September 17, 2008

Swedish Maker of Snuff Could Be Next to Attract Bid DEALTALK

By David Jones and Veronica Ek

Swedish Match, the last independent smokeless tobacco group, may attract a bid from a cigarette maker after Altria's bid for UST is set to make the U.S. market more competitive.

While cigarette smoking in the mature markets of Western Europe and the United States is declining, snuff consumption is rising in the United States, driven by the perception that it is not as harmful as cigarettes, prompting two takeovers in the last two years.

Snuff is moist tobacco placed under the upper lip rather than smoked and is Swedish Match's biggest and most profitable product, largely limited to the United States, the world's biggest market, along with Sweden and Norway.

Some analysts say a front-runner is Lorillard, the third-largest U.S. cigarette maker, which unlike some potential buyers already has a large U.S. distribution network. Lorillard declined to comment.

"I think that Lorillard could want to buy Swedish Match," said Martin Sikorski, an analyst at Cheuvreux. "If they start to believe that this category could take off, which Altria believes, I think they could come to the conclusion that a lot of money could be saved on co-distribution of snuff and cigarettes."

Lorillard's flagship brand, Newport, is the top-selling menthol- flavored cigarette in the United States, while it is currently test- marketing snuff products with Swedish Match.

Other analysts say Swedish Match will be subject to bid speculation because of its relatively small size, with an equity value of 31 billion Swedish kronor, or $4.6 billion, at a current share price of 121 kronor and a 100 percent free float. Including debt, the group is valued at 38.4 billion kronor.

Its shares may also benefit from scarcity value as the last independent smokeless tobacco group, they noted, adding that large cigarette makers like Lorillard, Philip Morris International, Japan Tobacco and Imperial Tobacco have no exposure to smokeless tobacco.

But others do not expect a rush of bidders for Swedish Match.

"We do not believe that the proposed acquisition of UST by Altria makes a move on Swedish Match any more imminent," David Tovar, an analyst at Merrill Lynch, said in a note.

Swedish Match gets about half its earnings from snuff and the rest from cigars, pipe tobacco and chewing tobacco in addition to matches and lighters. U.S. snuff accounts for only a tenth of group earnings but is an important growth driver, given the relative maturity of a number of its other businesses.

While smoking increases in places like Asia, U.S. cigarette consumption has fallen steadily since 1981 as messages about its health hazards have spread and smoking bans in public areas were implemented. But UST says it expects the U.S. smokeless market to grow 5 to 6 percent annually.

In Europe, snuff comes in pouches much like a tiny tea bag. In Sweden it outsells cigarettes and is credited with helping to cut the lung cancer rate to one of the lowest in the world.

The European Union banned snuff sales in 1992 amid concerns about oral cancer and other health problems and also because it might encourage smoking, but when Sweden joined the EU in 1995, the nation was given an exemption from the ban.

Last week, the biggest cigarette company in the United States, Altria Group, whose No. 1 brand is Marlboro, agreed to pay $10.3 billion for the largest U.S. smokeless tobacco maker, UST, whose most popular brand is Skoal. That deal will join Altria's 51 percent share of the cigarette market with UST's 58 percent share of the smokeless tobacco market in the United States.

In 2006, Reynolds American bought the Conwood smokeless business. That deal joined companies ranked No. 2 in the U.S. cigarette and smokeless markets, each with a 28 percent share.

Swedish Match has a 11.8 percent share of the U.S. snuff market, as against 87.5 percent in Sweden, while Lorillard has around 11 percent of the U.S. cigarette market.

Altria's chief executive, Michael Szymanczyk, said the UST premium brands Copenhagen and Skoal needed to be "tweaked" to "return those brands to some modest share growth" after they had been losing share to lower-priced Conwood and Swedish Match brands.

Jonathan Fell, an analyst at Deutsche Bank, said, "It's hard to interpret this as anything other than something that is likely to increase competitive pressure in the U.S. snuff market, potentially making it tough for Swedish Match to grow share with its lower- price snuff brands."

Swedish Match's chief executive, Lars Dahlgren, said last week that he expected the market to be very competitive after the Altria- UST deal, and Swedish Match and Conwood were quick to raise their snuff prices in the United States.


Veronica Ek reported from Stockholm.

Originally published by Reuters.

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