B.A.T. Industries PLC

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B.A.T. Industries PLC

Windsor House
50 Victoria Street
London SW1H ONL
+44 (171) 222-7979
Fax: +(44) (171) 222-0122
Web site: http://www.batindustries.com

Public Company
Incorporated: 1902 as British American Tobacco Company Ltd.
Employees: 164,000
Sales: £24.4 billion (1996)
Stock Exchanges: London Montreal Amsterdam Frankfurt Hamburg Antwerp Dusseldorf Basle Zurich Paris Brussels Geneva
SICs: 2111 Cigarettes; 6311 Life Insurance; 6321 Accident & Health Insurance; 6331 Fire, Marine, & Casualty Insurance

B.A.T. Industries PLC is best known as a manufacturer of cigarettes, and for good reason; it sold 670 billion smokes in 1996, accounting for nearly 13 percent of the worlds tobacco sales. B.A.T.s stable of brands includes State Express 555, Benson & Hedges, Kent, Lucky Strike, Pall Mall, John Player, and Kool. In addition to its tobacco interests, the company owns U.S.-based Farmers insurance group as well as two British insurers, Allied Dunbar and Eagle Star. Insurance premium income totaled £10 billion in 1996, or 40 percent of overall revenues. Though its sliding stock price in 1996 and 1997 reflected the U.S. tobacco industrys woes, growing international tobacco operations compensated enough to give B.A.T. record pre-tax profits of £2.64 billion in 1996.

Early 20th-century Foundations

B.A.T. was formed through an early 20th-century agreement between two competing tobacco companies: American Tobacco Company and the Imperial Tobacco Company. The rivalry was sparked by James Buchanan (Buck) Duke, founder and head of the highly successful American Tobacco Company, which had by the turn of the century captured 90 percent of the U.S. cigarette market. Armed with state-of-the-art cigarette manufacturing methods, Duke mounted an assault on the British tobacco market in 1901. In response to this competitive threat, several smaller independent British tobacco companies banded together to form the Imperial Tobacco Company Ltd.

Imperial Tobacco was able to resist American Tobaccos attempt to capture its native market but only after a prolonged trade war that proved very costly for both participants. American Tobacco having withdrawn from the English marketplace, Imperial was in a stronger position and decided to press its advantage.

It was when Imperial started to make moves toward the American market that chairman Duke saw the need for a compromise. A truce was called, and the two rival merchants agreed not to conduct business in each others domestic markets. Each company also assigned brand rights to the other so that consumers who had grown used to a given brand would not be lost. This deal also initiated the creation of a new company, British American Tobacco, of which American owned a two-thirds share and Duke was the first chairman.

This new company, registered in London in 1902, acquired the recipes and trademarks of both originating companies. It also acquired all the export business and overseas production operations of each company. The new companys sales and growth potential seemed limited compared to the successes of Imperial and American. In time, however, British American Tobacco would grow, not only to outsell its parent companies, but to become the worlds largest private-sector tobacco concern.

Steady but slow growth occurred during the first decade of the 20th century. Then in 1911 the United States Supreme Court ruled that American Tobacco was a monopoly and therefore illegal. The court, though requiring that Duke break up his successful American operation, did not want to deprive the American public of its tobacco or the American economy of a healthy business. Unable to come up with a viable solution, the court turned to Duke for help. The chairman of B.A.T. and of American Tobacco then devised his own, less damaging dismantling strategy, which the court accepted fully. American Tobacco canceled most of its covenants with B.A.T. and Imperial and sold all of its shares in B.A.T. Most of the shares sold went to British investors, and B.A.T. became listed on the London Stock Exchange.

This left British American Tobacco, still chaired by Duke, able to sell its product independently all over the world, except in the United Kingdom where it was still bound by its covenant with Imperial. Imperial at this time also retained a one-third share of B.A.T., but this did little to impair B.A.T.s success. Dukes operation began rapid expansion of British exports and overseas operations. Many new subsidiaries were established around the world during the brief period between the disentanglement from American Tobacco and World War I. Local sources of raw materials were discovered and developed, and international sales grew steadily.

The war brought large numbers of women into the company for the first time. They were primarily employed in the distribution of cigarettes to the troops abroad, most of whom had switched to cigarettes from the less convenient pipe. Although brought on by the war, the switch to cigarettes caught on and became permanent. Many people never returned to the pipe, and B.A.T. began selling cigarettes in increasing numbers.

The end of the war brought even greater fortunes for B.A.T. Until Duke did so, no commercial enterprise was able to penetrate the Chinese market farther than the government coastal trading stations. B.A.T., now able to exploit the untapped interior market, achieved record growth in the years immediately following and maintained impressive sales levels throughout the rest of Dukes chairmanship. While chairman, Duke was B.A.T.s pioneer in growth; the companys next chairman, Sir Hugo Cunliffe-Owen, was a pioneer of decentralization.

