The offer made by a Japanese tobacco company to acquire a slice of Ethiopia’s tobacco monopoly is not only the highest ever made to a state enterprise, but it has also soared the company’s worth to 1.1 billion dollars.
Japan International Tobacco (JIT), a publicly listed company, has made an offer of 510 million dollars to acquire 40pc of shares of the Ethiopian National Tobacco Enterprise (NTE). A bidder’s representative who was at the headquarters of the Ministry of Public Enterprises, located opposite the previous Imperial Hotel, described the scene as “extraordinary.” Indeed, no other state owned enterprise has attracted such high prize; the closest was earned from the total sale of Meta Abo Brewery to Diageo, for 225 million dollars.
On Thursday, May 19, 2016, offers from five bidders were opened, showing the second highest offer made by British American Tobacco at 230 million dollars. The American Philip Morris International, which has recently donated half a million dollar to the Ethiopian Red Cross Society, gave the lowest offer of 120 million dollars, through Pan African Entrepreneurs.
The titans began their battle for a slice of Ethiopia’s tobacco monopoly back in March after a long anticipated bid was announced as a surprise.
“The Ministry’s officials were firm in preserving government majority in the company,” a representative of one of the bidders told Fortune. “Giving up 40pc for sale leaving the state with 31pc was a surprise in the end.”
Strong lobby groups from interested buyers led to the government to explore alternative ways securing benefits and control by the state, said another expert that has been following the case closely.
Right before the official opening of the bid last week, it was not only an end to few months journey, but also a moment of anxiety to those who were seated, cross faced and quiet, holding their last breath.
“Take a 15-minute walk,” Netsanet Wondirad, chairperson of the evaluation committee cracked a joke, hoping to break silence.
In the middle had arrived a representative of Sheba Ethiopia Investment Group, owned by a Yemeni family with a 29.09pc control of the tobacco monopoly. Arrived three minutes late after the box was sealed. None of the bidders were accommodative, and protested Sheba’s entry to the bid.
“Getting security bond from a bank took us one whole day, and led us to this,” a representative of the company told Fortune.
Bidders were expected to submit two percent of the total value they would offer as bid security, according to the tender document. Later, this changed to two percent of the indicative price. Officials claimed this was made to protect the secretive nature of offers.
Sheba was allowed to acquire a maximum share 20pc, half of what had been floated. Back in 2015, it let an opportunity slipped through its grip where offered by the state to increase its shares to 71pc.
That leaves now the entry wide open to JIT, a subsidiary of Japan Tobacco Inc. (JT), established in 1999 the parent company acquired the non-American operations of the multinational R. J. Reynolds for 7.8 billion dollars. JT’s total shipment volume in the first quarter of 2016 grew to 94.4 billion cigarette equivalent unit and its revenues mounted to 2.46 billion dollars, 4.2pc larger than the same period last year.
For JIT, which is known for its brands such as Winston, Camel, and Benson Hedges, its potential acquisition in Ethiopia will be its first expansion.
“I’ve never expected such a high offer would come,” said an assistant to a representative of one of the bidders. “I’m puzzled of how the Japanese plan to collect the return on their investment considering the existing business environment and all the regulation that restricts tobacco use.”
Nonetheless, the history of cigarette consumption in Ethiopia shows A phenomenal growth since the first production was begun during the era of Menelik II. The first factory was erected early in the 20th Century in the town of Dire Dawa, 555Km east of the capital. This factory, owned by an Armenian native, was moved to Addis Abeba in 1931, to settle in a locality used to be called Benin Sefer, in what is today the Arada neighborhood. With a lone machine, the factory used to churn out 300 pieces an hour, up until the arrival of the Italians.
Although the Italian occupation forces used to produce cigarettes from La Gare Customs Office, thereby causing increased consumption, the first tobacco monopoly was established a year after their departure in 1942, with 300 employees. The Imperial Ethiopian Tobacco Monopoly was then restructured in 1981, bearing the name National Tobacco & Match Corporation, before it was christened a decade later to its present form. But it was in 1999 the company was reincorporated as a share company, with a 250 million Br capital.
Since then the company’s growth both in production and revenues has been tremendous, owning to the 45pc of the population being between the ages of 15 to 45. Nonetheless, with the male consumption rate of less than 10pc and female consumption of barely three percent, the prospect for growth remains high. The average consumption rate over the years has been recorded at eight per cent, according to surveys conducted by Development Studies Associates (DSA).
The company’s track record attests to this. In 2002, it sold 1.8 million sticks of cigarette to generate 243 million Br, a figure almost tripled to 3.4 billion and revenues of 1.1 billion Br a decade later. Even the cigarette brands smuggled through the borders to the country grew, although modestly. In the decade beginning 2002, 65 million sticks were sold from illicit origins, claiming a market share of 38pc.
This year, the tobacco monopoly has recorded a 400 million Br in profit from a 1.7 billion Br in sales as of last year. The company had plans to increase its production capacity, in 2016, to 5.9 billion sticks of Nyala, Gissilla, Elleni, and two premiums of Delight and Nyala Premium. But, more than 80pc of the company’s sales comes from its known brand, Nyala. The company has four farms under its possessions, in Shewa Robit, Blatie, Wolaytta and Hawassa, growing virgin, oriental and burley tobacco, accounting only 30pc of its use.
“It’s with positive outlook that one has to prepare to engage with the government and other shareholders,” said Tadesse Kiros, a lawyer who is hired as a consultant by JIT. “The offer has to be seen as a plus to the government; surprising revenue.”
The half a billion dollars offer made by JTI is does not only stand way over the curve given by its closest contenders. It also undercuts an offer from a tycoon from Niger, Irro Ado, who has tabled gave 35.1 million dollars for 10pc of the shares. He has, however, submitted a bid security of 368,000 dollars, from Commercial Bank of Ethiopia (CBE).
This offer is greater than what has been offered when Sheba first acquired 22pc of the shares at par value of 870,000 dollars. Contrary to expectations, China Logistics Ltd, has made an offer of 156 million dollars for the 40pc. The second Chinese company to show an interest in NTE, was considered a serious contender, for it was advised by Assefa Abraha, former Board Chairman of the Ethiopian Privatization Agency.
He was among a list of local consultants and legal counsels seen crowding the Ministry’s compound last week. Mehertab Leul & Associates, Tadesse Kiros & Associates, and Kumelachew Dagne Law Office were present through their managers, while Zemedenh Nigatu, managing partner of Ernst & Young Ethiopia was active in the process. Surprise like disappointment was evident on their faces. “Not everybody knew what was coming in terms of financial offers,” said one of them. “It’s top secret; it could as well be decided by one or two individual executives.”
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