BAT buys Mexico's biggest cigarette maker

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MEXICO CITY -- Empresas La Moderna confirmed on July 22 the return of control of its cigarette division Cigarrera La Moderna (CLM) to BAT Industries, in return for $1.7bn.

BAT slowly reduced its stake in CLM during the 1970s and 1980s as a result of laws hostile to foreign investment and eventually divested itself of its remaining share in 1989 to Empresas La Moderna.

CLM is Mexico's biggest cigarette company with about 53% to 54% of the country's $1.5bn cigarette market, a market that is estimated to rank 15th in the world by size.

BAT, the world's second largest cigarette company, will initially acquire 50% of the shares Cigarrera La Moderna, plus the two statutory qualifying shares and an option for the remaining 50%. BAT is expected to exercise the option to gain full control within six months.

The deal is subject to approval by Empresas La Moderna shareholders and Mexican authorities.

"The investment of BAT will strengthen CLM's position in a new and intense global competitive market," said Empresas La Moderna's Chairman and CEO Alfonso Romo in a statement. "CLM becomes a key strategic component for BAT in the face of the consolidation of the cigarette industry worldwide."

Local reports suggested the sale by Romo was prompted by Philip Morris upping its stake to 50% in rival Cigatam, which is owned by Carlos Slim.

CLM operates three plants in Mexico and markets 27 high and medium-priced brands, of which nine are international brands sold under licensing agreements, such as Winston, Salem, Camel and Dunhill. Another 12 brands are low-priced brands.

CLM dominates the medium-priced market segment, where brands including Montana and Boots capture 75% of the market versus 25% for Cigatam's Broadway and Baronet, according to a study by Mexican newspaper El Norte.

Cigatam, however, captures 59% of both the low- end and the high-end markets. Its leading brand is Philip Morris-owned Marlboro.

In March, Cigatam lowered prices on Marlboro cigarettes in a bid to stem losses to contraband cigarettes. Cigatam manufactures Marlboro under a licensing agreement, but was competing against cheaper illegal imports from the U.S.

CLM promptly followed suit with its own price cuts, and both companies are maintaining them indefinitely.

Copyright July 1997, Crain Communications Inc.

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