British American Tobacco (BAT) said yesterday that it has paid $494 million for an 85% stake in PT Bentoel Internasional Investama, Indonesia's fourth biggest cigarette maker.
The UK-based company paid the equivalent of Rp873 (nine US cents) per share, which represents a 20% premium over Bentoel's June 15 closing price of Rp730. Alongside other sellers, Bentoel's majority shareholder, the Rajawali Group, agreed to sell its 56% holding. The investment group, whose interests span across mining, plantations and property, bought its stake in Bentoel back in 1991.
A public tender offer for the remaining shares, which is mandatory, will be announced soon and is expected to be completed by the end of August. If all the remaining shares are tendered, the overall transaction will cost BAT around Rp5.878 trillion ($580 million).
John Daly, BAT's Asia-Pacific director, said in a written statement yesterday that the transaction "represents an excellent strategic opportunity to enter the very large and growing Indonesian kretek market and will provide a platform for future growth".
Indonesia is the world's fifth largest tobacco market by volume, with sales of around 250 billion cigarettes a year. There are few restrictions on advertising in Indonesia; according to government figures about a third of the country's 250 million people smoke. Kretek cigarettes, made from tobacco and cloves, account for about 93% of the Indonesian market. Bentoel's key kretek brands include Star Mild, X Mild and Sejati.
In 2008 Bentoel sold 17.7 billion cigarettes, representing approximately 7% of the market. Expanding on the strategic reasons for the acquisition, Simon Millson, BAT's Asia head of corporate and regulatory affairs, pointed out that sales volumes have grown 28% compounded over the past two years.
Bentoel's Ebitda for the 12 months to March 31, 2009, was $53 million and the deal represents an enterprise value-to-Ebitda multiple of 12.9 times after adjusting for normal working capital levels. The company had net debt of $164 million at the end of March.
In 2005, Philip Morris International paid about $5 billion, or 13.7 times earnings, to buy 97% of PT HM Sampoerna, which has since become Indonesia's largest cigarette maker.
BAT was advised by Deutsche Bank and UBS, while Credit Suisse acted as financial advisor to Rajawali. White & Case LLP and Hadiputranto, Hadinoto & Partners were Rajawali's legal advisors.
Rajawali, which was founded by Indonesian entrepreneur Peter Sondakh, said it plans to focus on its core businesses, but it is unclear exactly why it chose to make the disposal, for which it received about $326 million.
Last year, according to the group, Bentoel was among the fastest growing cigarette companies in Indonesia, with revenue increasing by approximately 30% to Rp5,941 billion. But, it seems that Rajawali was reluctant to make the necessary commitment to develop the business, and was keen to find a suitable buyer.
"BAT demonstrated strong interest in Bentoel's outstanding distribution network, manufacturing infrastructure, strong management team and employees. Bentoel will benefit significantly from BAT's international experience and global network, which will help catapult Bentoel's market position to the next level," said Darjoto Setyawan, managing director for business development at Rajawali, in a statement yesterday.
BAT, Europe's biggest cigarette maker, has an existing Indonesian business which has a 2% market share and only competes in the "white" cigarettes market. BAT's Millson declined to comment about plans for any further acquisitions in the region.
Bentoel shares rose 8% in Jakarta yesterday, while BAT's share price squeezed a fraction higher during morning trading in London.