EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

GRADUATE BUSINESS SCHOOL FACULTY OF BUSINESS MANAGEMENT

MANAGERIAL FINANCE FIN 745

MERGER REPORT MERGER AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

TABLE OF CONTENT Page a) Executive Summary b) Merger c) Tobacco Industry in Malaysia d) Background of Merger Case Study Rothmans of Pall Mall (M) Bhd Malaysia Tobacco Company Bhd (MTC)

e) Merger Transaction Details

f) Merger Results Financial Performance g) Conclusion

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

a) Executives Summary The executive summary provides an overall view of the topic of reviewing Merger between Rothmans of Pall Mall (Malaysia) Berhad and Malaysian Tobacco Company Berhad. The report will evaluate the impact of the merger between the two companies which resulted in the capture of the largest market share in cigarettes manufacturing in Malaysia and the emerged of a Winning Organization tagline for British American Tobacco Malaysia Berhad. The submission is also a part of requirement for completion of FIN 745 - Managerial Finance subject. Merger This section will provide the basic elucidation from the academic view and the basic principles of a merger. Tobacco Industry in Malaysia This section will provide the overview of Tobacco Industry players, market share and brand name in which the players presents. Background of Merger Case Study The background section will provides the merged companies and the information of the new emerge company resulted from the merger. Merger Transaction Details

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 This section will provide transaction details of how the merger took and what had transpired during the merger process.

Merger Results Financial Performance

Merger results will analyse the outcome

from the financial

performance perspective during and after the merger. Conclusion This section will provide the conclusion of the merger which happened between Rothmans of Pall Mall (Malaysia) Berhad and Malaysian Tobacco Company Berhad.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

b) Merger 1. Definition of Merger Merger is defined as the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger one. 2. Motives of Merger i. Growth or Diversification Firms that desire rapid growth in size of market share or diversification in their range of products ii. Synergy The synergy of merger is the economies of scale resulting from the merged firms lower overhead. Synergy is most obvious when Horizontal merger take place as many

redundant functions and employees can be eliminated. iii. Fund Raising Fund-raising merger motive happens when a cash rich firm merges with a cash poor firm. This will allow funds to be

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 raised externally at lower cost as it will increase the borrowing power by decreasing its financial leverage. iv. Increased Managerial Skill or Technology Increased Managerial Skill or Technology happens when the merger motive is to adapt or combine the managerial personal skill or acquire the technology needed.

v.

Tax Considerations

Tax Considerations motive happens when a firm merge with another as acquire the targets tax loss carryforward. The tax loss can be applied against a limited amount of future income of the merged firm. 3. Types of Merger i. Horizontal Merger Horizontal merger is a merger of two firms in the sale line of business. ii. Vertical Merger Vertical merger is a merger in which a firm acquires a supplier or a customer.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 iii. Congeneric Merger Congeneric merger is a merger in which one firm acquires another firm that is in the same general industry but neither in the same line of business not a supplier or a customer. iv. Conglomerate Merger Conglomerate merger is a merger combining firms in

unrelated businesses.

c) Tobacco Industry In Malaysia There are three biggest manufacturers of cigarettes in Malaysia which together control over 90% of the legal market share. The three manufacturers are:
1. British American Tobacco Malaysia Berhad (BAT)

Major

shareholder

of

British

American

Tobacco

is

British

American Tobacco Holdings (Malaysia) which hold 50%.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 BAT manufactures the cigarettes brands of Dunhill, Kent, Pall Mall, Peter Stuyvesant, Lucky Strike, Benson and Hedges and Rothmans. BATs 2010 total net sales amounted to RM 3,965 million and profit after tax of RM 959 million. They are currently the market leader in Malaysia as they hold approximately 65% of market share in Malaysia. British American Tobacco Group the second largest global tobacco company with more that 700 million cigarettes sold in 2010.

2. JT International Berhad (JTI Malaysia)

JT International Berhad is the Malaysian division of Japan Tobacco International. JTI Malaysia manufactures the cigarettes brands of Winston, Mild Seven, Camel and Salem.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 JTIs 2010 total net sales amounted to RM 1,205.1 million and profit after tax of RM 178.9 million. Currently JTI held almost 10 % of cigarette market share in Malaysia. Japan Tobacco International is the third largest global tobacco company with more that 500 million cigarettes sold in 2010.

