Tobacco maker, Philip Morris International Inc. (PM) has announced a restructuring plan for its Egyptian business as part of an initiative to expand in the profitable and growing North African and Middle Eastern markets.
Per the plan, Philip Morris plans to discontinue its existing contractual arrangements and has tied up with its strategic business partner, Eastern Company S.A.E. to create a new PMI affiliate in Egypt. Eastern Company S.A.E. manufactures Philip Morris’ products on a contractual basis in Egypt.
The company also entered into a new distribution agreement with Trans Business for Trading and Distribution LLC in order to facilitate distribution of the company’s products in Egypt. With respect to this restructuring, Philip Morris will record a charge of approximately 10 cents per share in full-year 2013 results, which are scheduled to be released on Feb 6.
Philip Morris believes that the new business structure will simplify operations in Egypt. Moreover, it will strengthen its presence in the dynamic Middle East market, which is now a flourishing economy with rapid urbanization. The company thus foresees large untapped potential for expansion outside the U.S.
Philip Morris is the leading international tobacco company in Egypt, with an estimated market share of 22.9% in 2013, up 4.7 points versus 2012, driven by its premium Marlboro and mid-price L&M brands.
The Egyptian restructuring plan comes on the heels of another plan announce earlier this month to construct a manufacturing facility in Bologna, Italy for 500 million euros. The production plant will produce reduced risk tobacco products called ‘Next Generation Products’ (NGPs).
The plant is expected to become operational by 2016 and employ 600 people. The investment in the facility marks Philip Morris’ initiative to shift focus toward the growing alternative tobacco product category to counter dwindling cigarette shipments.
The tobacco industry is facing difficult conditions owing to the ongoing anti-tobacco campaigns. Governments around the world are hiking excise tax on cigarettes and imposing packaging and advertising restrictions.
We believe that initiatives such as expanding business in the Middle East and construction of new facilities in the European Union will help the company maintain market share amid declining cigarette volumes. Philip Morris carries a Zacks Rank #4 (Sell).