Altadis S.A. - Company Profile, Information, Business Description, History, Background Information on Altadis S.A.

Eloy Gonzalo, 10
28010 Madrid

Company Perspectives:

With 20,000 employees and activities in nearly 35 countries, Altadis is a multicultural, internationally-orientated Group, generating more than a third of sales from foreign markets. Underpinned by a solid financial position, Altadis is pursuing a growth strategy based on acquisitions and international expansion in order to reinforce its leadership position and create value for its shareholders and employees.

History of Altadis S.A.

Altadis S.A., formed from the 1999 merger of the French and Spanish state tobacco monopolies SEITA and Tabacalera, is the third largest European tobacco company and the world's largest cigar producer. It is also a major distributor of tobacco and other products in Western Europe. Tabacalera, established in the seventeenth century as the tobacco monopoly of the Spanish empire, and Seita, which was incorporated from the remains of the Bourbon kings' tobacco monopoly by Napoleon I in the nineteenth century, joined operations to protect themselves from takeover by such tobacco giants as Philip Morris and to bolster their ability to make acquisitions and expand their power in the world marketplace.

History of SEITA

Tobacco was first introduced to France in the 16th century by the French monk Andre Thevet, but it was Jean Nicot, France's ambassador to the court of Portugal, who would give his name to the plant's active ingredient in 1560. The cultivation of tobacco--in particular, a "brown" variant of the plant that would dominate French tobacco tastes until the late 20th century--soon centered in the Savoy and southern regions. Touted for its medicinal properties, tobacco was first distributed by pharmacies and was used as an ingredient in a variety of syrups, balms, and ointments, as well as a snuff; it was not long, however, before smoking became the most popular usage of tobacco. By the mid-17th century sales of tobacco had reached significant levels.

Toward the end of the 17th century tobacco began to take on a new, and lasting, role: that of a "tax collector" for the state. France's war with Holland in that century had exhausted the country's treasury. In 1674, during the reign of Louis XIV, tobacco sales were placed under control of a "tobacco farm" (Ferme des tabacs) by Jean-Baptiste Colbert, the French king's controller-general of finances. Seven years later Colbert extended the royal monopoly to the fabrication of tobacco products, particularly cigars, as well. The farm's control over tobacco and tobacco products was to last for more than a century.

Sales of tobacco remained largely nonspecialized through the 17th century. Merchants developed signs to indicate that they were selling tobacco; while signs in the shape of pipes were common, another symbol became the most popular. Called the "carotte," the symbol represented the bundle of tobacco leaves tied and twisted together that the merchants used to prepare the pipe and snuff tobaccos for their clients. At the beginning of the 18th century the first dedicated tobacconists appeared, marking a new method of tobacco distribution. The oldest of these, the Civette, opened in 1716 in Paris, was still in operation (and under the same family ownership) in the 1990s. As the trend toward tobacconist shops developed, the carotte was adopted as an official symbol and, at the beginning of the 20th century, the use of the carotte became obligatory.

Tobacco became a favorite of France's nobility. The monopoly control of tobacco and the heavy taxes imposed on its sale, however, placed tobacco beyond the reach of the country's poor--soon to enter history as the sans-culottes. Meanwhile, a lively contraband succeeded in popularizing tobacco beyond the ruling class. In 1791 the French Revolution abolished the Tobacco Farm and liberated the cultivation, fabrication, and sale of tobacco and tobacco products. Yet this freedom would not last long.

Once again, tobacco represented an important source of potential revenues for a state in dire need of funds. In 1810 Napoleon Bonaparte reestablished monopoly control over the cultivation, production, and sale of tobacco and tobacco products, setting up a state agency, the Direction des Tabacs, to govern the monopoly. At the same time, the distribution of tobacco was regulated as well, with merchants placed under direction of the tax office. These merchants, particularly bar and newsstand operators, were required to fulfill other distribution functions, such as the sale of postage and fiscal stamps. The 19th century would see a number of important developments in tobacco use in France. Pipe smoking, which had long achieved popularity in northern Europe, came into fashion in France at the beginning of the 1800s. In 1825 a new tobacco product made its appearance in France. Greeted with disdain by "serious" cigar smokers, the little cigar, or cigarette, was considered little more than a fad that would quickly fade. Under Emperor Napoleon III, a dedicated smoker, cigarettes achieved a fashionable status. The period was marked also by the arrival of the first rolling papers, which, perfumed or tinted to match the smokers' clothing, brought a new elegance to smoking.

