December 4, 2013 / 12:30 PM / 6 years ago

Philip Morris, Japan Tobacco spend $1.5 billion on Russian distributor

MOSCOW (Reuters) - Philip Morris International Inc (PM.N) and Japan Tobacco Inc (2914.T) are buying 20 percent stakes for $750 million each in Russian distributor Megapolis, strengthening their grip on the world’s No. 2 cigarette market after China.

A man walks past a logo of Japan Tobacco Inc (JT) outside the company's headquarters building in Tokyo February 20, 2013. REUTERS/Toru Hanai

Russia, a market worth about $20 billion a year and where 40 percent of people smoke, has helped foreign tobacco companies offset dwindling sales in other countries where government regulation is becoming stricter and smokers fewer.

Foreign companies - including British American Tobacco (BATS.L), Imperial Tobacco IMT.L, Japan Tobacco and Philip Morris - control more than 90 percent of Russian sales.

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 DIXY.MM - controlling about 70 percent.

“This is a milestone deal,” said one buy-side analyst. “Tobacco producers have dreamed of breaking this monopoly.”

Tougher regulations are lifting cigarette prices in Russia also, crimping sales and limiting product availability as President Vladimir Putin’s Kremlin tries to stem a population decline that began after the Soviet Union collapsed in 1991.

Megapolis said the deal was the first time that the world’s leading cigarette had access to local distributors and that the cash inflow did not mean the company would not resurrect plans for a $1.5 billion 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.

Marlboro-maker Philip Morris said the deal - expected to close this year - is expected to be accretive to its earnings as of the first quarter of 2014.

Winston-maker 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 a 26 percent share and has facilities in Krasnodar and near St Petersburg.

Megapolis - exclusive distributor for Japan Tobacco, Philip Morris and Imperial Tobacco in Russia - delivered more than 260 billion cigarettes in 2012.

The purchase price of the combined 40 percent stake does not include a possible additional payment of up to $100 million by each of the companies depending on Megapolis’ performance.

(Reporting by Maria Kiselyova, Megan Davies and Olga Sichkar; Writing by Megan Davies; Editing by Louise Ireland and Douglas Busvine)

This story was refiled to add dropped word in the seventh paragraph

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