The American View: Swedish Match

Can Swedish Match – the U.S. cigar-market leader – survive as an independent? If not, which of the tobacco giants will bid for it? It’s the next available prize after Altadis – the world’s largest cigar company, but also a major player in cigarettes – was acquired by Imperial Tobacco earlier this year. This is a time when hope for the end of the 46-year U.S. trade embargo runs high. The Bush Administration, which has enforced the embargo with a zeal unseen up to this time, is coming to at end. However, even if the embargo ended tomorrow, many of the Cuban brands will be unavailable to American smokers because of trademark ownership issues. And that’s where Swedish Match comes in. The situation, based on U.S. Patent & Trade- mark Office records:

If the embargo were to end, Imperial Tobacco – through its Altadis U.S.A. subsidiary – would be able to sell Cabañas, Gispert, H. Upmann, Juan López, Montecristo, Por Larrañaga, Quintero, Romeo y Julieta, Saint Luis Rey and Trinidad right away as they own the trademark rights in the U.S. However, Swedish Match has the U.S. trademark rights to 13 brands: Belinda, Bolívar, Cohiba, El Rey del Mundo, La Flor de Cano, Hoyo de Monterrey, La Gloria Cubana, Los Statos Deluxe, Partagás, Punch, Rafael González, Ramón Allones and Sancho Panza. That’s 23 of the 33 brands still produced in Cuba. Five brand trademarks – Diplomáticos, Fonseca, José L. Pie- dra, San Cristóbal and Troya – are owned by U.S. companies and the remaining five – Cuaba, Guantanamera, Quai d’Orsay, Vegas Robaina and Vegueros – are owned by Habanos, S.A., although a dispute over Guantanamera with a U.S. company is ongoing.

So if Swedish Match were to be purchased by Imperial Tobacco, it would have essentially a stranglehold on Cuban cigar sales in the U.S. as soon as the embargo ends. Imperial can probably afford to buy Swedish, even after swallowing Altadis and taking on billions in debt. Imperial paid 14.2 times the 2006 earnings of Altadis for a $22.3 billion purchase price. Applying the same multiplier to Swedish Match, based on 2007 earnings (about $ 494.1 million U.S.), the price would be $ 7.02 billion. Imperial had operating profits (not including income taxes, depreciation and amortization) of $ 2.8 billion and that doesn’t include Altadis’ operating profits of $ 1.9 billion!

Swedish Match is much more than just a cigar company, of course, and is notably attractive because of its strong position in smokeless tobacco – chew, snuff and snus – and so there are numerous other potential suitors.

Philip Morris International, now independent of Altria, Inc., had operating profits of $ 8.9 billion in 2007 and has not been a player in the cigar game thus far. Its focus on sales outside of the U.S. might make Swedish Match less interesting to it.

Philip Morris USA acquired machinemade cigar company John Middleton last December for $ 2.9 billion in cash; Middleton’s 2007 operating profits were estimated at $ 182 million, about 37 percent of what Swedish Match made. Altria has plenty of capacity for acquisitions: it made $ 4.5 billion U.S. in 2007. British American Tobacco is in excellent position to make an acquisition. BAT had an exceptional year in 2007 and had operating profits of $ 5.7 billion. It is also not much of a player in the cigar trade at present.

Reynolds American had a strong 2007 with operating profits of $ 2.29 billion. Financial analysts have been predicting that it will acquire Swisher International sometime this year and Swisher’s wide base of machine-made cigar buyers may be a better long-term bet than Swedish Match. But Swedish offers entry into both the premium and mass-market business, not to mention the cache of Cuban brands.

What about Scandinavian Tobacco? The ST Group owns Henri Wintermans, C.A.O. and pocketed $ 4.1 billion (U.S.) in selling its cigarette brands to BAT earlier this year. This is more of a long shot, but the ST Group is more focused on tobacco products outside of cigarettes and could be a complimentary fit for Swedish Match.

Whether Swedish Match will be sold and who will buy is unknown, but the company – and its solid profitability – are certainly of interest. At stake is a future opportunity to be one of the two major players in the sales of Cuban cigars in the U.S. and a leading role in the next “Cigar Boom”. It’s a drama worth watching.

This article was published in the Cigar Journal Summer Edition 2008. Read more