Decentralization in 1920s

Sir Hugo had been involved with B.A.T. since its inception. Early involvement in the negotiations between American Tobacco and Imperial endeared him to Duke, who appointed him director and secretary. He held those positions until Duke retired in 1923 (he died two years later) and then succeeded the founder as chairman. When Sir Hugo inherited the chair, B.A.T.s capitalization had quadrupled since 1902 and its sales had grown by nearly a factor of 40. In 1923 B.A.T.s world sales had grown to 50 billion cigarettes per year.

Sir Hugo visited China in 1923 to decentralize one of B.A.T.s biggest operations. Chinese cigarette consumption had grown from 0.3 trillion in 1902 to 25 trillion in 1920, and to nearly 40 trillion by the time of his visit. Sir Hugos plan was to restructure B.A.T. China Ltd. into independent regional units which could operate when local conditions deteriorated. As China was a major concern, Sir Hugo also spent a great deal of time and energy over the next two decades lobbying the Chinese government to minimize the taxation of tobacco.

Sir Hugos decentralizing efforts spread from China to many of B.A.T.s other international operations. The Chairman felt that increased local autonomy would lead to better decisions and improved group performance. This proved true despite skepticism that too much decentralization could produce an unwieldy corporate structure. In 1927 B.A.T. had the resources to enter the U.S. market, monopolized at one time by American Tobacco. Sir Hugo acquired Brown and Williamson, a small tobacco producer in North Carolina. With B.A.T.s help, this modest company grew to become the third-largest cigarette manufacturer in the United States. This pattern of rapid growth from modest beginnings was maintained through the Depression era and steadily through World War II. At the end of the war, in 1945, Sir Hugo stepped down from the chairmanship and became simply titular president of B.A.T.

Without Sir Hugos active participation, the management of B.A.T. did little other than maintain the companys steady growth through the late 1940s and 1950s. Profitability remained undiminished and the company was able successfully to weather the storm of communist revolution in China, at which time all of B.A.T. China Ltd.s assets were nationalized. By 1962, B.A.T.s capitalization was such that it was able to begin major moves toward diversification.

Diversification in 1960s and 1970s

During that year, B.A.T. acquired minority interest in two companies, neither of which was involved in tobacco production or sales. Mardon Packaging International handled cigarette packaging and was thus a logical choice for B.A.T. Wiggins Teape Ltd., on the other hand, was a large specialty paper manufacturer. Mardon was not highly successful at first. It was formed from five smaller packaging companies in cooperation with Imperial Tobacco and its first-year turnover was modest. It grew steadily, however, as most of B.A.T.s investments have, and by the end of the 1970s was advancing turnover at a rate of 15 percent per annum.

The success of these two enterprises, which later became wholly owned subsidiaries of B.A.T., paved the way for further and greater B.A.T. acquisitions. The groundwork was now laid for B.A.T.s transformation from a large tobacco company to an even larger conglomerate. While other major tobacco companies were attempting to diversify into other packaged goods, B.A.T. wasted little time in moving into unrelated but profitable fields. During the 1960s and early 1970s several major international fragrance and perfume houses were brought in to create a third leg in B.A.T.s group. These included such internationally known concerns as Lentheric, Yardley, and Germaine Monteil.

Company Perspectives:

Our twin goals are to improve the long term growth prospects of our businesses and to increase shareholder value.

Once these companies were thoroughly absorbed into B.A.T.s operations, B.A.T. turned its eye toward a West German department store chain called Horten. At first a minority share was held and then, as before, the company was acquired as a whole. This led almost immediately to further department store chain acquisitions. Gimbels and Saks Fifth Avenue were acquired in the U.S., Kohls and Department Stores International in the U.K., and Argos, the British catalogue store, joined in 1979. Patrick Sheehy, before becoming B.A.T.s present chairman, was involved in one more such acquisition. Marshall Field department stores were the unwilling subject of a takeover bid conducted by the controversial team of Carl Icahn and Alan Clone. Sheehy was able to convince B.A.T. to make a white knight bid for the chain and managed to thwart Icahns raid.

Many of these investments gave B.A.T. a good deal of trouble at first, just as Mardon had before. While Saks Fifth Avenue, which appealed to the upper middle-class consumer, maintained high profitability, Gimbels, despite efforts to bring in wealthier clientele, has had a consistently poor showing. With the exception of Gimbels, B.A.T. has been able to absorb and make a real success of its retailing leg as well as its earlier extension into paper.