For most of the 19th century, cigarettes were handmade by artisans. In 1860 these manufacturers, as well as manufacturers of other tobacco products, were brought under the control of a new state body, the Executive Office for State Production, formed by the French Finance Ministry. Cigarette production remained rather limited--a skilled artisan was capable of producing as much as 1,200 cigarettes per day. The Industrial Revolution soon caught up to cigarette production: in 1878 the first industrial cigarette machinery was introduced in France, with production runs of more than 3,500 cigarettes per hour. Cigarette machinery would continue to be refined; by the 1990s machines were producing cigarettes at a rate of 9,000 per minute. The greater supply and lower cost of production began the rise of cigarettes as the dominant form of tobacco product.

Although certain names in cigars had long enjoyed popularity (the Morlaix site, still in operation in the 1990s, began producing cigars under Louis XV), brand names would play an important role in building the tobacco market in the 20th century. A step in this direction had been made in the 1850s, when the first cigar bands, bearing the manufacturer's or a prominent personality's name, appeared. The rise of production volumes enabled the packaging of cigarettes, leading in turn to the first branded cigarettes. In France the government tobacco body introduced two brands in 1910, Gitanes and Gauloises. Based on blends of brown tobacco, both would prove to have lasting appeal for the French smoker--indeed, they would become synonyms for cigarettes themselves--and achieve an international reputation. Distribution of tobacco products, through a growing network of merchants placed under separate government control, took a step forward when adoption of the "carotte" became mandatory in 1906. In France the sale of tobacco products became strictly limited to these merchants, a system common in much of southern Europe, as opposed to the northern European countries where tobacco distribution was more flexible (vending machines, supermarkets, etc.).

The modernization of the government tobacco monopoly would begin in the 1920s. To aid France's economy, devastated after the First World War, the French premier Raymond PoincarƩ established a new organization for managing the tobacco monopoly in 1926. Called the Service d'Exploitation industrielle des tabacs, or SEIT, the new body once again fulfilled an old function, that of reimbursing public debt. Yet the SEIT represented a first step toward eventual independence, functioning as an autonomous body.

Cigarette sales continued to rise, becoming the tobacco product of choice in the 20th century. The SEIT's flagship brands also began to develop their logos (Gitanes with its silhouette of a gypsy dancer; Gauloises with its winged helmet of a Gaul warrior) in the 1920s and 1930s. With the monopoly on the French market, including France's colonies in Africa, Southeast Asia, the Middle East, and Latin America, the SEIT had little difficulty imposing its brands. Yet even after the introduction of competing brands, Gauloises and Gitanes maintained their appeal. SEITA added the final initial to its name in 1935 when the production of matches (allumettes) was placed under its monopoly control as well.

Cigarette smoking gained in popularity and, by the end of the World War II, had become immensely popular. In 1953 SEITA launched a third brand of cigarettes, the Royale. Growing concerns over health issues related to tobacco use prompted SEITA's research and development wing to develop a method of reducing the tar levels in its cigarettes. From 35 mg per cigarette in 1953, tar levels would eventually be mandated, by the European Community, down to just 12 mg per cigarette in 1998. The formation of the European Community in the postwar years would lead to changes in the nature of SEITA as well. In 1959 SEITA's status was adjusted to that of a state-owned industrial/commercial concern (an Etablissement Public Ć  Caractere Industriel et Commercial). The following year the European Community took the first steps in opening its internal borders, allowing the importation of cigarettes among member countries. In 1962 SEITA's employees, formerly classified as civil servants, were granted independent legal status.

While the importation of foreign cigarette brands was slowly liberalized, their distribution in France remained under the exclusive control of the network of merchants established under Napoleon I. In 1964 that monopoly system, sorely in need of modernization, was also placed under SEITA's direction. As such, SEITA found itself in a new role, that of a "tax collector" for the French state. Other changes were in store as the European countries worked toward the formation of the European Economic Community (EEC). In 1968 SEITA introduced its first "foreign" brand, adding the production, under license, of Pall Mall cigarettes. Two years later the common market countries took down the customs barriers among member states; at the same time, SEITA lost its monopoly on tobacco cultivation--French tobacco farmers could now sell their produce on the worldwide market. The following year, another of the EEC barriers fell, when foreign brands were granted free access to the French market. SEITA, however, conserved its monopoly on the importation and distribution of these cigarettes. Yet, in 1972, SEITA lost the monopoly on the importation of EEC-produced matches.

