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British American Tobacco, the world’s biggest cigarette maker by revenues, has formally agreed to sell its Russian business, a year and half after first vowing to exit the country in the aftermath of Vladimir Putin’s invasion of Ukraine.
The maker of Dunhill and Lucky Strike cigarettes said on Thursday that it had agreed to sell its Russian and Belarusian divisions to a consortium led by BAT Russia’s management team, which people close to the deal said also included BAT’s Russian distributor SNS Group of Companies.
After a drawn-out process to finalise the terms of the deal and receive the assent of Russian authorities, BAT said it now expected the deal to be completed by next month, at which point the business will be known as ITMS Group. BAT’s Belarusian arm will also be sold as part of the deal.
BAT, which also makes Vuse vapes and Pall Mall cigarettes, is expected to generate some revenue from the sale but will sell the business at a loss, according to people close to the deal.
BAT’s Russian and Belarusian divisions accounted for 2.7 per cent of group revenues and 2.5 per cent of adjusted profits, as of the end of June. The cigarette maker has acknowledged an impairment charge and associated costs on its Russian business of £629mn in previous financial results.
A succession of western companies vowed to exit Russia in the immediate aftermath of Putin’s attack on Ukraine in February last year, but many have struggled to follow through on their promise, citing the need to protect their employees, the complex web of Kremlin loopholes to jump through and the difficulty of unwinding large operations.
BAT refused to comment on whether a clause to buy back its Russian business if the war subsides was part of the sale contract.
Last month, Heineken announced the sale of its Russian subsidiary for €1 to a local manufacturer and the Russian offshoot of pizza chain Domino’s said it was entering bankruptcy proceedings after failing to sell the business. In July, brewer Carlsberg and yoghurt maker Danone had their Russian businesses seized by the Russian state.
Japan Tobacco International, the biggest tobacco group in Russia, never vowed to sell its Russian business, which accounts for 10 per cent of group revenues and 24 per cent of adjusted profits. Meanwhile, Marlboro maker Philip Morris International previously told the Financial Times it would “rather keep” its Russian business than sell on stringent Kremlin terms after initially vowing to leave.
Russia has proved a fruitful market for Big Tobacco companies because of high smoking rates and an openness to trying reduced-risk products, such as heated tobacco devices. Davidoff maker Imperial Brands pulled out of Russia in April last year.
Nearly 1,500 foreign companies have either curtailed or completely withdrawn from Russia since the invasion, as of September 3, according to data collected by the Kyiv School of Economics. A further 524 companies have reduced operations or halted investment, but 1,384 companies still have operations in Russia, according to the KSE.
Initially after the invasion, BAT said it would only sell its local brands and retain its international brands in Russia, but it quickly changed course track in the weeks that followed.
Rae Maile, a tobacco analyst at Panmure Gordon, told the FT that the announcement was “rather more elegant as an exit than the original response to the crisis”. “Practically speaking, there have been real issues for all companies trying to exit, the fact the company has managed to achieve some kind of exit in a very hostile environment is a good thing.”
But Maile noted that because of issues with suppliers, “no one would have been expecting Russia to be featuring in [BAT’s] profit forecasts in the medium term”.
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