The danger of tobacco mergers

IN a move which could have a profound effect on Grand Prix racing in the long term, British American Tobacco has agreed to buy Rothmans International in a deal worth around $7.5bn. Rothmans is owned by two companies Richemont and Rembrandt which are both controlled by the Rupert Family. If the deal goes ahead the Ruperts will own 35% of BAT equity. "Industry consolidation is inevitable," commented Johann Rupert, "so we would far rather have a minority stake in a better business."

The merger will create a company with a market valuation of $21bn. It will control 16% of the world's tobacco market - just behind Philip Morris. The other big player in the industry is China's National Tobacco Corporation which is believed to have 30% of the world market but is not active outside China.

The BAT-Rothmans deal is expected to trigger more mergers in the tobacco industry as smaller companies try to find allies to survive in a market which is producing more cigarettes than there is demand.

The deal is likely to result in big job losses as the two organizations combine and there is likely to be a thinning out of the brandnames offered as BAT aims to establish a single global brand to challenge Marlboro, rather than offering different brands in different countries.

This is likely to have an effect in Formula 1 where BAT's State Express 555 is aiming at the same market as Winfield, a Rothmans brand. It is unlikely that both sponsorships will survive. The Winfield deal with Williams runs out at the end of 1999 but we hear that the Grove team - which begins an alliance with BMW in the year 2000 - already has a replacement title sponsor.

But while Williams may be fine, the squeeze in the tobacco industry could result in other teams losing their sponsorships as smaller companies are taken over by rival firms. With Rothmans disappearing there are now six tobacco companies involved in F1: BAT, Philip Morris (Marlboro), Reemstma (West), Japan Tobacco (Mild Seven), Gallaher (Benson & Hedges) and SEITAŹ(Gauloises). Not all of these are expected to survive as independents after the industry has consolidated.

The BAT-Rothmans deal means that the company will be the market leader in 55 countries around the world and will be dominant in South Africa (where it will have 90% of the market, Canada (80%) and Australia (60%). These situations may result in problems from regulatory bodies but if not the deal should be completed by the middle of the summer.

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