In 1976 SEITA lost its importation and distribution monopoly--in name, at least. In practice, the company's continued direction of the country's nearly 40,000 tobacco retailers, the largest retail network in France, meant that its competitors were still required to contract with SEITA for distribution of their products. That same year, however, held a more substantial blow to the company's marketing endeavors, when the growing strength of the anti-smoking forces succeeded in placing warning labels on cigarette packages and in instituting a ban on advertisements for cigarettes. This move came at the same time as imported cigarettes, particularly the lighter-flavored, blond "American" brands, were finding increasing acceptance among French smokers. SEITA faced a similar situation beyond its borders. While the U.S., British, and Dutch markets traditionally had favored, almost exclusively, blond tobaccos, other countries, notably West Germany, Italy, and Belgium, were also turning more and more to blond tobacco products. By the end of the 1970s blond tobacco had captured as much as 95 percent of these markets as well. Gauloises, which had ranked as the sixth largest selling brand in the world, steadily lost market share, tumbling to 15th place by the mid-1980s.

While France and its former colonies, as well as Spain and Switzerland, continued to favor brown tobacco, the increasing popularity of blond tobacco among female smokers and, most important, among young smokers, forced SEITA to adapt. In 1979 the company began producing light versions of its brown tobacco cigarettes; the following year the company introduced, rather unsuccessfully, its own "American" cigarette, News. In that same year SEITA began producing under license the Lucky Strike brand for the French market. More successful for the company was the 1984 launch of Gauloises Blondes, which enabled the company to hold on to its market leadership in France. SEITA's de facto control over cigarette distribution in France, meanwhile, allowed it to continue to profit from its competitors' success.

By the mid-1980s, however, SEITA was bleeding. As a government-controlled organization, SEITA was criticized for its slow response to the changing marketplace. As foreign brands grew in popularity (while cigarette consumption itself began to decline), SEITA's losses would rise to some FRF 4.5 billion per year by the end of the decade. Yet the government, content to collect taxes on tobacco sales (of some FRF 30 billion in sales, some FRF 24 billion went to the state), was ill-inspired to take action. Nonetheless, SEITA slowly began to change its status. A first step was made in 1980, when SEITA was transformed from a "service" to a nationalized company as a "sociƩtƩ nationale." In 1984 SEITA's character was again changed to that of a shareholder society, with the sole shareholder remaining the French state. This change, however, enabled the company to diversify its activities for the first time.

The company's new organization, which included a reorganization of its production capacity and the ability to lay off employees, enabled it to become profitable by the beginning of the 1990s. At the same time, the company managed to recapture much of the French market, with Gauloises Blondes becoming the second largest selling cigarette. In 1991, on post tax revenues of nearly FRF 13 billion, SEITA earned a net profit of FRF 226 million.

A significant change for the company would come in the mid-1990s. In 1993 SEITA was included in the list of national companies to be privatized, and in February 1995 SEITA (now Seita) became a privatized company, listing as a public company on the Paris stock exchange. As such, the company faced head-to-head competition with tobacco giants such as BAT Industries and Philip Morris, in a worldwide market where Seita's share was as little as one percent. Yet with its leadership position in the French market remaining stable, enhanced by its privileged position with the country's 35,000-strong retail network, Seita could begin to take steps toward international growth. In 1995 the company acquired Poland's third largest cigarette producer, ZPT Radom. In 1996 the company began expanding its exports into other Eastern European markets, including Slovakia and Slovenia. In July 1996 Seita made moves to expand into China, the world's single largest cigarette market, when it signed a technical cooperation agreement with the Chengdu cigarette factory.

After privatization, Seita's sales continued to rise, passing FRF 17 billion in 1996, for net profits of FRF 786 million. Seita continued to play the role of a tax collector for the French government, a position that came to the company's aid in 1997. With Seita facing a price war to maintain market share (as a result of a foreign brand's dumping its cigarettes on the French market), the government imposed a new tax on tobacco products in late 1997, a tax calculated against Seita's price structure. A giant at home, Seita remained a minor player on the international tobacco market in 1998. Yet with Gauloises's status as one of the world's most recognized brands, Seita maintained an attractive future, certainly to a potential suitor to the company's key French retail network.

