Balkanalysis.com

In a Western world of prohibitions, hysterical advertising and dire warnings, Southeastern Europe has become the last refuge of the smoker.

Immune from the whining of lobby groups and governed by leaders with greater concerns, the region has become a gold mine for multinationals facing increasing resistance in America and the European Union.

Over the past few months, companies like Philip Morris, British American Tobacco and Altadis have taken over government-owned tobacco interests in Serbia and Italy, while bidding closes on October 24th for Tekel, the Turkish state-owned cigarette producer. Bulgaria also plans to privatize.These sales have brought generous amounts of capital into government coffers. In August, Phillip Morris and BAT won controlling stakes in two Serbian tobacco factories- for 600 million euros. A month earlier, BAT paid 2.32 billion euros for Ente Tabacchi Italiani, Italy’s state-owned cigarette company. In June, Spain’s Altadis paid 1.29 billion euros to the Moroccan government for its Regie des Tabacs Marocains.

According to the “Financial Times,” these three sales “…fetched prices ranging from double to quadruple original estimates.” Tekel’s sale will probably do the same.

On September 19th, European smokers were outraged by EU Health Commissioner David Byrne’s American-style plan to ban smoking in restaurants, bars and cafйs. Ironically, the EU spends over $1 billion per year subsidizing its tobacco farmers. Whether or not a ban is ever enacted, it is a sign of the times and tobacco corporations are taking note.

As such, current tobacco sales in non-unionized countries indicate the industry’s plan for squeezing a few more lucrative years out of Europe. While Italy is an EU country, Serbia and Turkey are not and won’t be anytime soon. Such countries are immune- at least for now- from stifling EU anti-smoking plans.

Western fears are contrasted by Eastern customs. While tobacco consumption in such countries continues to rise (by 3.4 percent annually), American cigarette sales fell by 13 percent between 1997 and 2002, reports “Bloomberg.” Yet “soaring” sales in Russia will see Philip Morris make a 43 percent increase in investments there.

The commonality of smoking in the region- something terrifying for risk-averse Americans- reflects the primary motivation for industry interest. The tobacco giants also hope that a strong presence will weaken the lucrative cigarette counterfeiting and smuggling trade.

Such practices are endemic in countries such as Greece, Bulgaria, Serbia and Ukraine. In Slovakia, Philip Morris blames the black market partially on consumer tax increases.

Lawless Kosovo- where children armed with cardboard boxes full of counterfeit cigarettes are a fixture on Pristina’s streets- is the heart of Balkan smuggling.

In Montenegro, allegations of state-condoned smuggling have dogged the regime of Milo Djukanovic. He and other officials have been named by Italian investigators in Bari and Naples. The EU claims that Montenegrin contrabands have cost it some $1.7 billion in annual lost taxes.

High-level involvement in Macedonia’s illicit business caused the flight of a former customs chief, and fed international fears over investing in this chain-smoking nation.

The region does have a reputation. But privatization failures and bidding caution have additional causes. Negotiations with Deutsche Bank’s Tobacco Capital Partners (for an 80 percent share in Bulgaria’s Bulgartabac) failed in April, primarily because of unattractive loss-making subsidiaries and government protectionism.

According to the “Sofia Echo,” Serbia’s experience has inspired the government to consider other strategies. Instead of selling Bulgartabac as one entity, the company may be divided and sold in 5 privatization rounds. This would separate the wheat from the chaff, dumping the loss-makers first and saving for last the most profitable plants, in Blagoevgrad, Sofia, Stara Zagora and Plovdiv.

Protectionist measures to forestall labor unrest scuttled the original negotiations. These could be expanded. The new Tobacco Act calls for a minimal 65 percent homegrown tobacco. Previously unsuccessful demands for set purchase commitments may also be revived.

Nevertheless, the government hopes its new strategy will net up to 300 million euros- far exceeding the 110 million euros offered by TCP, but not incongruous with recent regional deals.

The Turkish sale, however, looms largest. The country’s growing population more than doubles those of Greece, Bulgaria, Macedonia and Serbia combined. One in three Turks smoke, and Tekel enjoys market rule. As in Bulgaria, government’s tough negotiating often causes privatization failures. And with a domestic debt of $130 billion, Turkey is certainly an IMF favorite.

According to the “Financial Times,” Tekel’s 2001 profit was $181 million, with a 61 per cent market share in cigarette sales. This constituted 77 percent of the company’s 2002 total revenues ($2.8 billion).

In recent weeks, Tekel’s market share has dropped three percentage points over privatization uncertainties. But Turkish authorities downplay potential competition problems, and have dispensed with the preliminary bidding round, envisioning a final auction to be held November 10th.

British-American Tobacco (BAT), Japan Tobacco and Philip Morris parent company Altria lead the field of 7 bidders.

Analysts at Turkish and international securities firms such as Raymond James and J.P. Morgan value Tekel at anywhere from $2-4 billion. The Turkish government’s stated target of $2 billion will be exceeded.

According to “Forbes,” Altria’s current 28 percent market presence could be its Achilles Heel. The other two big bidders have much smaller shares- and could look better for government regulators. Japan Tobacco currently has a 10 percent market share. Last month, “Bloomberg” cited president Katsuhiko Honda as saying JT “…wants to be the dominant cigarette vendor in Turkey.”

BAT, with only a 1 percent market share, is looking at over a $3 billion bid, according to the “Telegraph,” and has been deemed “aggressive” by Turkish analysts.

According to “Bloomberg,” 6 attempts to sell Turk Telekomunikasyon AS failed, “…mainly because politicians imposed conditions that deterred potential bidders.” In fairness, the weak state of the worldwide telecom market has lessened Turkish enthusiasm to sell.

In August, the sale of Turkish chemical giant company Petkim Petrokimya Holding AS collapsed due to government dissatisfaction over the down payment size. A new selloff strategy is expected by October 31st.

What about Tekel? Expect haggling, but also an element of urgency to influence the sale. The IMF, which holds Turkey in its clutches, mandates $4 billion in asset sales. The government has already raised $74 million. Several other companies are on the block.

The Petkim failure means that Tekel’s sale must be both quick and lucrative, if the goal is to be reached this year. The government is therefore put into the awkward (yet usual) position of having to hold out- but not forever.

However, if anyone knows how to bargain, it’s the Turks. When the smoke clears, the government will pull in a considerable sum, probably approaching $3 billion, in what may be Europe’s last great tobacco sale.