BAT Takes $31.5 Billion Charge on U.S. Cigarette Brands
Maker of Camel, Newport and Pall Mall brands says U.S. sales hit by smokers switching to cheaper products
British American Tobacco BTI -8.61%decrease; red down pointing triangle is booking a $31.5 billion charge to slash the value of its U.S. cigarette business, one of the biggest corporate write-offs in recent history.
The accounting charge, largely stemming from its 2017 takeover of the U.S. maker of Newport and Camel cigarettes, approaches the value erased by the failed merger of AOL and Time Warner. The media company took a $45.5 billion charge in 2003 a few years after its deal.
BAT spent $49 billion six years ago to take full control of U.S. tobacco company Reynolds American. In the face of an accelerating decline in cigarette smoking, BAT and other tobacco giants have been trying in recent years to pivot to cigarette alternatives such as e-cigarettes and heated tobacco devices.
BAT also faces a planned U.S. ban on menthol-flavored cigarettes, which account for more than half of the tobacco giant’s U.S. cigarette sales. The Food and Drug Administration is expected to publish the new rule next year, though it wouldn’t take effect immediately and BAT and other tobacco companies are expected to challenge it in court.
BAT, whose portfolio includes Newport, the leading U.S. menthol brand, Kent, Dunhill and Lucky Strike, said its performance in the U.S. had been hindered by smokers switching to cheaper, nonpremium brands and a rise in illegal disposable vapes.
Citing macroeconomic pressures on its traditional cigarette business and its plan to invest more in its so-called noncombustibles business, the London-listed company said Wednesday that it would book an accounting charge of around £25 billion this year. BAT has a market value of around £50 billion.
The company said the charge mainly relates to U.S. brands it acquired, as it assesses their carrying value and economic usefulness in the years to come.
Shares of BAT dropped about 8% in Wednesday trading, putting it on course for its lowest close in more than a decade. Shares of rivals Altria and Philip Morris International also fell in Wednesday trading, by 3% and 2%, respectively.
Other big deals have resulted in big write-downs. In 2008, ConocoPhillips recorded a $25.4 billion charge connected to its 2005 acquisition of natural-gas producer Burlington Resources. In 2018, General Electric took a $22 billion charge on its 2015 acquisition of Alstom’s power business. Procter & Gamble took an $8 billion charge on Gillette in 2019 and a smaller write-down on the shaving business this week.
BAT, long one of the world’s largest cigarette companies, expanded in the U.S. in 2017 when it agreed to take full control of Reynolds American, a deal that at the time marked renewed interest among international players in the U.S. tobacco market.
BAT paid more than $49 billion in cash and stock that year for the nearly 58% of Reynolds it didn’t already own. BAT had been a Reynolds shareholder since 2004, when BAT’s U.S. unit Brown & Williamson merged with R.J. Reynolds to create Reynolds American.
In more recent years, BAT and rivals have sought to shift their focus to smoke-free products to reduce their reliance on traditional cigarettes. Altria paid $12.8 billion for a big stake in vaping startup Juul Labs, an investment it later wrote off almost entirely after a regulatory crackdown.
Global tobacco volumes are forecast to slump 3% in 2023, the company said Wednesday. It said its market share so far this year was flat, with a decline in the U.S. offset by growth elsewhere.
BAT did, though, report strong volume and revenue growth from its new products, which it expects to broadly break even this year, two years ahead of schedule.
The company said it plans to generate up to 50% of its revenue from noncombustibles by 2035, covering products such as vapes and tobacco-free nicotine pouches. The company is fighting in court a recent decision by the FDA ordering Reynolds’s top-selling Vuse Alto menthol e-cigarettes off the U.S. market.
Overall, BAT said it expects revenue growth for 2023 to be at the low end of its previous guided 3%-5% range, and low single-digit revenue growth next year.