti-ses. It was important, therefore, that a
permanent resident representative was appointed to monitor the situation
and to promote SAT's interests.
24. It was noted that Mr. Wattertan would be visiting Vietnam at the end
of the mouth to put forward proposals agreed by the CPC. On the ..
assumption that the Vistuansto would not allow development to be based
on the old BAT factory site in Saigon, a first priority would be to
ensure that others would also be excluded from this line of approach.
BAT's own proposal would be based on an initial investment to set up a
secondary on a greenfialds site. This would be a joint venture with
7jet ab a, achieved through cross shareholdings. Two Vietaba brands would
'.-Pe ceded to the JV which would then register additional International
Brands to broaden the portfolio. The second stage of the proposal would
'it to set up a primary in a disused warehouse, thereby creating a
complete production line.
25. Cambodia : It -de# noted that Cambodia has a population of B million,
and a cigarette market of 6 billion, of which 2.6 billion is totally
produced. Tay Choon Ilya, BAT's distribution in Singapore has a lease on
the three factories owned by the national monopoly. Tay Choon lye
wishes to assign the lease to a new joint company 402-owmed by the
-wnopoly 40% by BAT and 202. by Tay Choon Rye who is also prepared to
enter into an agreement that UT can vote his shares.
26. There are several restrictive clauses in the lease (including price
control) which, ideally. SAT would like to have cancelled. Rowever, it
was agreed that because of the potential affect on the price of the
business elimination of all these clauses should not be a *in& quo non
!or reaching agreement. Mr. Wattertom will visit Cambodia in June
to progress these negotiations.
27. Mynamer : It was noted that although I has a population of
42 million most of the smoking motorists market is for charoots and the
consumption of manufactured cigarettes is only 3 billion of which 1.5
billion are produced locally. The CFC had agreed the parameters for
negotiation on a similar basis to that for Cambodia, leading to another
44:40:20 company in which Tay Chaco Rye will again code his voting
rights to SAT.
28. In addition to the opportunity for cigarette sales Ryannar offers good
opportunities for Leaf growing and the potential for this line of
development will also be investigated during Mr. WAtterton's
forthcoming visit in Juno.
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6
Lower Priority Investigations
19. Poland : It was noted that BAT now has an office and a small sales
staff established in Poland. The Group has also been allocated a quota
of 0.8 billion out of the 6 billion of imports permitted in 1992.
30. The chaotic political situation in Poland has resulted in a virtual
standstill in legislation and although it has been agreed in principle
that the original proposal to keep the monopoly intact is not the best
solution, the recent agreement to offer 3 factories for sales (including
Augustow) has not yet been izplemmtod. Rowever, BATCT is ready to
progress the proposal to invest in Augustow as soon as it is possible to
do so.
31. It was noted that STZ have a licences making and selling Prince in
Poland and that they would be interested to participate with BAT an the
.%ugustow project if there is an opportunity to do so.
32. It was agreed that Poland should be added to the list of. countries for
priority consideration.
33. Moldova : Mr. Wattertan reported that loaf experiments were
continuing in vloldova and that a lector of intent to broaden this
co-operation had been signed. BAT also has a first option if the
Holdovans decide to sell their cigarette factory.
34. Estonia z Mr. Bramley reported that although M have negotiated
with the Estonian tobacco industry they were not accessed with the
people they met and have not signed a letter of intent to continue the
negotiations.
35. Latvia : TM have, however, signed a letter of intent with the
Latvian industry and are discussing the form of future co-operation.
36. Lithuania : Mr. Barter reported that by agreement with the other
Operating Groups, BATC? had represented BAT in Lithuania, a market of 3
billion served by 2 factories. Good contacts had been established and a
plan will be drawn up which will include proposals to close one of the
factories.
37. Belorussia : Mr. Barter reported that a visit bad been made to
Belorussia to establish contact. The consumption in the country is
20 billion cigarettes pa. and this is served by one factory. Although
the economic prospects of the country are poor, its strategic position
is such that it could attract considerable aid, especially from the EC.
'It was agreed that contact should be maintained.