History of Tabacalera

Tabacalera is one of the oldest companies in the world, with its roots in the period of Spanish colonization of Central and South America. Tobacco was one of many substances unknown in Europe before being discovered by the conquistadors as they pushed the new boundaries of Spanish domination south from their first settlements in Mexico during the 16th century. Regarded initially as a curiosity with supposedly medicinal properties when ground and inhaled, tobacco was used in Europe only in small quantities during the 16th century.

One of the main features of Spanish colonial expansion was the government's determination to retain tight control of the economic traffic between the colonies and Spain. Aimed mainly at ensuring a steady flow of mineral wealth from American mines, this policy limited the number of ports in the colonies that could ship goods to Spain, while also limiting the number of ports in Spain that could receive the goods. At the Spanish end, the government designated Seville as the central port for trade with the colonies, and it was controlled by the Casa de Contratacion--the hiring house for seafarers--which was established in 1504. Because of this designation, Seville became the center of tobacco imports from the Americas, and was one of the first places in Europe where the tobacco plant was cultivated. In the early 17th century, a factory for processing tobacco was built on the banks of the Guadalquivir River near Seville to cater to the growing popularity of snuff (powdered tobacco) among Sevillans.

In 1636, the Spanish government moved to ensure its control of the growing tobacco trade by establishing a monopoly over the production and sale of tobacco in the kingdoms of Castille and Leon. The government decreed that tobacco trade would be controlled by a newly formed body, the Estanco del Tabaco. Despite considerable changes to its structure and powers in the following three and a half centuries, the Estanco del Tabaco formed the foundation of what became present-day Tabacalera, S.A.

Tobacco use grew steadily during the late 17th and early 18th centuries, and in 1725 the Estanco del Tabaco decided to build a new factory in Seville to accommodate the increasing demand. Although construction began in 1728, disputes over the plans and other problems delayed completion of the new factory until 1770. Upon completion, however, the size of the new Royal Tobacco Factory of Seville, along with its proximity to the tobacco port, made it the most important tobacco manufacturing plant in the world at the time.

As popular tobacco tastes changed in the early 19th century, the Royal Tobacco Factory in Seville restructured its operations to begin producing cigars in addition to powdered snuff tobacco, which had been produced exclusively for years. The shift to cigar manufacture, brought on by changes in consumer tastes, required a highly labor-intensive process and demanded a large, cheap work force to hand-roll the tobacco leaves. This demand was satisfied by using large numbers of women in the factory, marking one of the first instances of women's large-scale involvement in Spanish industry. This provided the inspiration for the main character in Merimee's novella Carmen, which in turn inspired Bizet's opera of the same name.

The demand created by the emergence of cigars as a popular form of tobacco prompted the Estanco del Tabaco to invest heavily in expanding its production capacity during the 19th century. With a second factory already established at Cadiz, the Estanco opened nine more new factories throughout Spain during the 19th century, creating one of the country's biggest and most productive industrial enterprises.

In the mid-19th century, the Spanish government began looking for ways to change the managerial structure of the company. It wished to take advantage of the more sophisticated economic environment, in which direct state control appeared outdated and seemed to hamper delivery of the highest possible profit to the state. Beginning in 1844, various proposals were put forward until finally the operations were placed under the control of a strictly corporate entity in 1887. At that time, the state transferred its monopoly to the central bank, the Bank of Spain, which formed a company called the CompaƱia Arrendataria de Tabacos. This company leased the management of the monopoly from the bank. The new corporate structure was aimed at achieving the greatest efficiency from the operation by distancing it from the government, while at the same time ensuring the continued supply of revenue to the state from the tobacco operations.

The leasing company controlled the tobacco monopoly for the next 60 years, throughout the tumultuous Spanish Civil War of the 1930s and the final victory of the fascists in 1938. When the contract between the company and the bank came up for its regular review in the early 1940s, the government changed the legal structure of the company once again, opting this time to turn it into a company wholly owned by the state. Thus, in March of 1945 a limited company was formed: Tabacalera, Sociedad Anonima, CompaƱia Gestora del Monopolio de Tabacos y Servicios Anejos was formed. This change set in place the corporate structure that the company retains today.

