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Business

Japan Tobacco staking growth on emerging markets

Cigarette business slows to a wisp in developed nations

JT is building up its presence in emerging nations, such as with this Turkish plant.

TOKYO -- Japan Tobacco's pending purchase of a Philippine peer's tobacco assets continues a series of emerging-market acquisitions that have come to define the manufacturer's global strategy as growth in more developed cigarette markets plateaus.

The cigarette maker known as JT agreed Tuesday to pay 52.6 billion Philippine pesos ($1.02 billion), including tax, for assets belonging to Mighty, which commands a 23% share of the Southeast Asian nation's tobacco market. JT aims to build up its share there, which currently sits at less than 5%.

The Japanese company has already begun expanding in the Philippines, opening a cigarette plant in April. That factory will take over production of brands such as Camel from a Malaysian facility set to close in December. Relocating those functions to a major smoking nation is expected to cut costs.

JT is also bolstering its scanty presence in Central and South America. The company acquired Bis Overseas Bolivia, a distributor of tobacco products and smoking supplies, in 2016, aiming to expand its roughly 7% market share in that South American nation.

New opportunities

This emerging-market push comes at a tough time in the tobacco market. JT first came to global prominence with two enormous acquisitions: American conglomerate RJR Nabisco's overseas tobacco operations in 1999, and Gallaher Group of the U.K. in 2007. But further purchases of that size could easily run afoul of antitrust laws.

What is more, advanced nations' tobacco regulations are growing more strict, resulting in revenue declines in JT's overseas tobacco operations for the past two years. Those businesses' sales have accounted for between 55-60% of the company's total for the past several years.

But emerging markets in Southeast Asia, Africa, the Middle East and elsewhere offer vast untapped opportunities. JT snapped up a Brazilian tobacco distributor in 2015 and a 50% stake in La Tabacalera of the Dominican Republic in 2016. Earlier this month, the company agreed to pay $677 million for Indonesian cigarette maker Karyadibya Mahardhika and its distributor.

Such small acquisitions are at the core of JT's plan to keep growing. And they seem to be paying off. Sales in emerging nations have climbed steadily in recent years, reaching 137.9 billion cigarettes in 2016. That is more than 30% of JT's overseas total.

The Japanese company has been slower to cultivate a presence in emerging nations than many of its rivals. Philip Morris International of the U.S. and British American Tobacco of the U.K. have a foothold in nearly 200 nations, compared with JT's 120 or so. But the company will likely continue its investments apace, aware that a solid presence in those valuable markets is the key to future success.

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