38. Bulgaria : It was noted that a privatisation law had been passed in
Bulgaria but this has not yet been gazettod. Contacts remain good
through Jr. Itul W a relationship with the hood of Bulgarcabac, Mr.
Dichav. The-industry remains in problems due to the collapse of exports
to Russia and prospects are uncertain. However, the situation will be
,monitored and contact maintained.
39. Romania : Mr. Pritchard reported that he had visited &mania in
'February. Although the country is in a poor state economically, the
tobacco monopoly with whom BAT maintains good relations appears to be
relatively efficient with a very clean factory. Thar* is no sign of any NJ
-covement towards privatisation and the main focus of the Group's efforts
will continue to be on, imports, including Rollywood from Cyprus.
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40. Albania There has been a goal I order from Albania, which will be
visited in the near future.
41. T&dsttikistm/WiZhW* : Mr. Vatterton is arranging visits to
these two Republics which could be useful suppliers of Leaf and which
are also interested in setting up cigarette factories.
42. Uzbechistan : Mr. Tomat has met a delegation from Uzbechistan
who have said the,! are interested in the possibility of co-operation
with B.A.T Industries. It was agreed that the team visiting
Tadzhikistan and KirighisiA should also visit Usbachis tan, which will
addi:ionally be visited from Moscow.
43. Armenia, Georgia. Other Former Soviet Republics - It was noted that
there had been insufficient resource to assess the potential in the
other former Soviet Republics. It was agreed that to overcome this
limitation, Mr. Watterton will commission consultants to carry out a
basic fact finding investigation in each, covering, inter alia, the
current status of the industry, the prospects for privatization and the
identity of potential representatives for the Group.
44. Mexico : Mr. Pritchard reported that Brown & Williamson had been
successful in keeping cigarettes on the agenda for the continuing WAFTA
talks. Progress in these calks (in which the Mexicans are asking for 20
years continuing protection for their tobacco industry) are slow and no
agreement is expected until well after the US presidential election. In
the meantime, the situation will continue to be monitored.
45. Colombia : W. Pritchard reported that following changes in the
duties applied to cigarettes, imports waro now more competitive. Sales
of Kant, tool, Itollywood and Belmont were all expanding.
46. Morcosur/Urugusy : Mr. de Castro reported that a mating with
14r. Mailbas had established that he was interested in selling his
busimess to I.A.T Industries. 11owever, initial figures supplied by him
suggested that the price he was asking may be too high.
&7. The Chairman asked Mr. de Castro to prepare an early warning
note for the C?C indicating what eight be proposed. 36 should then seek
to put the negotiations on a more formal basis by involving a merchant
back or independent auditors to establish BAT's own value for the
business.
48. Paraguay : Discussions were proceeding with the licencee who holds
the rights to several of the Group's brands with & view to recovering
these. The next mosting an this is scheduled for Jame.
49. Argentina : It was noted that the import duty on Brazilian
cigarettes was now only 112. The Rallywood trademark bad been
registered and imports would be increased. The second Brazilian brand
on sale in Argentina was Ritz but this was entering illegally and
regular *Otts would not be established until the trade mark had been
registered. It this proved difficult, another, similarly priced brand
would be chosen to replace Ritz.
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$0. it was noted that the Xercosur agreement raised fundamental questions
about the viability of the Argentinian tobacco industry. BAT needed to
establish the full extent of this problem, the implications for the
Sroup and the action which might be taken to meet the resultant
opportunities and challenges. It was agreed that Mr. de Castro
should set up this investigation using Keith DMt from I and any
ocher outside advice which he thought to be appropriate. Mr. Grant
should also be kept informed of progress but because of possible
conflicts Of interest due to the affect on. lableza, he should not be
directly involved in the team.
51. It was agreed that, in future, Marcosur and the individual country
developmncs arising from it should be dealt with as priority projects.
52. Cub& , Kr. Pritchard reported that although there was a shortage
of cigarettes in Cuba, US trade restrictions meant chat this was not a
realistic opportunity for Brown 6 Williamson. It was agreed that
Mr. de Castro should evaluate Cuba as an opportunity market for
Souza Cruz.
