Japan Tobacco lights up the tobacco sector by acquiring Vector Group in U.S. push

Japan Tobacco (OTCPK:JAPAY) (OTCPK:JAPAF) snapped up the outstanding shares of Vector Group (NYSE:VGR) for $15.00 per share in cash. The deal is worth approximately $2.4 billion of total equity value, in addition to redemption or repayment of debt. The boards of directors of both companies have unanimously approved the merger agreement. After closing, Vector Group (VGR) will become a wholly owned subsidiary of JT Group.

The acquisition was noted to be in line with Japan Tobacco’s (OTCPK:JAPAY) tobacco business strategy. The acquisition is anticipated to add a growing and historically profitable business, which is expected to improve the company’s ROI in combustibles. Notably, the transaction will significantly expand Japan Tobacco’s (OTCPK:JAPAY) presence in the U.S., the second-largest tobacco market in net sales and one of the most profitable globally. Furthermore, it is expected to strengthen Japan Tobacco’s (OTCPK:JAPAY) financial position through mid to long term hard currency profits and cash flows.

Morgan Stanley said its first impression of the deal is that it is slightly positive because it will Japan Tobacco (OTCPK:JAPAY) to capture business with relatively high gross margins and offering volume growth. The acquisition is expected to be accretive to EPS from year one of the consolidation.

Analyst Haruka Miyake noted that the U.S. tobacco market is experiencing significant down-trading in demand, with the deep discount category growing significantly. However, Vector Group (VGR) was noted to have achieved market share growth and revenue growth by strategically capturing volume share and increasing prices using multiple brands.

In terms of sector implications, British American Tobacco (NYSE:BTI) (OTCPK:BTAFF) and Imperial Brands PC (OTCQX:IMBBY) (OTCQX:IMBBF) are not expected to either participate and/or attempt to interlope in the deal because it would have the potential to derail the companies’ ability to buy back shares at their respective current pace. “Additionally, both companies have flagged bolt-on M&A as part of their respective capital allocation policies, with a focus on expanding presence in New Categories and/or Beyond Nicotine,” highlighted Miyake.

The deal for Vector Group (VGR) will push Japan Tobacco’s (OTCPK:JAPAY) U.S. market share to about 8% as it lands two of the top ten U.S. cigarette brands. “Even though cigarette volumes are declining at a double-digit pace, robust pricing will allow the company to generate significant cash for future reduced-risk U.S. product investment,” stated Bloomberg Intelligence analyst Duncan Fox.

Share of Vector Group(VGR) rose 8.01% to $15.11 in afternoon trading on Wednesday. RLX Technology (RLX) rallied 5.67%. Altria (MO) was 0.55% higher, while Philip Morris International (PM) notched a 0.82% gain and Universal Corp. (UVV) tracked 0.52% higher.