By Siddharth Cavale and Samantha Machado
(Reuters) – Imperial Brands is withdrawing from the premium cigar business to focus on vaping, with a 1.23 billion euro ($1.33 billion) sale of hand-rolled makes including Cohiba and Montecristo which will help it pay down debt.
The sale to private buyers includes Imperial’s 50% stake in Cuba’s official exporter Habanos, a unit of state-owned tobacco company Cubatabaco, which gives it rights to sell prestige brands Cohiba, Montecristo and Romeo y Julieta in 150 countries.
Imperial will retain its machine-made cigar business, whose most popular brand is Backwoods, which only constitutes a small proportion of its overall revenues. The firm entered the premium cigar business in 2008 with the acquisition of Spain’s Altadis.
The market for premium cigars has been driven by well-off Chinese consumers, who often splashed out during trips abroad, but a weaker yuan saw slower purchases in the second half of 2019 before any impact from the coronavirus crisis.
Nielsen data shows total cigar sales in the United States fell 1.2% to $3.2 billion in the year to October 26, 2019.
But 360 Research Reports said in February, before the coronavirus crisis fully hit, that it expected the worldwide market to grow at about 2.5% a year over the next five years, reaching $18.5 billion in 2024.
Its study cited the increasing purchasing power of middle class consumers in emerging markets, especially in Asia.
For Imperial, the sale is part of its plan to divest assets worth 2 billion pounds by May 2020 to pay back about 12 billion pounds in debt and invest in new vaping products, seen as the new growth frontier as rates of traditional smoking fall away.
Even though the company has not witnessed any changes in consumption of tobacco during the coronavirus crisis, it forecast that its earnings per share would be lower than last year mainly due to a U.S. ban on the sale of certain flavoured e-cigarettes.
The maker of Winston and Gauloises Blondes cigarettes said the sale will be in two parts, with Gemstone Investment Holding buying its U.S. unit for 185 million euros and Allied Cigar Corp buying the rest for 1.04 billion euros.
Imperial did not disclose further details about the buyers of the premium cigars business, which it has been trying to sell since late 2018.
“There had been some scepticism that the deal would get done, given how long it has taken to complete,” Alicia Forry, analyst with Investec said.
“However, the fact that it was 2 buyer groups plus dealing with the Cuban government during the sale explains the delay,” she said.
The sale, expected to be completed in the third quarter, also removes a potentially major headache for new chief executive Stefan Bomhard, who will join Imperial in July.
The business, which makes 340 million cigars a year, generated sales of over 300 million pounds and 80 million pounds in profit before tax in the year to September 2019.
After accounting for tax and other costs, net cash proceeds from the sale will amount to about 1.09 billion euros, which will be used to reduce pro-forma net debt to EBITDA leverage by about 0.2 times, Imperial said.
AZ Capital is advising Imperial Brands, whose stock was up 3.3% to 1,597.6 pence at 1115 GMT. The shares rose as much as 4.8% earlier in the session, its best day in nearly three weeks.
(Reporting by Siddharth Cavale and Samantha Machado in Bangalore; Editing by Aditya Soni, Saumyadeb Chakrabarty and Alexander Smith)