Morocco: Smoker's Delight at Tobacco Company Sell Off |
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The Moroccan economy received an important boost at the start of June, with the announcement of the privatisation of 80% of state monopoly Régie des Tabacs (RTM) to the French-Spanish multinational Altadis. The sum to be paid out - MAD14.08bn (EUR1.29bn, USD1.52bn) - brought out smiles in the Moroccan finance ministry and the business community. However, it also caused more than a few eyes to bulge in the financial community abroad.
The MAD14.08bn privatisation, announced on June 2, is the second largest privatisation that Morocco has made since liberalising its economy, outstripped only by Vivendi Universal's now legendary MAD23bn payment for the 35% stake in Maroc Telecom in 2000. In one single transaction, the Ministry of Finances and Privatisation has exceeded its privatisations estimate for the 2003 budget, forecast at MAD12.5bn. Furthermore, for the business community, grimly optimistic after the May 16 attacks in Casablanca, the privatisation is seen as a welcome and real sign of confidence in the continued strength of the Moroccan economy.
The privatisation was praised by all (winning) parties concerned, from Minister Fathallah Oualalou to co-presidents Jean-Dominique Comolli and Pablo Isla, and the financial intermediaries, Attijari Finances and HSBC CCF. The common refrain was that the process was highly professional and transparent. It seems that for the first time in the country, the competing offers were actually opened in front of the bidders.
It is common knowledge amongst development economists that privatisation usually works best when there are a number of bidders involved. In this case, the interest of Philip Morris (offering MAD9bn) and British American Tobacco (MAD10bn) doubtless led Altadis to make its killer offer. At 2.2 times the initial estimate, however, it is natural that many eyebrows were raised.
One after another, financial institutions and agencies downgraded their ratings for Altadis, seeing the bid as well above what was expected.
Moody's, Fitch, CSFB, DresdnerKleinwortWasserstein and GoldmanSachs all downgraded their stance on the company, citing primarily misgivings about a potential deterioration in Altadis's financial portfolio. Altadis's shares also took a fair hammering, losing around 12% in the week after the announcement was made. By the time of the company's AGM on June 10, the company directors were at pains to defend the plan and assure shareholders firstly that other expansion plans (in Italy, Serbia and Turkey) could still be funded, and that their EUR0.70 dividend was safe.
At 18 times Régie des Tabacs' EBITDA, the Altadis bid might indeed seem somewhat steep. But Altadis has been at pains to explain its logic. According to El Mundo, Pablo Isla considers the bad reaction abroad to be the result primarily of a lack of knowledge of RTM's strengths and potential. It is interesting to note in this respect, as reported by La Vie éco, that it was the head of Telefonica (and ex-head of Tabacalera, the Spanish part of Altadis) Cesar Alierta Izuel, who strongly encouraged Altadis to make a killer bid.
In Morocco at least, there is no argument. RTM is the sixth largest company in the country, with EUR260m in sales in 2002 and with a 36% EBITDA margin. It has been the object of a highly successful restructuring and repositioning - the pension funds have been successfully externalised (at a cost of MAD3.4bn), real estate sold off (a focus on its core business), and costs brought down - both in transformation and the workforce, the latter through retirements. The good recent performance has been registered with the new owners, who have opted to retain the services of the current boss, Larbi Bellaha. RTM's dominant domestic position also bears close similarities to Altadis's forebears, Seita (France) and Tabacalera (Spain) - which should help them devise similar defensive market-retention strategies for the Moroccan concern.
Although tobacco liberalisation has now been set in law, the market is not due to be fully liberalised until 2008. Until then, RTM (Altadis) will continue to retain a distribution monopoly in Africa's fifth largest smoking nation (14.4bn units puffed away in 2002); indeed imports, transformation, and exports will not be opened up until 2005. Altadis can therefore enjoy a good period of monopoly transition, during which time it can increase its own brand presence, as well as help RTM consolidate its domestic presence (pursuant to future increased competition) and increase its export potential.
The challenges are not negligible. RTM might control 100% of distribution and produce 85% of market volume, but it retains only 67.5% of market value. Part of the problem is its dominance in the relatively less profitable dark tobacco segment (45% of volume but only 19% of value). Altadis intends to keep the trend firmly towards blonde tobacco, evinced by the state-of-the-art cigarette factory in Aïn Harrouda, the planned shutdown of the Casablanca plant, and the continued state-supported encouragement of local tobacco growers to switch crops. Efforts are also planned to increase quality and marketing, both of which will prove crucial should RTM prove to be a stepping stone into the Maghreb, Middle Eastern and Sub-Saharan African markets.
Finally there have been concerns that the privatisation will once again cause excess liquidity in a monetary market which is still trying to recover from the Vivendi bonanza of three years ago. This has been mitigated by the fact that some of the financing (up to EUR300m) will be raised in the local market. Nevertheless the capital market intermediaries CFG Group, believe that the intermarket bond rates will continue to decline, although the impact will perhaps not be felt until the second semester of 2003.
© Oxford Business Group 2003
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