Philip Morris International takes control of Sampoerna

The international cigarette company has tabled a bid to buy Indonesian clove cigarette company Sampoerna in a deal that could be worth $5.2 billion.

It was announced yesterday (March 14) that Philip Morris International (PMI) - maker of Marlboro and L&M cigarette brands - has made a bid to buy Indonesia's iconic Sampoerna clove cigarette company. PMI has agreed to pay the Sampoerna family Rp10,600 a share for its 40% stake and will now launch a public tender for the remaining 60% of the company listed on the stock market at the same price.

The total size of the deal, if 100% of the company is acquired, will be Rp48 trillion ($5.2 billion). This will make it the largest cross border M&A deal in Indonesian history.

The price represents a 20% premium to where Sampoerna's stock closed on Thursday March 10 although it is more than double where the company's stock price was one year ago. This is clearly not a knock out bid for minorities and it could look as if PMI has decided to offer a price that would entice the major shareholder to sell control, but not one high enough to make the minorities seek an exit. In this it would be similar to the bid Temasek launched last year for NOL.

The deal has been in the works for about 18 months, with the last 12 months consisting of intense negotiations, mainly conducted in the US. For PMI it represents a chance to get a number three position in the world's fifth biggest cigarette market.

It will also give it a powerful in-built distribution platform to extend the sale of its own products. Last year Sampoerna sold 41 billion cigarettes for revenue of Rp9 trillion. It made a profit of Rp3.1 trillion, giving it a margin in excess of 35%. This bid values the company at around 15.5 times last year's earnings.

"Our investment in Sampoerna is a great opportunity to significantly expand our business in the world's fifth-largest, and growing cigarette market," saysAndre Calantzopoulos, President and Chief Executive Officer of PMI. "The announcement reflects our confidence in the economic future of Indonesia and its tobacco industry, and positions us for profitable future growth by partnering with a well-managed and successful company that has an outstanding distribution and manufacturing infrastructure."

The deal will now move into the tender phase, with a 30-days tender period starting so as to finish at some stage within 90 days time. Finance for the acquisition will come from the internal resources of PMI as well as from some local financing that is yet to be finalized.

"This is an excellent development for our shareholders and employees," said Putera Sampoerna, President Commissioner of Sampoerna. "PMI is well known as a successful and responsible manufacturer and marketer of quality tobacco products."

Credit Suisse First Boston was sole adviser to PMI on this deal and it will be appointed to run the tender and raise local finance alongside a yet to be named local securities house. Crucially this deal does not look like it requires any specific government or regulatory approvals, which given the sticky hands of government officials could have slowed the process down considerably.

"We look forward to working with the employees of Sampoerna and are especially pleased that Putera Sampoerna has agreed to serve as special advisor to the board through the integration period and beyond," says Matteo Pellegrini, President for the Asia Pacific region of PMI. "The action we're taking today reflects our decision to enter the large and profitable kretek [clove] cigarette segment in Indonesia. We intend to further invest in Sampoerna's infrastructure and will continue to build the brand equity of its strong and well-established brands. We have the highest regard for Sampoerna, its employees and its strong heritage."