Japan Tobacco to buy Indonesian 'kretek' cigarette firms for $677 million

The flag of Japan Tobacco Inc (JT) is seen outside the company's headquarters building in Tokyo, Japan, May 18, 2016. REUTERS/Toru Hanai

JAKARTA/TOKYO (Reuters) - Japan Tobacco Inc on Friday said it has agreed to buy an Indonesian maker of “kretek” tobacco and clove cigarettes, together with its distributor, for $677 million, giving it a bigger footprint in the world’s second-largest tobacco market.

The announcement comes as Japan Tobacco has been trying to acquire tobacco businesses in emerging Asian markets. It has said it is in talks to buy assets of Philippine cigarette maker Mighty Corp Ltd.

In a statement on Friday, Japan Tobacco said it is acquiring all shares of PT Karyadibya Mahardhika and PT Surya Mustika Nusantara. Including the pair’s debt, the value of the deal is $1 billion, Japan Tobacco said.

The transaction will be completed in the October-December quarter, pending regulatory clearance, Japan Tobacco said.

Kretek cigarettes, which are made of tobacco and the spice clove, dominate in Indonesia where Japan Tobacco mostly sells conventional cigarettes, the company said.

“This deal will give the JT Group immediate scale and presence on a nationwide level in the Indonesian kretek market,” Japan Tobacco said.

Indonesia’s cigarette market was the world’s second-biggest after China with 316.1 billion sticks sold last year, data from Euromonitor International showed.

Japan Tobacco has been looking for acquisition targets in emerging markets, such as Southeast Asia, Africa and Latin America, the chief executive of the world’s third-biggest tobacco company told Reuters in May.

The former state monopoly, still one-third owned by the government, has been hit by a faster-than-expected decline in cigarette sales in Japan, its biggest market, where it commands a 60 percent share.

Reporting by Eveline Danubrata in JAKARTA and Taiga Uranaka in TOKYO; Editing by Christopher Cushing