TOKYO -- Japan Tobacco announced Sept. 29 that it bought non-U.S. rights to Reynolds American's Natural American Spirit cigarette brand for 600 billion yen ($4.94 billion) -- and the company's stock sunk 7% the next day as critics charged that JT was paying too much.
Executive Deputy President Yasushi Shingai spoke with The Nikkei to discuss the company's post-purchase growth strategy and how Natural American Spirit will contribute to it.
Q: Natural American Spirit's business outside the U.S. made 17.6 billion yen in net sales and logged a 2.1 billion yen pretax profit in fiscal 2014. Do those numbers justify a 600 billion yen purchase?
A: Although it is a mustard seed, it is achieving rapid growth. Because the company is filled with people with entrepreneurial spirit and it has a solid organizational culture, an investment such as ours will spur even further growth. Determining the purchase price on the current scope of sales and profit levels of a growth business is difficult. Those who have experience in the tobacco industry or have invested in and foster pharmaceutical ventures praise the deal.
We cannot discuss many topics prior to closing the purchase due to U.S. antitrust laws. But we are looking at generating an annual free cash flow of 30 billion yen five years from now due to growth in Japan and other overseas markets. That level is in line with our company's expected rate of return.
Q: What synergies can JT expect from the acquisition?
A: We aim to expand our selection of high-end products, an area where we are lacking. We mainly focus on brands such as Mevius in Japan and Winston overseas. We are trying to transform Mevius into a premium brand, but it is difficult to do when competing companies are maintaining or cutting prices on their high-end products.
With a premium product like American Spirit in our possession, we reduce the risk of our price strategy succumbing to competition. We will also aim to capture consumers in their 20s and 30s. Those results are not included in the purchase amount. In one simple example, we are spending a few billion yen a year to make sure we did not lose market share to American Spirit, but those expenses will go away.
Q: The acquisition represents an increased financial burden and it will generate amortization expenses related to the trademark. Will it affect shareholder return?
A: We expect to pay around 180 billion yen with cash on hand, and we plan to borrow the rest, but it is not a large financial burden. There will not be any changes to the dividend outlook for the fiscal year ending this December.
Since we announced the acquisition, it has become easier to decide how to utilize our capital, such as the earnings from unloading our beverage vending machine division. Excluding those capital gains, we are in position to also grow profit for the fiscal year ending December 2016. We are aware of the concerns about dividend cuts. We have continued raising dividend payments [for the past 11 years up to fiscal 2014], and we still hope to continue to boost dividends.