In 1972 the treaty of Rome brought the United Kingdom into the EEC and with it an end to the agreements between B.A.T. and Imperial Tobacco. New restraint of trade laws prohibited their arrangement. The companies exchanged brand rights once again, each retaining full ownership of its original brands in the U.K. and Western Europe only. B.A.T. was able to keep its brand and trademark ownership in the rest of the world and in the duty free trade outside Western Europe. Ties with Imperial Tobacco were finally severed in 1980 when that company sold its remaining few shares in B.A.T. after having made major reductions over the preceding decade.

Due to the increasingly diversified nature of British Americans interests, the name of the company was officially changed to B.A.T. Industries in 1976 and management was restructured for tighter control. B.A.T. Industries became a holding company for several smaller operating companies organized according to industry. These operating companies in turn controlled the individual manufacturing and retailing enterprises.

Appleton Papers was added to the B.A.T. operation in 1978. This American company established B.A.T. as the world leader in the manufacture of carbonless paper. That year B.A.T. also acquired Pegulan, a large home-improvements company in West Germany, as well as two fruit juice companies in Brazil. Other purchases followed in pulp production in Brazil and Portugal.

Acquisition of Financial Services Companies in 1980s

Within two years of his 1982 accession to B.A.T.s chairmanship, Patrick Sheehy decided to add a fourth leg to B.A.T.s existing three supports. Eagle Star, a British insurance group, was involved in an unfriendly takeover struggle with the West German firm Allianz when Sheehy contacted its chairman, Sir Denis Mountain, with a friendly proposal. Eagle Star, which had rejected a low bid from Allianz as grossly inadequate, accepted a similar bid from B.A.T. since Sir Denis felt the two companies could work together well. In fact B.A.T. Industries saw a 26 percent rise in pre-tax profit during the first half of 1987, 45 percent of which was due to Eagle Star. Hambro Life Assurance, another large British firm, rounded out B.A.T.s new fourth leg in financial services and became Allied Dunbar when it was acquired by B.A.T. in 1985.

After adding financial services to B.A.T.s portfolio, Sheehy implemented a policy of focusing and reshaping the business rather than continuing to move into new areas. Sheehy felt that B.A.T. should only be involved in companies able to maintain a leadership position in their markets. This meant some significant divestitures for B.A.T. In 1984 British American Cosmetics, International Stores, and Kohls Food Stores were all sold. Mardon Packaging was spun off to its own management in 1985 and in 1986 Gimbels and Kohls (U.S.) department stores were put up for sale. That year 88 B.A.T. U.S. retail stores were also divested in the U.S. along with the West German Pegulan. Despite the trimming, or perhaps because of it, B.A.T.s sales continued to rise; 1986 sales were up 12 percent over 1985.

Sheehy continued to decrease B.A.T.s dependence on the tobacco industry such that by 1986 only 50 percent of B.A.T.s pre-tax profit came from its tobacco group, down from 57 percent in 1985 and 71 percent in 1982. This change was not due to a reduction in tobacco sales, however, but to overall growth in the other groups, most notably Eagle Star, which increased its contribution to B.A.T.s profits from 11 percent in 1985 to 19 percent in 1986. Furthermore, the company added the Farmers Group, Americas fifth-largest insurer, to its roster of companies in 1988.

B.A.T.s diversification efforts ended in 1989, when the company came under threat of a hostile takeover by British financier Sir James Goldsmith, who offered £13 billion (US$21 billion) for the conglomerate. The raid induced B.A.T. to divest several major retail and manufacturing properties, assets that investors like Goldsmith thought were undervalued as part of the conglomerate. In 1990 alone B.A.T. reaped more than £1.5 billion (US$2.5 billion) through the sale of the Saks and Marshall Field department store chains. That year also saw the spinoff of the conglomerates Wiggins Teape Appleton paper-making interests. The company used part of the proceeds from its asset sales to repurchase about 10 percent of its own stock, thereby fortifying the share price and thwarting Goldsmiths raid in 1990. The asset sale continued into 1992, when B.A.T. divested some Australian insurance interests.

B.A.T. declared its intent to reclaim its world tobacco dominance with the 1994 acquisition of former parent company American Tobacco for US$1 billion in 1994. The acquisition gave B.A.T. the U.S. rights to the Lucky Strike and Pall Mall labels, thereby increasing its share of the American cigarette market to 18 percent and granting it worldwide control of these brands. While these venerable cigarette trademarks had long ago lost their leading positions in the American tobacco market, they were highly viable international brands. By 1994 B.A.T. appeared poised to reassert itself as a global tobacco juggernaut by parlaying these distinctly American labels into worldwide power brands. The company pushed especially hard in Eastern Europe and Asia.

