Japan Tobacco Buys Belgium’s Gryson for $597 Million

Japan Tobacco Inc. (2914) climbed the most in a month in Tokyo trading after the maker of Camel and Mild Seven cigarettes agreed to pay 475 million euros ($596 million) for Gryson NV to boost growth in Europe’s roll-your-own market.

Asia’s largest cigarette maker by market value climbed 3.4 percent to 440,000 yen as of 9:27 a.m. in Tokyo, heading for the biggest advance since March 27. Japan Tobacco will pay 12.3 times estimated 2012 earnings for all outstanding shares of Gryson, the Tokyo-based company said in a statement yesterday after market hours.

The purchase gives Japan Tobacco control of Gryson’s Fleur du Pays brand, France’s largest selling roll-your-own cigarettes, according to the statement. Japan Tobacco President Hiroshi Kimura has agreed to buy rivals in the U.K., South Sudan and Belgium since 2006 as sales volumes decline in Japan, where tax increases and an aging population damp demand.

“They paid a little bit towards the top end, but it’s reasonable,” Erik Bloomquist, an analyst in London at Berenberg Bank, said in a phone interview yesterday. “The business is growing volumes by about 4 percent. The brands are ones that Japan Tobacco International is pleased to have and they are going to invest more in the business. So for a growing business, that’s a reasonable multiple.”

Japan Tobacco is getting growth at a reasonable price, Satsuki Kawasaki, an analyst at Credit Suisse Group AG in Tokyo, said in a note to clients. He rates the shares outperform.

Roll-Your-Own Growth

The global roll-your-own and make-your-own market grew 3.9 percent on average between 2000 and 2011, Japan Tobacco spokeswoman Mahoko Tsuchiya said by telephone yesterday. Western Europe accounts for about 75 percent of global demand for the cigarettes, which smokers make from paper and loose tobacco, she said.

Bloomquist said the deal moves Japan Tobacco from the fourth-biggest seller of fine-cut tobacco in Europe to number three, behind Imperial Tobacco Group Plc. (IMT) and British American Tobacco Plc. (BATS)

The deal gives a “very clear read” that Japan Tobacco is not interested in buying Imperial, Bloomquist said. “Why do the deal to move to number three if you are going to go for number one?”

The cigarette maker’s market value has climbed 22 percent this year, compared with a 0.6 percent drop for the broader Topix index.

The purchase of Gryson, which also owns the Orlando and Domingo brands and has operations in Luxembourg, Spain and Portugal, will be financed from cash and borrowing from banks and will have a “minor effect” on earnings this fiscal year, according to the statement. The transaction is set for completion this year, according to the statement.

Comparable Deals

Japan Tobacco had cash and near-cash items of 405 billion yen as of March 31, compared with a five-year average of 237 billion yen, according to data compiled by Bloomberg.

Japan Tobacco is paying 15.96 times earnings before interest and taxes, compared with a median of 14.29 times for nine similar deals, according to data compiled by Bloomberg.

The deal is the largest acquisition by a tobacco company since British American Tobacco’s $644 million purchase of Bentoel Internasional Investama Tbk in June 2009, according to data compiled by Bloomberg.

Japan Tobacco’s domestic market share fell to 55 percent in the year ended March 2012 from 64 percent a year earlier after the March 11, 2011, earthquake triggered reduction of tobacco shipments.

Net income will probably drop 1 percent to 318 billion yen ($4 billion) for the year ending in March 2013, while sales are expected to rise 4 percent to 2.12 trillion yen, the company said last month.

To contact the reporter on this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net

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