After three-and-a-half centuries of operating in the comfortable environment of a state-enforced monopoly, Tabacalera was presented with one of its greatest challenges in January 1986, when Spain opted to join the European Economic Community (EEC). As part of the requirements for joining the community, the Spanish government was obliged to relinquish its monopoly of tobacco production and sales. This process involved the partial privatization of Tabacalera, S.A. The state transferred all of its assets and acquired rights in the tobacco monopoly to Tabacalera, in exchange for shares issued by the company that left the state with a 53 percent controlling stake of the company's capital.

Under the new laws of the EEC, Spain's wholesale import and tobacco trading activities were liberalized, giving anybody the right to carry out these activities, but under strict guidelines. Although Tabacalera continued to manage the Spanish monopoly for tobacco products manufactured outside the EEC, and although the state retained control of the retail sales monopoly through its concessionaires, the breaking of the local production monopoly struck at the heart of Tabacalera's operations. This fundamental change, coupled with the upcoming single European market, made it clear that the company had to do more than simply continue making and selling tobacco products if it was to survive. The urgency of change was made even more pressing by signs that tobacco sales could no longer be counted on to rise due to heightened anti-smoking sentiment worldwide.

In 1987, under the presidency of Candido Velazquez Gaztelu, Tabacalera launched a wide-ranging diversification plan aimed at ensuring the company's future in the less secure post-monopoly commercial environment. Velazquez pushed the company into two new areas--food manufacturing and retail distribution--on the basis that these two sectors were best suited to Tabacalera's existing operational structure.

Tabacalera took its first tentative step into the food industry in 1986 by setting up a snack foods operation, Nabisco Brands EspaƱa y Portugal, as a joint venture with RJR Nabisco. Two years later, Tabacalera actually purchased the company when Kohlberg Kravis Roberts took over RJR Nabisco. In the same time period, Tabacalera bought a group of companies controlled by the Spanish food group Instituto Nacional de Industria. These companies gave Tabacalera access to a wide range of food markets, such as Spain's leading milk concentrate and liquid milk producer, Lactaria EspaƱola (LESA); meat and preserves company Carnes y Conservas EspaƱolas S.A. (CARCESA); deep-frozen foods producer Frioalimentos (FRIDARAGO); and Congelados Ibericos S.A. (COISA). Tabacalera also bought a controlling share in a pulses company, Comercial Industrial Fernandez (COIFER S.A.), and a stake in a marine cultivation company, called Acuicultura. Tabacalera also made a strong move into retail distribution, purchasing 75 percent of retailing business Distribuciones Reus S.A. (DIRSA), a company with 325 supermarkets and over 500 franchised shops. DIRSA was also the owner of another company with a chain of more than 100 supermarkets.

The diversification program made Tabacalera one of Spain's leading producers of items such as biscuits, powdered and concentrated desserts, and milk packaging, while it also gave the company a leading position in the tomato sauces, pulps, conserves, juices, and pulses markets and control of one of the largest networks of retail outlets in Spain.

Unfortunately, rather than assure Tabacalera a secure hold on a broader range of operations, the swiftness of the diversification program brought with it a number of serious problems. Namely, in the rush to acquire new businesses, the company had bought a number of operations which were heavy loss-makers. Tabacalera planned to use the economies of scale provided by such a large group to turn the troubled subsidiaries around, but after two years it became clear that the worst of them were largely unsalvageable and would only hamper the group's efforts to become more flexible.

Therefore, Velazquez's successor as chairman, Miguel Angel del Valle Inclan, took office in 1989 and began a process of rationalizing the group's food and distribution activities. He described Velazquez's diversification program as "too ambitious," as reported by Reuters News Service on June 21, 1990. The new aim was to keep only the profitable food subsidiaries, divest the rest, and acquire businesses in other sectors so that the company's revenue from non-tobacco activities would match its tobacco revenue.

Accompanying these moves into different markets, Tabacalera also updated its core tobacco operations during the 1980s to account for changes in the market. Spanish smokers had begun to give up their traditional preference for black tobacco in favor of blond Virginian tobacco. By 1985, Virginian tobacco sales in Spain had already risen to 44 percent of the total tobacco sales, and were on the verge of surpassing those of black tobacco. Tabacalera responded by reorganizing its cultivation and processing operations to produce more Virginian tobacco, which provided a higher profit margin. The company took consideration of this consumption change when it began building a new factory at Cadiz in 1984, much bigger and more efficient than the company's existing plants. Furthermore, in preparation for the challenges likely to emerge due to the upcoming single European market in 1993, the company signed an agreement with Tabaqueira de Portugal in 1989 to allow cross-marketing of the two companies' brands in their respective countries. In December 1990 Tabacalera also announced a modernization plan, which would involve the termination of 1,500 jobs to produce a leaner company in time for the advent of the single market.

