Philip Morris, Fortune Tobacco in 'marriage of equals'

Posted at 02/25/10 11:06 PM

MANILA, Philippines - It's being called a marriage of equals.

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Philip Morris, maker of Marlboro, with a 30% share of the local cigarette market, and Lucio Tan's Fortune Tobacco, with a 60% market share, have agreed to combine their businesses under a 50-50 joint venture company called Philip Morris Fortune Tobacco Corp. (PMFTC) Inc.

The combined company will have a virtual monopoly of the local cigarette market, and will be managed by Philip Morris country manager Chris Nelson.

“The chairman of the PMFTC Inc. will be Lucio Tan, and I’ve got the honor of being the first president, and there will be executives from both companies in the management team,” said Nelson in an interview.

But it's an unprecedented move for the media shy Lucio Tan who did not attend the press conference.

Tan, who has been called the one of the country's richest men by Forbes magazine, has never been involved in a business he didn't control. And now, he has effectively ceded operational control of his flagship business to a foreign-owned company despite the fact that he has the bigger market share.

His brother Harry offered an explanation.

“The problem in any business decision is not 100% purely that you’re looking at the market share, but you’re also looking for other, profitability and efficiency, the way how management…the way that you carry, you know, the professional management of the company. So the reason we’re entering to this one is surely not just one factor but many other factor that we’re thinking a multiple effect that which would achieve you a lot of cost saving which is a waste, I mean to say this can be, nobody make it just a waste, but because of this synergy, you can save a lot of this thing of the waste,” said Harry in the press conference announcing the new joint venture.

But many observers say there's more to this deal than meets the eye. Among the Chinese business elite, there has been consistent talk of Tan's poor health and the problems of succession.

Tan has been involved in a very public dispute with his brother Mariano Taneligan, who until recent years, was his most trusted consiglieri.

Mariano has even threatened to testify against Lucio in the Marcos wealth cases.

Mariano was expected to run the Tan empire until the lines of succession between his numerous children became more clear.

But so far, family disputes have prevented a clear succession. With the succession unclear, and with his health reportedly failing, Tan seems to have opted to gradually sell his tobacco business.

Neither Harry Tan nor Philip Morris's Chris Nelson would address the issue directly.

“It’s not fair to speculate so it’s conceivable. But frankly speaking, we’re not looking at that. What we’re looking at is that they offer, as I said, expertise in the domestic business. I think we bring skill set for international, and we look forward to marrying that together,” said Nelson.

But Harry did admit that if they sell out, they would be required to offer their shares in PMFTC to Philip Morris.

“So far, we are happy with what, you know, just like marriage, 50-50. Whatever the property, the earnings. And we’re not even thinking of divorce. Today is just our marriage day. Hopefully you will recommend the question that we are going to divorce – I buy you out or you buy me out,” Tan said.

Whatever the case may be, two former rivals are now 50-50 partners in the largest cigarette maker in the country in an arrangement that seems more like an long affair than a permanent marriage.