(Bloomberg) -- Japan Tobacco Inc. agreed to buy Russia’s Donskoy Tabak for 90 billion rubles ($1.6 billion), strengthening its leading position in the country as competition from cigarette alternatives erodes its domestic market share.
Donskoy Tabak has a 7 percent share in Russia, the world’s third-largest tobacco market, Japan Tobacco said in a statement Friday. The Tokyo-based company already controls about one-third of the cigarette business in Russia. While tax increases and restrictions on smoking in public places have taken a toll, Russia still has one of the highest smoking rates in the world.
“For a number of years now this market has been a cornerstone of our group’s earnings growth,” Mutsuo Iwai, president of the company’s global tobacco business, said in the statement.
Japan Tobacco has been grappling with domestic and global headwinds that have impacted the industry’s sales and profitability. Its dominance in the Japanese tobacco market has been challenged as rivals’ high-tech products, such as Philip Morris International Inc.’s IQOS, lure smokers away from cigarettes. The company said it expects domestic cigarette sales volume to fall almost 17 percent in 2018.
Masamichi Terabatake, who took over as Japan Tobacco chief executive officer at the start of the year, said the company would actively pursue deals to expand its share of existing markets while pushing into new ones. The company, which acquired international rights to the Natural American Spirit brand in 2015, last year snapped up assets in emerging markets like the Philippines, Indonesia and Ethiopia.
The Russian company it’s acquiring owns brands such as Donskoy Tabak, Kiss and Play. Its sales totaled $278 million last year, Japan Tobacco said. The price is a mid-teens multiple over 2016 earnings before interest, taxes, depreciation and amortization, a spokesperson said.
Donskoy Tabak, Russia’s fourth-largest tobacco company, is controlled by the family of businessman Ivan Savvidi. The company is a part of Agrocom Group, which also manages meat processing and packaging businesses.
The transaction should be completed by the third quarter, Japan Tobacco said. The deal will be financed with cash and debt and is not expected to affect earnings for this fiscal year.
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