* Firms buy into distributor Megapolis for $750 mln each
* To support expansion in world No.2 market by volume
* Megapolis may still pursue IPO
* Russia cracking down on tobacco consumption
By Maria Kiselyova and Martinne Geller
MOSCOW/LONDON, Dec 4 Philip Morris International
Inc and Japan Tobacco Inc are buying 20 percent
stakes in their Russian distributor Megapolis for $750 million
each, strengthening their grip on the world's No.2 cigarette
market by volume after China.
Russia, where 40 percent of the adult population smoke, is a
key battleground for foreign tobacco companies grappling with
dwindling sales in many developed markets where government
regulation is becoming stricter and smokers fewer.
Foreign players - British American Tobacco,
Imperial Tobacco, Japan Tobacco and Philip Morris -
supply more than 90 percent of the Russian market, worth about
$20 billion a year.
However, distribution has stayed mostly in Russian hands
with Megapolis - majority owned by Igor Kesayev, who also
controls the Degtyarev arms factory and food retailer Dixy
- controlling about 70 percent.
"This is a milestone deal," said an analyst who declined to
be named. "Tobacco producers have dreamed of breaking this
By partly owning Megapolis, Marlboro cigarettes-maker Philip
Morris and Japan Tobacco, home of the Winston brand, may be
hoping to reduce their distribution costs and raise their
profile compared with Imperial Tobacco, whose Davidoff and
Gauloises brands are also distributed by Megapolis.
Imperial was not immediately available for comment.
Philip Morris said it expected the deal to lift its earnings
as of the first quarter of 2014, without detailing how.
Tougher regulation is lifting cigarette prices in Russia,
crimping sales and limiting product availability as President
Vladimir Putin's Kremlin strives to improve public health and
stem a population decline that began after the Soviet Union
collapsed in 1991.
Morningstar analyst Thomas Mullarkey predicted Russian
cigarette sales volumes would fall nearly 10 percent next year
due to an increase in excise taxes, but said the price of a pack
was still cheap.
"It's still an affordable habit, and the excise taxes are
still going to be low compared to U.S. and UK standards, even
after the increase," he said. "In the long run, the Russian
market has ample opportunity to continue its trend of going from
low-level brands to higher-margin and higher-priced brands."
STEP TOWARD OPENNESS
Megapolis said the deal was the first time that the world's
leading cigarette makers had access to local distributors and
that the cash inflow did not mean the company would not
resurrect plans for a flotation, pulled in 2011.
"This deal is for Megapolis a step toward being more open;
we are not giving up the idea of holding an IPO," a spokesman
for the Mercury Group, Kesayev's holding company, said.
The deal includes possible additional payments by each stake
buyer of up to $100 million based on Megapolis' performance over
the four years following the closing of the transaction,
expected this month.
Japan Tobacco has a 36 percent share of the Russian market
and runs factories in St Petersburg, Moscow, Leningrad Region
and Yelets. Philip Morris has 26 percent and has facilities in
Krasnodar and near St Petersburg.
Megapolis delivered more than 260 billion cigarettes in 2012
to 150,000 outlets and had revenue of around $12 billion.