April 4, 2014 / 3:45 PM / in 4 years

Fitch: Imperial Most Vulnerable to UK Plain Cigarette Packaging

(The following statement was released by the rating agency) LONDON, April 04 (Fitch) The introduction of plain cigarette packaging in the UK would hurt manufacturers' pricing power and could increase the chances of other EU countries introducing similar legislation, Fitch Ratings says. Imperial Tobacco would face the biggest impact if the UK goes ahead with new regulations and is also among the most vulnerable to the risk of broader European reform. Loss of pricing power would be a particular concern for tobacco companies as it is the ability to increase prices that has allowed them to maintain growth despite falling volumes. As all tobacco packages would look the same, brand appeal would fade, potentially reducing the price difference between brands. Another effect that is difficult to predict is the risk of a widespread increase in illicit trade as packages would become more vulnerable to forgery. Imperial Tobacco has already suffered from a pick-up in illicit EU trading and would be the most exposed to a UK requirement for plain packaging because the UK generates around 20% of its operating profits. If plain packaging were introduced in the UK and the impact of illicit EU trading continued, we believe the company would probably reduce share buybacks to improve its financial flexibility. Imperial generates 65% of its operating profits in the EU, so it would also be among the hardest hit from an introduction of packaging restrictions in other major EU markets, or across the region as a whole. Imperial is less reliant on premium brands than other manufacturers, which would be some mitigation. Philip Morris International could also be significantly affected by broader EU reforms because, while it only derives 30% of operating profit from the EU, its portfolio is skewed towards premium brands. Any attempt to introduce plain packaging would probably be met with multiple legal challenges similar to those being brought against Australia. The final form of any regulations and the speed at which other countries might follow would therefore depend on the extent to which the courts saw plain packaging as an infringement of companies' intellectual property or a breach of trade agreements. The UK's Public Health Minister said Thursday that she is "currently minded" to introduce plain packaging, but that there will be a consultation before a final decision is made. Contact: Giulio Lombardi Senior Director Corporates +39 02 8790 87214 Fitch Italia SpA Vicolo Santa Maria alla Porta, 1 20123 Milan Ching Mei Chia Director Corporates +44 20 3530 1068 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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