Smoked Deal; Philip Morris eyes GPI cigarette brands

Global tobacco stalwart Philip Morris International (PMI) has initiated talks with its Indian partner, Godfrey Phillips India (GPI) to exercise control over the cigarette brands according to the Economic Times.

Philip Morris had joined hands with the KK Modi Group way back in 1979 and together they incorporated Godfrey Phillips India, a Joint Venture (JV) partnership. According to the latest shareholding pattern, Philip Morris International owns 25.10 per cent in the combined JV, whereas KK Modi Group and family owns 46.96 per cent. Rest of the stake is held between financial institutions and the public.

The current round of talks between the two parties pertains to PMI acquiring the GPI cigarette brand along with the tobacco business. Tobacco and Cigarette are a highly restricted sector that bars any foreign direct investment (FDI) in manufacturing of tobacco or tobacco products like cigarettes. Therefore, FDI in tobacco will need government approvals that could be a barrier for the deal to go through.

Both the parties are mulling over a structure that involves splitting of GPI into two, with one entity focusing solely on manufacturing while the other housing all the GPI brands like Four Square, Red & White, Cavanders and Hawk Eye, along with its marketing and distribution network. In the structure predicted Godfrey Phillips India would act as a contract manufacturer while Philip Morris will take over the marketing and distribution channel.

IPM is likely to buy the entire GPI brands portfolio along with its marketing and distribution network as part of the deal being considered. As per company information, GPI cigarettes are distributed through a pan-India network of 800 exclusive distributors, and over 800,000 retail outlets. This would in turn help Malboro maker in launching its global flagship brands in India like Virginia Slims, L&M, Parliament, Benson & Hedges, Chesterfield etc. without any hurdles and also to make use of the vast distribution presence of GPI.

The 5.2 billion Indian Cigarette market is dominated by ITC with around 80 per cent market share, while Godfrey Phillips has managed to garner around 8 per cent market share. Cigarette consumption has seen a slight decline with government imposing higher taxes on it. 90 per cent of the GPI revenue comes from tobacco based products. Therefore, in order to diversify its revenue base GPI has ventured into different product categories like mouth fresheners (Pan Vilas) and food & beverages as also contemporary tea products.

In the past six months the Godfrey Phillips stock has risen close to 170 per cent, anticipating a deal between PMI and KK Modi Group. However, during the same period ITC and the Nifty50 declined by 1 per cent and 9 per cent respectively. Reacting to this development the stock was up more than 3 per cent in early trade and eventually hit a day high of Rs 1449.