Tobacco companies are trying hard to get hold of the $20
billion Russian cigarette market to boost volumes. As part of
this strategy, two cigarette makers -
Philip Morris International
) and Japan Tobacco International - have announced that they have
agreed to acquire minority stakes in their Russian distributor
A major distributor of cigarettes in Russia, Megapolis has
almost 70% share in the Russian tobacco market. It has
distribution agreements with international tobacco makers like
PMI, Japan Tobacco International and Imperial Tobacco Group.
Last week, Philip Morris entered an agreement to take over 20%
stake in Megapolis for $750 million. An additional $100 million
will also be paid by Phillip Morris based on Megapolis'
performance over the four years following the closing of the
The deal by Philip Morris comes simultaneously with Japan
Tobacco International's similar agreement with Megapolis. Both
the deals are expected to close before 2014.
While Philip Morris expects the acquisition to be accretive to
its earnings in the first quarter of 2014, Japan Tobacco expects
the takeover to have a minor effect during fiscal 2013.
According to market research firm Euromonitor International,
the Russian tobacco market is the most lucrative, as it has a
large population and 40% of its adults smoke. Moreover, Russian
leaders have decided to significantly reduce import duties on
cigars and cigarillos through 2017.
Philip Morris' cigarettes sold in Russia are locally produced
at two state-of-the-art facilities in Krasnodar, in the South,
and St. Petersburg, in the North. As per market research firm
Nielsen, the company occupies 26.1% of market share in
The deal is expected to reduce Philip Morris and Japan
Tobacco's distribution costs and raise their profile compared
with U.K based Imperial Tobacco. Megapolis also distributes
Imperial Tobacco's brands - Davidoff and Gauloises.
The war for market share between Philip Morris and Japan
Tobacco is also significant as the former is facing severe
competition in Japan from the latter's competitively priced local
brands - Mighty and Marvel. Moreover, Philip Morris experienced
volume decline in the region following the launch of Japan
Tobacco's Melvis Cut in 2013. Marlboro is finding it difficult to
compete with the cheaper alternative.
Philip Morris currently holds a Zacks Rank #3 (Hold). Some
better-ranked stocks in the consumer staples sector worth
Con Agra Foods Inc.
Green Mountain Coffee Roasters Inc.
). All these stocks carry a Zacks Rank # 2 (Buy).
CONAGRA FOODS (CAG): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
PHILIP MORRIS (PM): Free Stock Analysis
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