Japan Tobacco to Expand in Smokeless Products Via M&A, Tie-Ups as consumers demand alternatives and regulations tighten worldwide; “There are many ways to enjoy tobacco, so it doesn’t necessarily have to be cigarettes”

Japan Tobacco to Expand in Smokeless Products Via M&A, Tie-Ups

Japan Tobacco Inc. (2914) plans to expand its range of smokeless tobacco products and is looking at tie-ups or acquisitions as consumers demand alternatives and regulations tighten worldwide. “There are many ways to enjoy tobacco, so it doesn’t necessarily have to be cigarettes,” Akira Saeki, an executive deputy president who heads the tobacco business, said in an interview in Tokyo. “Cigarettes’ appeal may be diminishing” as more people are bothered by smoke, he said.Asia’s largest listed tobacco maker is expanding in smoke-free alternatives as domestic demand rises and it faces stiffer laws on the sale and consumption of cigarettes overseas. While acquisitions are a possibility, the Tokyo-based company is also looking to develop more of its own smokeless products as the proportion of cigarette users declines in Japan, its biggest market, Saeki said.

“It won’t be the pillar of their sales. I think smokers still prefer smoke,” said Naoki Fujiwara, chief fund manager at Tokyo-based Shinkin Asset Management Co., who declined to disclose his holdings. “But regulations will be tougher in the future and it’s not a bad thing for them to try out a new option.”

Japan Tobacco fell 0.4 percent to 3,465 yen on Oct. 4 in Tokyo trading. The stock has risen 42 percent this year, compared with a 35 gain for the Nikkei 225 Stock Average.

The company sees more growth opportunities in regions such as Africa, South America and some parts of Asia, Saeki said Oct. 1. Japan Tobacco has a relatively smaller presence in these places, where population growth is faster than in developed nations, he said.

Southeast Asia

Japan Tobacco plans to expand in Indonesia, Southeast Asia’s most-populous nation, possibly through acquisitions or ventures with local companies, the executive said, without giving specific details.

The company sells its smokeless-tobacco products under the “Zerostyle” label in Japan. Zerostyle Mint, featuring a mouthpiece with a cartridge of tobacco leaves, went on sale in 2010.

The company began selling snus, a type of powder tobacco that’s usually tucked under the upper lip, in Osaka in August. Sales that month were twice as much as Japan Tobacco had expected and the company may extend its availability nationwide depending on demand, said Saeki, who didn’t provide figures.

It has also invested in San Francisco-based Ploom, a maker of pocket-sized devices that vaporize nicotine from tobacco leaves without emitting smoke. Japan Tobacco currently sells the device in Austria and plans to offer it in more countries this year, according to its annual report.

Rising Profit

In April, Japan Tobacco forecast net income will climb 21 percent to 415 billion yen ($4.3 billion) while sales will gain 12 percent to 2.37 trillion yen in the year ending March 31.

A weaker yen is boosting the value of revenue from tobacco operations overseas, which accounted for about 49 percent of the company’s total in the first quarter, according to data compiled by Bloomberg. Tobacco products made up about 80 percent of revenue in the same period, with the remainder coming from operations including food, beverage and drugs.

Japan Tobacco sees “certain demand” from smokeless products, Ryohei Sugata, a company spokesman, said by phone. “There is an increasing number of smokers who try to be thoughtful to people around them.”

Stiffer laws on smoking have contributed to this trend, Sugata said. He said the sales contribution from smokeless products was small and declined to give specific figures.

Plain Packs

Russia implemented a law in June that bans smoking in public areas including workplaces and areas near schools and hospitals. Australia became the first country to mandate plain packaging for cigarettes on Dec. 1.

Global retail sales of smokeless tobacco were equivalent to about 2 percent of that for cigarettes last year, according to Euromonitor International. Cigarette sales will probably rise 26 percent from this year to about $906 billion in 2017, while smokeless-tobacco sales may gain 18 percent to $13.3 billion.

Smokers made up about 21 percent of Japan’s population last year, down from 26 percent in 2007, according to the company’s annual report.

Japan’s government will raise the sales tax to 8 percent in April from 5 percent at present. The company, which plans to pass on the increase to customers, will decide on the price hike for its products by early next year, Saeki said.

Japan Tobacco completed 11 acquisitions totaling $1.1 billion in the past five years, the largest of which was the purchase of Belgium-based roll-your-own cigarette maker Gryson NV for 475 million euros ($647 million) in 2012, according to data compiled by Bloomberg. It also bought Nakhla, a waterpipe tobacco company in Egypt, for an undisclosed sum this year.

The company had 142.7 billion yen in cash and equivalents as of March 31, based on its financial statement.

“We have been focusing on areas that are a little different from cigarettes in the past few years,” Saeki said. “Bringing local companies to the global market is one of the values we can provide through acquisitions.”

To contact the reporter on this story: Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net