Philip Morris to Buy Russian Stake

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In order to increase volumes, tobacco companies try to invade new markets. Thus two giant tobacco manufacturers, Philip Morris International and Japan Tobacco International, have declared that they have agreed to buy minority stakes in their Russian distributor Megapolis.

Megapolis is main distributor of cigarettes in Russia, with 70% share in the Russian tobacco market. It has agreements with world largest tobacco manufacturers such as Philip Morris International, Imperial Tobacco Group and Japan Tobacco International . Recently Philip Morris, the maker of Marlboro, decided to buy 20% stake in Megapolis for $750 million.

Besides this, Phillip Morris will pay additionally $100 million based on the results obtained by Megapolis over 4 years after the transaction.  Similar agreement was made between Megapolis and Japan Tobacco International.

Philip Morris expects that the purchase will be very beneficial to company’s earnings in the first quarter of 2014, and Japan Tobacco expects the purchase to have a minor effect during fiscal year of 2013.

Euromonitor International wrote that today Russian tobacco market is the most lucrative because among its large population almost 40% of adults smoke cigaretets. The good news is that Russia is going to reduce import duties on cigars and cigarillos by 2017.

Philip Morris cigarettes sold in Russia are  produced in St. Petersburg and Krasnodar. The tobacco company occupies 26.1% of market share in this country. It is excpected that the new agreements will reduce Japan Tobacco and Philip Morris distribution costs and increase their profile in comparison with Imperial Tobacco. To note that Megapolis also distributes such Imperial Tobacco cigarette brands as Gauloises and Davidoff. At the moment Philip Morris holds a Zacks Rank #3 (Hold).

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