In 1990, Tabacalera sold the DIRSA retail chain for ESP 12 billion to the French Promodes group, after owning it for only two years. In the same year, the company sold its interest in FRIDARAGO, and gave up its management of the Tabacos de Filipinas company, which had incurred losses of ESP 1.4 billion in 1989 and 1990.

The main problem brought on by the diversification was the milk company, LESA, which continued to lose money despite Tabacalera's investment of large sums to improve it. The company provided more than ESP 8 billion to LESA in the two years following the purchase, but by 1990 the milk producer still showed a huge loss of ESP 5.2 billion. Tabacalera put LESA up for sale, and by April 1991 was holding advanced talks with the French group Union Laitiere Normande over the sale of the subsidiary. Also in 1991, Tabacalera changed the name of its Nabisco Brands subsidiaries to Royal Brands.

After cleaning out the bulk of its unprofitable food operations, Tabacalera attempted to consolidate the lucrative remaining businesses by merging the Royal Brands subsidiary with the Carcesa operation to create a more efficient food division. Under del Valle, the company also began to diversify into other areas: particularly real estate and tourism. In 1990, Tabacalera took a 33 percent stake in a joint venture to build a ESP 10 billion tourist complex in the Canary Islands. It also began to take advantage of its widespread real estate holdings by leasing them out, as well as by using its distribution network to deliver other companies' products. The most lucrative of these contracts was that of the West German company Quelle, Europe's biggest mail-order house, which chose to use Tabacalera's trucks for its Spanish deliveries.

The changes brought about by Spain joining the EEC, combined with the challenges posed by the European single market, caused the question of Tabacalera's relationship with the state to be raised once again. In August 1990, del Valle had stated his belief that the arrival of the single market was a good time to consider whether the state should continue to be the company's major shareholder. The question was sharpened when Spanish legislation was passed in 1990 banning almost all forms of tobacco advertising. Later that year, Spanish newspapers reported that Tabacalera desired a reduction in the state's stake, which would allow the company to be quoted on Spanish stock exchanges by the end of 1992.

The growing debate reached its peak in April 1991, when del Valle was forced out of office in what the Financial Times (April 10, 1991) described as "the climax of a political confrontation with the Finance Ministry." He was replaced by German Calvillo Urabayen, president of another government-controlled body: Fomento de Comercio Exterior. Meanwhile, many news sources were giving the impression that the Spanish government was actually considering the idea of selling a portion of its stake in Tabacalera, as well as its stakes in other large state-controlled companies, as a means of earning money to reduce the country's deficit.

By 1993, however, Tabacalera remained a company that was primarily held and controlled by the government. Rather than wait to see if a government business privatization plan would affect the company and help generate growth, Tabacalera instead focused its attention once again on continued restructuring efforts. It entered into a joint venture with RJR Nabisco Holdings Corporation in July 1993, in which each company held a 50 percent stake in the Royal Brands food operations. The deal was structured so that RJR Nabisco would have the option of purchasing the remaining 50 percent of Royal Brands in early 1994, which it did in May of that year. In selling Royal Brands off, Tabacalera signaled its renewed focus on its tobacco products and its desire to continue divesting other peripheral operations acquired in the 1980s.

The following year, Tabacalera was facing a mature market in its homeland of Spain. Although existing Spanish laws gave the company unique distribution rights which translated to a monopoly of sorts, the company knew that it needed to expand globally in order to sustain growth. Therefore, it purchased a 51 percent stake in Culbro Corporation's General Cigar Company, which gave Tabacalera an entry into the United States' cigar market, which was one of the world's largest and fastest-growing markets. The purchase helped Tabacalera position itself for future growth and distribution expansion, even in the face of the fact that Spain's government was still see-sawing on the idea of relinquishing a portion of its controlling stock in Tabacalera to the public.

By mid-1996, Tabacalera had made moves to sell off the remainder of its food businesses and focus solely on the production and distribution of tobacco, the product it began with over three centuries earlier. The company launched a new cigarette brand in France, called Montecristo, in its continued effort to expand distribution beyond the borders of Spain.

