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Japan Tobacco to complete $1.5bn deal for Akji Group

Japan Tobacco to complete $1.5bn deal for Akji Group

Japan Tobacco Inc. is expanding into emerging Asia after acquiring Bangladesh-based cigarette company Akij Group in a $1.5bn deal.

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By Meili Chen 08.08.2018

Japan Tobacco Inc. is expanding into emerging Asia after acquiring Bangladesh-based cigarette company Akij Group in a $1.5bn deal. The move is part of the Japanese company’s strategy to increase its presence in markets where smoking is still prevalent as stringent domestic regulations continue to put pressure on sales. 

Bangladesh’s economic growth is accelerating, with analysts expecting its GDP growth to hit 7% this year. This pegs it as one of the fastest-growing countries in the whole of Asia, and with officials eager to push the view that Bangladesh is open for business for investors, it is perhaps no surprise that Japan Tobacco has decided to conclude a deal in the country.

The Tokyo-based company has been pursuing an aggressive acquisition policy during the last 12 months, having spent over $3bn to buy companies in countries such as the Philippines, Indonesia and Russia. It recently moved to acquire Akij Group, one of the leading cigarette makers in Bangladesh with a 20% share in the market.

“With this investment, we continue to accelerate our expansion in emerging markets that matter,” Japan Tobacco Executive Vice President Mutsuo Iwai said in a statement on Monday. “Akij’s substantial market share places us straight at the No. 2 position in Bangladesh.”

Japan Tobacco has focused on expansion during the last 18 months due to pressures in both its home and global markets. Smoking regulations are making it difficult to sustain sales at a healthy pace, and demand has seen a marked drop-off in Japan. This is the not the case in Bangladesh, where smoking is still relatively common.

Global expansion is a top priority for Japan Tobacco, but long-standing rival Philip Morris International Inc. has pursued a different strategy to cushion sales. The American multinational company sells products in 180 countries outside the US and is best known for its Marlboro brand, but it has not completed an acquisition of traditional tobacco assets for several years.

Instead, Philip Morris has increased its investment in next-generation devices, which are seen as important to the future of the industry. Japan Tobacco has not been idle in this area either, having announced last week that it will increase investment in smokeless devices. However, it is also largely betting on emerging markets, as these countries offer unmatched growth opportunities because they often take longer to introduce restrictions on smoking.

Bloomberg Intelligence Analyst Duncan Fox baulked at the cost of the latest acquisition but said that Japan Tobacco has the reserves to conclude such a deal. Rather than focusing on the upfront expense, he added that selecting an emerging market with the right regulatory conditions and capacity for growth is more important.

Japan Tobacco first entered Bangladesh’s market three years ago, but it struggled to make any headway and held just a small 0.1% market share in 2017, according to estimates from within the company. Meanwhile, Akij Group has recorded volume growth of 2% year-on-year in its home market with popular brands such as Sheikh and Navy.

“Bangladesh is one of the fastest-growing economies in the world with a pro-business mindset, which is why we are keen to expand our presence in the country,” Japan Tobacco CEO Eddy Pirard said. “The tobacco business of Akij is profitable, has state-of-the-art manufacturing facilities and a strong distribution network and workforce.”

The formalities of the deal are yet to finalize, but it will conclude sometime during the third quarter. Japan Tobacco has said that the acquisition is unlikely to have an impact on its earnings for the fiscal year. The company had ¥273.4bn ($2.1bn) in cash reserves as of the end of June.

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