3. Philip Morris (Malaysia) Sdn Bhd (PMM)

Philip Morris (Malaysia) Sdn Bhd is wholly owned by Philip Morris International. PMM manufactures the cigarettes brands of Marlboro, L&M and Semporna A. Currently PMM held almost 15 % of cigarette market share in Malaysia. Japan Tobacco International are the largest global tobacco company with more that 900 million cigarettes sold in 2010.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

d) Background of Merger Case Study British American Tobacco (Malaysia) Berhad (British American Tobacco Malaysia) emerged on 3rd November 1999 from the merger of Rothmans of Pall Mall (Malaysia) Berhad and Malaysian Tobacco Company Berhad. These two long established tobacco companies brought with the merger, experience and an unrivalled portfolio of highly successful international brands to create the largest tobacco company in the country. British American Tobacco Malaysia manufactures and markets high quality tobacco products designed to meet diverse consumer preferences. Brand portfolio includes well-established international names like Dunhill, Kent and Pall Mall. 1. Rothmans of Pall Mall Rothmans of Pall Mall (M) Bhd was incorporated on September 1, 1961 and was listed on the Main Board of the Kuala Lumpur Stock Exchange (KLSE) on October 27, 1961. It involved in the manufacture, importation and sale of

cigarettes, pipe tobaccos, cigars, the sale and distribution of luxury consumer products and the provision of travel services. Rothmans Malaysia manufacture and markets Malaysias leading cigarette brand, Dunhill and other brands such as Peter Stuyvesant, Perillys, Rothmans and Winfield.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 Its financial year ended March 31, 1999 recorded a turnover of RM1.95 billion and a pre-tax profit of Rm616.6 million.

2. Malaysia Tobacco Company Malaysia Tobacco Company Bhd (MTC) was incorporated on September 28, 1956, and listed on the Main Board of the Kuala Lumpur Stock Exchange (KLSE) on July 1, 1978.

MTC is principally involved in the manufacture, importation and sale of cigarettes and other tobacco products in Malaysia. Through its subsidiaries, MTC is involved in the marketing and distribution of cigarettes, and the provision of travel services. British American Tobacco brands manufactured and marketed under licence by MTC include Benson & Hedges, Kent, Pall Mall, Lucky Strike and State Express 555. For its financial year ended December 31, 1998 MTC recorded a turnover of RM525 million and a pre-tax profit of RM23.2 million.

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011

e) Merger Transaction Details Both Rothmans Malaysia and MTD have entered into an Asset Sale and Investment Agreement for the purchase of JPS, and a Sale and Purchase Agreement for the acquisition of MTCM. Rothmans

Malaysia and British American Tobacco group companies also signed trademark licenses to enable the continued manufacture and marketing of British American Tobacco cigarette brands currently made and sold by MTC (Benson & Hedges, Kent, State Express 555, John Player Gold Leaf, John Player Special, Lucky Strike, Pall Mall and Matterhorn). Rothmans Malaysia acquired all of MTC operation businesses for a total f RM 769.5 million. The purchase consideration represents the equivalent of RM 3.80 per MTC share in issue. MTC transferred its tobacco manufacturing business to its wholly own subsidiary, John Player Special Sdn Bhd (JPS). Rothmans

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 Malaysia wholly own subsidiary, Tobacco Importers & Manufacturers Sdn Bhd purchased the existing two RM1 share in JPS in issue and subscribe for 160,999,998 new ordinary shares of RM1 each for a total cash of RM161 million. Rothmans Malaysia through its wholly own subsidiary, Commercial Importers and Distributors Sdn Bhd, acquired MTC Marketing Sdn Bhd (MTCM) for RM608.5 million. Rothmans Malaysia will finance the acquisition through borrowings and internally generated funds.

f) Merger Results Financial Performance 1. KEY FIGURES FROM BALANCE SHEET

% CHANGES 2.95% -2.54% -0.13% -2.88% 0.00% -1.48% 0.00% 0.00% 10.67%

BALANCE SHEET CURRENT ASSETS FIXED ASSETS TOTAL ASSETS CURRENT LIABILITIES LONG TERM LIABILITIES TOTAL LIABILITIES SHARE CAPITAL CAPITAL RESERVES ACCUMULATED PROFIT (LOSS)

2000 860,968,000 1,037,007,000 1,897,975,000 773,127,000 757,642,000 1,530,769,000 142,765,000 11,144,000 213,297,000

1999 836,322,000 1,064,042,000 1,900,364,00 0 796,073,000 757,642,000 1,553,715,00 0 142,765,000 11,144,000 192,740,000