Despite the initial difficulties caused by an over-zealous diversification program a decade earlier, by the closing years of the 20th century Tabacalera appeared to have emerged in a good position to face the more competitive environment of a single European market. Its profits were healthy, its core tobacco business was reorganized to accommodate a changing market, and its expansion into other less lucrative sectors was successfully abandoned. The question of the company's future relationship with the state remained the only unresolved issue, but posed no immediate problems.

The Late 1990s Merger

In 1999, SEITA and Tabacalera announced that they would merge under the new name Altadis, which is an acronym in French and Spanish for "alliance in tobacco and distribution." The move was billed as a merger of equals, but the deal was structured as a friendly takover of SEITA by Tabacalera. Under the acquisition agreement, SEITA shareholders received 19 Tabacalera shares and EUR 5 for every six SEITA shares, a deal that was estimated at EUR 6.7 billion ($3.3 billion). The stated goals of the merger agreement were to protect SEITA and Tabacalera from takeover, to increase turnover from EUR 692 million to EUR 1 billion by 2001, and to realize "financial synergies" that would result in a combined profit of EUR 70 million to EUR 100 million by 2003. Altadis' official headquarters were placed in Madrid, and the company's operational headquarters were situated in Paris. The chairmen of the former companies would act as co-chairs of the new conglomerate. Shareholders were less than sanguine about the deal. As one commentator wrote in The Economist of December 21, 2000, the merger "combines two small, fat and badly managed companies. The signs are that it will produce one large, fat and badly managed company." Both companies' stocks took a beating after the merger was announced, whereas they had been on the rise before the merger was announced due to speculation about possible takeover attempts from larger competitors.

The new company set about looking for acquisitions to secure a larger stake in the rapidly consolidating world tobacco market while trimming back on redundant and outdated operations in its home countries. On both fronts, the going proved tough. Shortly after its merger, Altadis was able to buy a 50 percent share in the Cuban state cigar monopoly, CorporaciĆ³n Habanos, which added leading premium cigar brands including Montecristo and Romeo y Julieta to Altadis' portfolio and vaulted the conglomerate to the lead position in the world cigar market. A 2002 bid to acquire the German tobacco company Reemstra was no match for the big money put up by U.K. competitor Imperial Tobacco, however. Altadis also lost out in the bidding for the state tobacco monopolies in Italy, where British American Tobacco won control, and Austria, which sold its tobacco business to UK competitor Gallaher. In 2003, the company scored a major coup by acquiring an 80 percent stake in the Moroccan national tobacco monopoly RĆ©gie des Tabacs Marocains (RTM) for EUR 1.29 billion ($1.51 billion) in cash outbidding both Philip Morris and British American Tobacco. The deal bought Altadis a well-managed company of tobacco farms and manufactories located on a continent where smoking was on the rise, giving it a foothold for further African acquisition attempts and market expansion. The deal angered some shareholders who believed that the company had overpaid for RTM in an attempt to compensate for its poor bidding strategy in the competition for Reemstra.

In 2002, Altadis opened a new cigarette factory in Alicante, Spain, that took over production from closed factories in Valencia, Madrid, San Sebastian, and an older plant in Alicante. In autumn 2003 a new factory in Cantabria replaced production from shuttered factories in Managa, Dijon, and Santander. Opposition from unions and workers over closure of factories--some of which were centuries old--brought protests in France and Spain in 2003. Although workers managed to win some concessions in the form of social programs intended to help displaced people find new jobs, Altadis eliminated 1,276 jobs and closed cigarette factories in Lille, France, and Tarragona, Spain; a threshing plant in Tenneins, France; and the 400-year-old cigar workshop in Seville, Spain.

The largest growing segment of Altadis' business was its logistics division, which produced 20 percent of the company's revenues. In 2004 it purchased Etinera, the logistics division of the former Italian tobacco monopoly, from British American Tobacco, strengthening its position as a distributor of sweets, stationery, magazines, and other non-tobacco merchandise in the European Union. Although Altadis' cigarette division produced 56 percent of company revenues, and its cigar division was responsible for a quarter of world cigar sales, the tobacco market worldwide was shrinking. The logistics division, known as Logista, provided a stable basis for future growth as consumers became more aware of the dangers of smoking and nations campaigned to reduce or eliminate smoking within their borders.

Principal Competitors: Altria Group Inc.; British American Tobacco plc; Japan Tobacco Inc.


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