Kenya’s second-biggest cigarettes maker, Mastermind Tobacco, has entered into negotiations that could see it sell a majority stake to Philip Morris International Inc, the world’s largest tobacco company by sales.
The multi-billion-shilling deal is expected to include a cash injection into the business that will see Mastermind upgrade its factory to start producing Philip Morris’ products such as Marlboro – the world’s leading cigarette brand.
Mastermind founder Wilfred Murungi declined to respond to our requests for a comment, including queries on the buyout price, but multiple sources familiar with the ongoing negotiations with the New York-based company say the transaction is at an advanced stage.
“Mastermind has been preparing to push Marlboro locally, the negotiations are advanced,” said a source with knowledge of the negotiations, but who requested anonymity to safeguard his business ties with the company.
Mastermind’s brands include Supermatch, Rocket and Supermatch Menthol, which could be expanded to include Philip Morris’ Marlboro, Parliament, Bond Street and Chesterfield.
Philip Morris is expected to acquire 51 percent shares of Mastermind, giving it a firm footing in the region’s multi-billion-shilling cigarettes business.
British American Tobacco (BAT) is Kenya’s biggest cigarette maker while Cut Tobacco is third.
The latest Kenya National Bureau of Statistics Economic Survey data shows that exports of cigarettes and semi-processed tobacco leaf hit a peak of Sh21.9 billion in 2014 before declining steadily to Sh17.7 billion in 2017.
If concluded, the transaction between Mastermind and Philip Morris will bring significant competition to the market leader, BAT Kenya, whose London-based parent, the BAT Group, is one of the major global rivals of Philip Morris.
With the financial heft and technical input of Philip Morris, Mastermind is expected to rival BAT’s model of large-scale manufacturing of premium to low-price brands for the domestic as well as the export markets.
Philip Morris reported annual net sales of $78 billion and a net income of $6.3 billion in 2017. It was followed by Altria whose annual net revenue and net earnings stood at $25.5 billion and $10.2 billion respectively. BAT was third with net turnover and normalised net income of $20.2 billion and $5 billion respectively.
BAT’s brands include Embassy, Dunhill and Sportsman.
Mastermind imports more than half of its raw material (semi-processed tobacco leaf) from Uganda and the Democratic Republic of Congo.
The proposed deal with Mastermind will expand Philip Morris’ presence in the continent, which is currently concentrated in North Africa; Algeria, Egypt, Libya, Morocco and Tunisia.
The conglomerate will acquire one of Kenya’s most controversial companies that has fought scores of court battles against its employees and the Kenya Revenue Authority (KRA).
The taxman, for instance, has claimed more than Sh1.2 billion in unpaid taxes, interest and penalties from the cigarette manufacturer.
Inflate cost of goods
According to court records, Mastermind would inflate its costs of goods (tobacco leaf imports) to report lower profits and taxes payable thereon.
The alleged accounting mis-statements were done without supporting documents. Mastermind and KRA have reportedly reached a settlement, which is set to be approved by the courts.
The entry of Philip Morris in the Kenyan market is seen as part of a global trend where big tobacco firms are seeking growth in emerging and frontier markets such as India, Nigeria and Uganda.
These markets are attractive because of their large population of people aged 25 and below – the age at which it is relatively easier to pick up the addictive habit of smoking cigarettes.
The growth markets are also yet to implement stricter tobacco rules such as plain packaging as happens in the developed world and which have slightly reduced smoking in countries such as Australia, New Zealand, the UK and Norway.
Plain packaging bans the use of branding, logos and colours on packaging other than the brand name and variant that may be printed only in specified locations and in a uniform font.
Its goal is to reduce the attractiveness of tobacco products, limit the use of pack as a form of advertising and increase effectiveness of health warnings.
More countries are expected to adopt similar restrictions as part of efforts to curb smoking, which cuts life expectancy by 10 years on average.
Other countries including South Africa are also considering adopting plain packaging legislation.
In Kenya, the law requires cigarette packs to contain graphic images warning of smoking’s health risks such as lung cancer