Business / Corporate

Japan Tobacco to buy U.S. e-cigarette brand as operating profit falls

Bloomberg

Japan Tobacco Inc.’s first-quarter operating profit declined 8.4 percent as domestic cigarette sales fell and the weakness of the Russian ruble hurt earnings from its biggest overseas market.

The company also agreed to buy Logic Technology Development LLC, a U.S. e-cigarette brand, as it expands in emerging products, Japan Tobacco said, without disclosing financial details.

Operating profit fell to ¥143.4 billion for the three months ended March from ¥156.6 billion for the same calendar period last year, Asia’s largest listed cigarette maker said Thursday. Japan Tobacco provided a first-quarter “like-for-like” comparison as it is shifting to a new accounting period to match the calendar starting this year.

International sanctions against Russia over the worsening Ukraine crisis has weakened the ruble, eroding the value of Japan Tobacco’s profit when converted into dollars at its international unit. At home, Japan Tobacco’s cigarette sales during the first quarter dropped 16 percent from a year earlier, according to the company data, as a surge in demand before an April 2014 sales tax increase disappeared.

Net income grew 17 percent to ¥104.2 billion due to lower income taxes, the company said.

The Russian currency weakened 30 percent against the dollar in the past 12 months. Japan Tobacco has planned its 2015 business based on 65 ruble versus the greenback, the company said in February.

The acquisition of Logic Technology, which sells rechargeable, ready-to-use and disposable e-cigarettes, will be funded by cash and loans, and would have a minor effect on Japan Tobacco’s 2015 results, the company said.

The purchase is “part of the company’s strategy to boost investments into alternative cigarettes. It’s inevitable for Japan Tobacco to go this way as the traditional cigarette market is shrinking,” said Tokushi Yamasaki, an analyst at Daiwa Securities Co.

In February, Koizumi announced 2015 as Japan Tobacco’s “year of investments,” and said the company plans to speed up investments into other types of tobacco products such as e-cigarettes. Japan Tobacco bought Zandera Ltd., the maker of the E-Lites e-cigarette brand in the U.K., in June last year for an undisclosed sum.

The company completed 11 acquisitions totaling at least $2.1 billion in the past five years, the largest of which was the purchase of a 20 percent stake in Russia’s Megapolis Distribution BV for $750 million in 2013, according to data compiled by Bloomberg.

Japan Tobacco, which in February announced it will exit its drinks business, is also exploring a sale of its beverage vending machine unit that could fetch as much as ¥100 billion, people familiar with the matter said earlier this month.