AT retains option to reclaim its Russian business after sale

British American Tobacco (BAT), the world’s second-largest tobacco company, has agreed to sell its Russian and Belarusian businesses to a consortium led by its local management team. The deal, which is expected to close within a month, will end BAT’s presence in the world’s fourth-largest tobacco market, where it has a 25% share.

BAT announced its intention to exit Russia in March 2022, citing the unsustainability of its business in the current environment. The decision came amid rising tensions between Russia and the West over the annexation of Crimea and the conflict in eastern Ukraine, which triggered sanctions from the US, the EU and the UK. BAT said that the ownership of its business in Russia was no longer compatible with its “ethos and values”.

However, BAT has retained an option to buy back its Russian business in the future, if the political and economic situation improves. The terms of the agreement include a clause that gives BAT the right to reacquire the business at a pre-agreed price within a certain period of time, according to sources familiar with the deal. The exact duration and price of the option are not disclosed, but they are said to be based on the performance of the business and the market conditions.

BAT focuses on new categories and emerging markets

The sale of its Russian and Belarusian businesses is part of BAT’s strategy to focus on its new categories of products, such as e-cigarettes, heated tobacco and oral nicotine, which offer a lower-risk alternative to combustible cigarettes. BAT’s ambition is to have 50 million consumers of its non-combustible products by 2030 and to generate £5 billion of new categories revenue by 2025.

BAT is also shifting its attention to emerging markets, where it sees more growth potential and less regulatory pressure. BAT’s operations in Russia and Belarus accounted for only 2.7% of its revenue and 2.5% of its adjusted profit from operations in the first half of 2023. BAT said that the sale of its Russian and Belarusian businesses would not affect its full-year guidance, which it reaffirmed at its half-year results in July.

BAT’s chief executive, Jack Bowles, said that the sale was a “difficult but necessary decision” and that he was proud of the achievements of the Russian and Belarusian teams. He said that BAT would continue to monitor the situation in Russia and Belarus and that it would remain open to opportunities to return to these markets in the future.

BAT faces challenges from competitors and regulators

The sale of its Russian and Belarusian businesses will reduce BAT’s exposure to one of its most challenging markets, where it faces fierce competition from its rivals and increasing regulation from the authorities. BAT’s main competitors in Russia are Japan Tobacco International (JTI), which has a 36% market share, and Philip Morris International (PMI), which has a 26% share. Both JTI and PMI have invested heavily in their Russian operations and have launched their own reduced-risk products, such as IQOS and Ploom.

BAT also faces regulatory hurdles in Russia, where the government has implemented strict measures to curb tobacco use and promote public health. These include raising the minimum age to buy tobacco products from 18 to 21, banning the sale of tobacco products in kiosks and vending machines, restricting tobacco advertising and sponsorship, and increasing tobacco taxes. The government is also considering introducing plain packaging for tobacco products and banning the sale of flavored tobacco products, including menthol cigarettes and vaping products.

BAT’s Russian and Belarusian businesses to be renamed ITMS Group

The buyer of BAT’s Russian and Belarusian businesses is a consortium led by members of BAT Russia’s management team, which will wholly own both businesses after the completion of the deal. The consortium includes Alexander Lyuty, the general director of BAT Russia, and Sergey Kiselev, the finance director of BAT Russia. The consortium is backed by a group of Russian and international investors, whose identities are not revealed.

The consortium said that it would rename the businesses as the ITMS Group, which stands for “Innovation, Technology, Marketing, Sales”. The ITMS Group will continue to produce and sell BAT’s brands, such as Kent, Rothmans, Dunhill and Pall Mall, under a licensing agreement. The ITMS Group will also retain the existing workforce of about 2,500 employees in Russia and Belarus, and will offer them comparable employment terms for at least two years after the completion of the deal.

The consortium said that it was confident in the future of the tobacco industry in Russia and Belarus, and that it would invest in the development of the business and the introduction of new products. The consortium said that it would also maintain high standards of corporate governance and social responsibility, and that it would cooperate with the authorities and the stakeholders to ensure a smooth transition.

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