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011
TOTAL SHAREHOLDER'S EQUITY 367,206,000 346,649,000 5.93%

2. KEY FIGURES FROM PROFIT & LOSS

PROFIT & LOSS STATEMENT TURNOVE PROFIT (LOSS) BEFORE TAX INCOME TAX PROFIT (LOSS) AFTER TAX RETAINED PROFIT (LOSS) C/FORWARD

2000 2,772,008,000 701,185,000 (195,227,000) 505,958,000 505,958,000

1999 1,545,152,000 322,314,000 (95,704,000) 226,610,000 226,610,000

% CHANGES 79.40% 117.55% 103.99% 123.27% 123.27%

3. KEY FINANCIAL RATIOS:

2000 PROFITABILITY RATIOS PROFIT MARGIN BASIC EARNING POWER RETURN-ONASSETS RETURN-ONEQUITY EARNING PER SHARE NET INCOME / SALES*100% EARNING BEFORE INTEREST/ & TAX NET ASSETS*100% NET INCOME / TOTAL ASSET*100% NET INCOME / TOTAL EQUITY*100% NET INCOME/NO. OF SHARES OUTSTANDING 18.25% 36.94% 26.66% 137.79% 1.77% 14.67% 16.96% 11.92% 65.37% 0.79% 1999

DEBIT MANAGEMENT RATIOS DEBIT RATIO TOTAL LIABILITIES / TOTAL ASSETS*100% 80.65% 81.76%

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011
EQUITY RATION LONG-TERM DEBT RATIO TOTAL EQUITY / TOTAL ASSETS*100% LONG-TERM LIABILITY / TOTAL EQUITY*100% 19.35% 206.33% 18.24% 218.56%

ASSETS MANAGEMENT RATIOS INVENTORY TURNOVER (Times) DAYS SALES OUTSTANDING FIXED ASSETS TURNOVER (Times) TOTAL ASSETS TURNOVER (Times) SALES / INVENTORY RECEIVABLES / (SALES/365) SALES / NET FIXED ASSETS SALES / TOTAL ASSETS 7.40% 12.00% 2.67% 1.46% 3.92% 19.00% 1.46% 1.81%

LIQUIDITY RATIOS CURRENT RATIO CURRENT ASSETS / CURRENT LIABILITIES (CURRENT ASSETS-INVENTORIES) / CURRENT LIABILITIES 1.11% 1.05%

QUICK RATIO

0.63%

0.56%

CASH-PAYABLE RATIO A/R RATIO A/P RATIO STOCK AGING DAYS LEVERAGE RATIOS

CASH / CREDITORS SALES / A/C RECEIVABLE SALES / A/C PAYABLE (STOCKS / SALES)*365

2.08% 31.00% 18.00% 49.00%

1.56% 19.00% 11.00% 93.00%

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011
DEBT TO ASSET RATIO DEBIT TO EQUITY RATIO TOTAL LIABILITIES / TOTAL ASSETS*100% TOTAL LIABILITIES / TOTAL EQUITY*100% 80.65% 81.76%

416.80%

448.20%

g) Conclusion The merger involves Rothmans of Pall Mall (M) Bhd and Malaysian Tobacco Company Bhd (MTC) is a horizontal and strategic merger as both parties are in the same line of business and the main motives are to achieve economic of scale. The main motives for this merger are Growth, Diversification and Cigarettes Industry Synergy. The Merger Negotiation Process is through Management

Negotiations. Rothmans offers an attractive offer price per share of

EMBA MANAGERIAL FINANCE FIN 745 MERGING AS A WINNING ORGANIZATION BRITISH AMERICAN TOBACCO NOVEMBER 2011 RM 3.80 in compared to MTC Book Value Share Price of RM 2.32 at that time. The result of this merger, British American Tobacco(M) Bhd had become an enlarged company with around 70 per cent share of the Malaysian tobacco market. The merger also has resulted a high cost saving through economic of scale and rationalization of overlapping operational structures in manufacturing, marketing, sales, distribution and administration. The total cost saving of RM 91.5 million was generated in the first year. These savings comprise of Advertising and Promotion at RM 43.8mil, salaries at RM 24.7mil, other overheads at RM 20mil and rentals (RM 3mil) The post merger analysis and years of proven records have shown that a significant synergy creation by the participating business entities. Its currents stock price as of 11 th Novemeber 2011 was RM 45.70 and have become top 25 companies on Bursa Malaysia Securities Berhad in term of market capitalization.