Litigation Dominates Mid-1990s

B.A.T.s Brown & Williamson subsidiary came under heavy fire in the mid-to-late 1990s. In 1995, former Brown & Williamson executive Dr. Jeffrey Wigand blew the whistle on what he claimed were decades of tobacco industry obfuscation of the harmful effects of smoking. After shelling out tens of millions of dollars each year on smoking litigation over the previous four decades, Brown & Williamson lost its first case in 1996, when Mrs. Grady Carter of Jacksonville, Florida, won a US $750,000 judgment against the company over the death of her husband. The decisionwhich in 1997 was still under appealtriggered a flurry of similar lawsuits.

During this same time, the U.S. tobacco industry in general was feeling the pressure of dozens of lawsuits brought by state attorneys general who among other things charged that cigarette makers should reimburse state health care systems for the cost of treating ill smokers. In June 1997, the U.S. industrys Big FourPhilip Morris Companies, RJR Nabisco Holdings Corp., Brown & Williamson, and Loews Corp.s Lorillardagreed to a broad settlement that would pay out upwards of US$365 billion in damages over the next 25 years. The money would go toward health care expenses, antismoking campaigns, tobacco research, and stricter federal regulation of the industry and its products. By the fall of 1997, the agreement had yet to be crafted into law, and was expected to undergo some alteration during the ratification process.

B.A.T.s mounting legal woes sent its stock price tumbling in 1996. The company lost more than 25 percent of its market value£5.1 billion (US$8.5 billion)from February 1996 to January 1997. Those who held on to B.A.T.s stock began to clamor for the divestment of its tobacco interests, but CEO Martin Broughton and his executive team eschewed that strategy. In fact, Broughtons annual review of 1996 asserted the companys intent to regain our position as the worlds number one tobacco business and thereby deliver strong profit growth. In line with that goal, the conglomerate announced the US$1 billion acquisition of Mexican cigarette manufacturer Cigarrera La Moderna that June, providing further indication of its intent to buttress its international tobacco interests.

Principal Subsidiaries

British-American Tobacco (Holdings) Limited; BAT Capital Corporation (U.S.A.); British American Financial Services (UK and International) Ltd.; BAT International Finance plc; Tobacco Insurance Co. Ltd.; IMASCO Ltd. (Canada; 42%); Skandinavisk Tobakskompagni AS (Denmark; 32%); The West

Indian Tobacco Co. Ltd. (Trinidad & Tobago; 47%); ITC Ltd. (India; 31%); VST Industries Ltd. (India; 30%). The company also lists subsidiaries in the following countries: Argentina, Australia, Bahamas, Bangladesh, Barbados, Belgium, Brazil, Bulgaria, Cambodia, Cameroon, Canada, Chile, China, Costa Rica, Cyprus, The Czech Republic, El Salvador, Finland, France, Germany, Ghana, Guyana, Honduras, Hong Kong, Hungary, Indonesia, Isle of Man, Kenya, La Reunion, Malawi, Malaysia, Mauritius, The Netherlands, New Zealand, Nicaragua, Nigeria Pakistan, Panama, Papua New Guinea, Poland, Portugal, Republic of Ireland, Romania, Russia, Sierra Leone, Singapore, Slovakia, South Africa, Spain, Sri Lanka, Surinam, Switzerland, Uganda, Ukraine, Uzbekistan, Venezuela, Vietnam, Zaire, and Zimbabwe.

Principal Divisions

Allied Dunbar; Eagle Star; Threadneedle Asset Management; Farmers Group; British American Tobacco.

Further Reading

B.A.T. to Pay $1 Billion in Mexico Cigarette Deal, New York Times, July 23, 1997, p. C20.

British Company Opposes Changes in Tobacco Deal, New York Times, July 31, 1997, p. A13.

Chewing Up Tobacco, Economist, September 20, 1997, p. 70.

Dunham, Richard S., Alright, Everybody, Back to the Table, Business Week, September 29, 1997, p. 34.

Fallon, James, Hoylake Plans New Bid for B.A.T., WWD, November 17, 1989, p. 2.

Gleick, Elizabeth, Tobacco Blues, Time, March 11, 1996, pp. 54-59.

Kimelman, John, Defensive Maneuver, Financial World, June 21, 1994, pp. 32-33.

The Last Drag? Economist, April 30, 1994, p. 75.

Learning the Hard Way, Economist, September 30, 1989, pp. 70-71.

Noah, Timothy, Clinton Refuses to Inhale, U.S. News & World Report, September 29, 1997, p. 66.

No B.A.T. Man, U.S. News & World Report, May 7, 1990, p. 14.

Rublin, Lauren R., Wall Street Keeps a Stiff Upper Lip, But Tobacco Has Taken a Body Blow, Barrons, August 19, 1996, pp. MW3-MW5.

Smolowe, Jill, Sorry, Pardner, Time, June 30, 1997, pp. 24-29.

Valdmanis, Thor, Where Theres Smoke Theres Ire, Financial World, January 21, 1997, pp. 38-40.

updated by April Dougal Gasbarre