Philip Morris, Fortune Tobacco form joint venture

Posted at 02/25/10 12:41 PM

MANILA, Philippines (3rd UPDATE) - The Philippine unit of Philip Morris International and unlisted Fortune Tobacco Corp. (FTC) will combine their core businesses in a new company which will control 90% of the local cigarette market.

"Philip Morris and Fortune Tobacco concluded an agreement to form a new company called PMFTC," Chris Nelson, president of Philip Morris Philippines, told reporters.

Philip Morris and its Philippine saga

The joint venture deal between Philip Morris and Fortune Tobacco Corp does not only seal the end of the local firm’s monopoly days, it also culminates an almost 55-year-long presence in one of the world’s biggest cigarette markets. Read More

How the sin tax policy created a duopoly  

While businessman Lucio Tan has been generally perceived to have perfected the art of influencing regulation and tax schemes to favor his Fortune Tobacco Corp., the expansion efforts of multinational player Philip Morris in the Philippines have changed the playing field. Read More

"It's 50-50, it's an equal marriage. We are not going to divulge the financial details," Nelson said.

When asked which group initiated the talks, Nelson said: "We kissed at the same time."

The new company will command a dominant position in the local tobacco market, with Philip Morris Philippines Manufacturing Inc. and Fortune Tobacco, owned by one of the country's richest men, Lucio Tan, having a combined share of about 90%. 

Philip Morris—which sells Marlboro cigarettes and is the world's largest non-state-owned tobacco firm, with over $2.4 billion earnings in Asia last year—considers the Philippines its 12th-biggest market. Through the new firm, it gains wider access to the local cigarette market, including the profitable medium- to low-priced segments.

A joint statement said Fortune Tobacco and Philip Morris "each contributed selected assets and liabilities into the new company, with each party holding an equal economic interest."

Philip Morris will retain its export business, shipping cigarettes mostly to Thailand. It declined to give the value of the export business.

Fortune Tobacco will keep its interest in the distribution of the Winston brand of Japan Tobacco Inc., the statement said. It also said the new firm would not be affected by pending tax and ownership disputes with local courts involving Fortune.

Top player

Philip Morris has dominated the high-end cigarette market in the Philippines for years while Fortune Tobacco is the top player in the medium to low-priced cigarette segment, with a 60% share of the entire industry.

"By uniting our business operations with a well managed and successful company that has an outstanding distribution and manufacturing infrastructure like FTC, we are laying the foundation for the long term success of PMFTC Inc.," Nelson said.

"While Philip Morris currently competes mainly in the premium price segment, FTC's strength is in the value and medium priced segments. Thus, PMFTC Inc will have a representation in all segments of the Philippine market," he said.

The Philippines is the 15th largest consumer of cigarettes in the world, and the second largest in Southeast Asia, consuming as much as 80 billion sticks a year, according to the World Health Organization.

Tan's decision to sell

Reporting for ANC on Thursday morning, Carandang said the merger could be a move by Tan to sell in order to avoid internal problems.

"The stories in the Chinese business community are that Mr. Tan is aging, he's not in good health, and he's had succession problems. It's not clear at this point who is going to take over. He's had disputes with his brother, so given the lack of clarity about succession and his health, the decision was made to go with this merger," Carandang said.

Carandang said there was also talk in the Chinese community that "Mr. Tan was apparently the first to approach Philip Morris about this deal."

He also reported that "it's not clear also at this point whether there'll be further consolidation."

"The question now is whether this is just the first of other steps that will eventually lead to Philip Morris acquiring an even larger share of Fortune Tobacco," Carandang reported. --With reports from Reuters, ANC, ABS-CBN News