53. Thailand : Mr. Pritchard reported that conditions in the Thai
market remained difficult. The tobacco monopoly was run by a retired
general who was close to the ruling party. Rence, any concessions
freeing trade were difficult to obtain and even sets difficult to
sustain over time. Despite this, however, progress continued to be made
in establishing the Group in the market.
54. Philippines : Mr. Pritchard reported that a Brown & Williamson
visitor to the Philippines, sent to locate the source of illegal imports
coming out of the country, reported that Rothmans was seeking another
equity partner with whom to co-operate an US brands.
55. The Chairman asked Mr. Pritchard to prepare an early warning
note for the CPC after which a decision would be taken how to follow-up
with the Philippines company and Rothmans.
56. Taiwan : Mr. Wattortm reported that Pr iv at is& of the
Taiwanese tobacco industry was expected within throe years. Although no
dramatic developments were expected, it van agreed that the situation
should be monitored through IATWM and BAT's agent in Taiwan.
57. Portugal : It was &$read that moves towards privatis,sticm in
Portugal should also be monitored.
58. Scandinavia : It was noted that the proposal by STK and Volvo to
form a joint company covering all of Scandinavia now appeared to have
been dropped. The main problems in the region were that Lucky Strike
and Barclay were not progressive in Norway and Sweden, that STX promoted
Lucky Strike ineffectively and that this could leave then very
vulnerable when the imposition of the EC 15mg limit on let Januar7 1993
will lead to a need to reformulate Prince. Those issues will be dealt
with at the Tobacco Strategy Uviaw Tom meeting on 29th May whom
Mr. Pritchard will also report an progress with Barclay in
Scandinavia.
59. Iran : It was noted that Iran has a population of 70-80 million and
a market of 35-40 billion cigarettes of which 20 billion are produced r1J
locally, 10 billion are legal imports (80% BATCF and 20Z Reemstma) and C)
10 billion illegal imports.
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SO. Philip Morris and 1JR have sat up local offices end are pressing for a
share of the legal imports. M are also believed to have submitted a
draft proposal to sat up a factory.
61. SATCF have opened an office and are attempting to actract an ox-monopoly
mm to run this. -hey are also considering whether to respond to a
request to submit a proposal to upgrade an existing local factory from
15 billion to 20 billion capacity. In addition, they are considering a
link-up with the Slaabal foundation who act as import agents.
62. It was agreed that the strategy to establish closer relations and a
presence on the ground vat likely to be helpful both in maintaining a
good level of exports to 'Iran and in allowing the Group to have an'
option an any investment opportmities. Mr. Pritchard confirmed -
that a link with the Shabal foundation could affect their relations with
their agent but he did not sat this as a problem. SATC? will keep Brown
& Williamson informed of developments so that appropriate action can be
taken.
5 3. representation : Concluding, the Ch&irw-m reiterated the importance
of having an accredited representative of the Group on the ground in all
territories in whi--h the Group had a significant interest, to monitor
and report an significant political. legal and market developments and
to represent the Group's interests where it is appropriate to do so.
64. Outside Advisors : Re also stressed the used to make full use of
outside advisors and consultants in order to supplement the necessarily
limited In-house Management resources.
55. Priorities : It was noted that following the changes in priorities
agreed at the meectug, the current list of countries for priority
consideration is:- The Ukraine; Russia; Poland; Macedonia; Vietnam;
Cambodia; 14yanwar; JAzzentina; Paraguay; Uruguay (MArcosur); The
Philippines; and Iran. In addition, priority would also be given to
evaluating the potential in the other exr-Soviet Republics and for Souza
Cruz in Cuba.
66. Other countries where contact will be maintained and the situation
monitored but wh are not expected to offer immediate prospects for
investment are:- Czechoslovakia; Romania; Solgaria; -Serbia; Albania;
Thailand; Taiwan; Mexico; Colombia; and Portugal. Exports to these
countries will also continue to be expanded, especially to Thailand and
Colombia.
RS/RS/DJS
3rd June 1992
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BAT Industries document for Province of British Columbia 23 April 1999