Japan Tobacco Considers Joining Corporate Exodus From Russia

(Bloomberg) -- Japan Tobacco Inc., the biggest cigarette producer in Russia and the largest holdout in the country’s tobacco market, is considering selling its operations there amid heightened pressure to leave following the invasion of Ukraine. 

The maker of Russia’s popular LD cigarette brand said Thursday it’s evaluating various options for the Russia business, including a transfer of ownership given the challenging and unpredictable situation there. Japan Tobacco has a market share of about 37% in Russia, the world’s fourth-biggest cigarette market. Nearly a third of adults in the country smoke.

“We are considering a sale as an option as it may be better to separate the business and hand over it to a third party,” said Koji Shimayoshi, deputy chief executive officer of Japan Tobacco’s international business unit, in an earnings briefing Thursday. “We are closely analyzing what could happen to the business, our brands and the employees if we suspend our business.” 

The war in Ukraine has drawn international condemnation and triggered trade restrictions and financial penalties against Russia, reversing three decades of Western investment following the collapse of the Soviet Union in 1991. All the major international tobacco companies, including Philip Morris International Inc. and British American Tobacco Plc, already announced plans to exit the country.  

Japan Tobacco said on March 10 it would suspend investment and marketing in Russia, and included the possibility of halting production. The company, which paid about $1.6 billion to buy Donskoy Tabak in 2018, has about 4,000 staff and four factories in Russia. All workers will be retained for the foreseeable future, it said. The company historically has a big position in the market after its acquisition of Gallaher, a U.K. cigarette maker that was big in eastern Europe.

Jefferies analyst Owen Bennett downgraded Japan Tobacco to hold from buy last month, saying an exit from Russia would be the last thing it needed, but that such an eventuality was likely. Russia accounts for about 9% of the company’s sales and 8% of profit, he said. 

The cigarette maker announced Thursday its first-quarter operating income rose 11% from a year earlier to 178 billion yen ($1.4 billion), beating analyst estimates. Revenue rose 6.2% to 582 billion yen, the company said. 

Japan Tobacco kept its full-year forecast unchanged, but emphasized the uncertainty of the Russian market. Any forecast revision will be made at the second quarter earnings or later if necessary, it said. Full-year operating profit is projected to rise 7% and sales are expected to fall 0.4%, according to the company.

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