Japan Tobacco (JT), the world’s third-largest listed tobacco company, is in talks to acquire a part of the promoter’s stake in Godfrey Phillips India (GPI). Sources familiar with the development say the talks are at an early stage. The KK Modi Group, which owns close to 47% in GPI, is believed to be also in talks with long-time partner Philip Morris International for a similar deal.
Sources say JT has been scouting for a re-entry into India and envisages GPI’s manufacturing and marketing operations may be split into into separate entities to facilitate the move. JT would then acquire a majority stake in the newly-created marketing and distribution company. FDI in cigarette manufacturing is no longer allowed; moreover, activity relating to these products, including wholesale cash and carry and retail trading, are governed by restrictions laid down in the FDI policy.
JT surrendered its manufacturing licence and left India in 2011 after revised FDI regulations halted further foreign investments in the tobacco manufacturing sector. According to reports, the joint venture called JT International (Wholesale) India had a licence to manufacture 5 billion cigarettes per year.
The JV was also involved in import and marketing of JT’s popular brands like Camel and Winston. In FY15 the Nikkei-listed JT’s profits declined by 7% as its annual revenues fell to around $23 billion from $25 billion a year before. In recent media interviews, the company’s CEO Mitsuomi Koizumi has talked about acquisitions to enter newer markets. In October last year, JT acquired privately owned Arian Tobacco Industry in Iran for an undisclosed amount to boost its presence in the country.
Meanwhile, sources said talks with KK Modi Group currently hinge on the premium JT may be willing to pay for a controlling stake. An email sent to the KK Modi Group remained unanswered but responding to FE’s query, a JT spokesperson said: “We do not comment on speculation.”
Capital market experts say an acquisition could trigger the mandatory open offer to minority shareholders if the acquisition is 25% or more. Such open offers are required for acquisition of up to a 26% stake from public shareholders. Alternatively, a company gaining ‘control’ of a listed company would also need to make an open offer for public shareholders without crossing the threshold shareholding limit (25%), according to the Sebi Substantial Acquisition of Shares and Takeovers Code.
Currently, the KK Modi Group and associates own a 47% stake in the company, while Philip Morris Global Brands owns 25.1% and together form the promoter group in the company. Since September last year, the GPI stock has more than doubled and is at Rs 1,390 currently. The cigarette market in India is currently dominated by ITC, which controls an 80% market share. Sales of popular ITC brands like Wills Classic and Gold Flake accounted for Rs 31,855 crore in revenues for FY15. In terms of market share, GPI comes a distant second with a turnover of over Rs 4,480 crore with brands like Four Square, Red & White and Cavanders. Additionally, GPI also manufactures and distributes Marlboro brand of cigarettes under licence from PMI. The company has also forayed into the pan masala segment under the Pan Vilas brand.