There’s big news at the largest cigar company in the world. Scandinavian Tobacco Group (STG), who claims to be the largest manufacturer of cigars in the world and is the parent of General Cigar Co., Cigars International and others, is going public while its minority partner, the tobacco giant Swedish Match, is expected to begin the process of selling at least part of its stake in the business.
It will mark a second chapter for Scandinavian Tobacco Group, which was formed in 2010 by Swedish Match and Skandinavisk Holding A/S, a company owned by two foundations: Augustinus Fonden and Det Obelske Familiefond.
Swedish Match merged its cigar and pipe business, including General Cigar Co. and Cigars International, with Skandinavisk Holding, a company that sold mass market cigars, roll-your-own tobacco, pipe tobacco and CAO. Skandinavisk Holding A/S assumed 51 percent ownership in the new Scandinavian Tobacco Group, while Swedish Match acquired 49 percent and around $30 million in cash to account for the difference in assets contributed.
The deal was finalized in October 2010, creating a company with over 9,000 employees and an estimated annual revenue around $1 billion, making it the world’s largest cigar company—including an estimated 30 percent of the U.S. market at the time, as well as the world’s largest seller of pipe tobacco. That deal included a “standstill agreement” that expires on Oct. 1, 2014, a restriction believed to prevent either party from modifying its position in the company.
Earlier this year, Swedish Match acknowledged the standstill agreement’s expiration and publicly disclosed it had retained an investment bank to “evaluate the options in terms of future ownership structure for the company”—in simple terms, it had begun to weigh the possibility of selling its stake.
Two separate moves will take place. One involves the buyout of the Swedish Match stake, who has refused to comment on the matter. It remains to be seen if Swedish Match will sell all of its stake, but multiple sources at STG briefed on the matter confirmed to halfwheel that the company is expected to, at the very least, reduce its ownership. According to one stock market expert, this could take place before the public offering, in order to better control the amount of shares listed and reduce risk for the newly-public ST Group.
The second will be the IPO, where STG will offer stock to the public. According to the Danish publication Børsen, who broke news of the planned public offering, JP Morgan has spent the last six months analyzing the company’s options and analysts anticipate a valuation of around 10 to 11 billion Danish Krones ($1.8-1.97 billion).
A public offering will not only serve as a way to generate capital for STG to buy Swedish Match out of its ownership, but also will give Scandinavian Tobacco Group added capital to expands its company through acquisition. One source told halfwheel that Q1 2015 is the expected date of the public offering. Nasdaq OMX Copenhagen will be the exchange according to Reuters.
Following the IPCPR convention and trade show last month, rumors emerged that General Cigar Co. (STG) was in “acquisition mode” in the premium cigar category. It’s unclear how aggressively the company will pursue these options, as the impending deeming regulations by the U.S. Food & Drug Administration would drastically alter the value of any cigar company.
ST Group has global ownership of the CAO, Macanudo, Foundry and Don Tomas brands, along with the rights to Cohiba, Partagas, La Gloria Cubana, Hoyo de Monterrey, Punch, Bolivar and Sancho Panza trademarks in the U.S. On the premium side, it operates the General Cigar Dominicana factory in the Dominican Republic, STG Estelí in Nicaragua and STG Danlí in Honduras.
Also of note is a restructuring of Cigars International and its distribution company Meier & Dutch, which owns hundreds of trademarks including Man O’War, 5 Vegas and the former XIKAR cigar brands including HC and Defiance.
As of Aug. 1, the retail and distribution operation is now at least four separate companies, a move that is expected to leverage some tax benefits, while also bringing the retailer closer to how its biggest competitor, JR Cigars/Santa Clara, is run. Products will now be purchased by Meier & Dutch, which in turn will sell the cigars and other items to its end consumer operations which include physical retail operations in Pennsylvania, four different online storefronts and a physical mail-in catalog.
“The long-rumored CI superstore project for Texas has been put on hold (until the) second half of 2015 once the offering is complete,” said a high-ranking official at another cigar manufacturer. The restructuring of the company’s business is said to create a situation in which Cigars International would be able to open up business in other states without putting its nexus in Pennsylvania, a state without a cigar tax, in jeopardy.
Despite the restructuring of Cigars International and the public offering of the larger ST Group, a sale of Cigars International is highly unlikely.
A spokesperson for ST Group did not return multiple requests for comment. According to the report from Børsen, Jørgen Tandrup, chairman of ST Group, indicated, “A listing of Scandinavian Tobacco Group is a good opportunity. Stock market looks good at the moment.” The publication also quoted Claus Bagger, an executive at Skandinavisk Holding A/S, the 51 percent owner of STG, as stating, “If you ask whether Skandinavisk Holding has no plans to admit to listing STG, then the answer is no.”
ST Group’s reported revenue of $1.06 billion and manufacturing of 60 million hand-rolled cigars in 2013 compares to other large companies such as Oettinger Davidoff AG, who reported revenues of 5,925 MDKK ($1.09 billion) and 38.9 million cigars rolled per year.
In addition to premium cigars, the company produced 2.8 billion machine-made cigars in 2013. It also has a presence in the roll-your-own, pipe and smokeless tobacco segments.