Several major players, including China National Tobacco Corporation, compete for the purchase of the company based in Rostov-on-Don. The complete list of contenders are known only to the shareholders in Donskoy Tabak, of whom there are just two: the Savvidi family (87.36%) and Open Joint Stock Company Primary Don (12.64%). Ivan Savvidi has been director general of the factory since the privatisation of the former state-owned facility in 1993. Elected to the parliament in 2003, he registered his stake (which was then 75%) to his wife, Kyriaki Savvidi.
Current state of affairs: good
All shares have been consolidated by now because Primary Don is also controlled by Ivan Savvidi. KPMG auditors have worked at the company for two years; as an open joint-stock company Donskoy Tabak has long since kept its financial records by international standards. In other words, the facility is formally ready for sale, the decisions are made by one person only, and documents are in order. However, selling requires that both sides wish to make the deal and that agreement be reached on the price.
Looking back, although both potential buyers and the seller had a wish for such a deal in the past, no compromise was reached on the price. But the above described formal aspects were in a much worse state then. The situation has changed in many respects by now. There are reasons for a buyer to offer a higher price, while the present owner may be more flexible about the value of the factory.
Why has Donskoy Tabak become more attractive to investors in recent years? The answer lies in its sales dynamics and financial performance. From 2007 to 2010, production grew by 50% for Donskoy Tabak to nearly 27 billion cigarettes. In 2011, almost as many (25 billion) were made during the first nine months.
Today, the company comes in second place in Russia in terms of export which in absolute terms will presumably exceed 4 billion pieces in 2011. The cigarette range has altered significantly over the same period. Instead of cheap filter brands, which are largely intended for the local market, and non-filter products, Donskoy Tabak today makes over 40 cigarette varieties covering all price ranges.
Though sales in the upper price ranges are not too remarkable against a background of competing brands, the brands are available in many cities and towns across the country and, most importantly, have a good presence in Moscow. Also, the factory has been able to develop one of its brands into a real best-seller. The cigarette brand in question is Kiss Superslims. It is a value brand which does not generate large margins, but demand for it amounts to 5 billion pieces or even more.
Finally, at the end of 2010 Donskoy Tabak took over the second-largest independent Russian factory, Nevo Tabak, based in St Petersburg. In other words, the company is developing, it makes increasing quantities of products that enjoy high demand and generate profits, its exports grow rapidly, its debt is easily payable, and it buys up competitors. It is in every respect a perfect target for acquisition by some multinational giant or even just an investor.
Uncertainties ahead
This, however, is the facade intended specifically for potential buyers. In reality, the situation is not as bright. The manufacturing performance gives evidence of an impressive past. Growth in the past year is due to the acquisition of Nevo Tabak and it is not yet clear whether Donskoy Tabak will this year reach the same sales as the combined sales at Donskoy and the acquired competitor last year.
In all probability, the potential for growth has been exhausted. Performance is at its peak today and may start falling tomorrow, but it is the new owner who will have to find out.
The tremendous success of the Kiss brand depends very much on an exceedingly aggressive marketing strategy targeting adolescents. This autumn, Donskoy’s advertising drew unprecedented condemnation in the blogosphere and Russian media and many observers directly accused the owner, the then member of parliament Ivan Savvidi. Moreover, Russian antimonopoly bodies which are in charge of advertising control have fined Donskoy Tabak repeatedly for improper advertising and the use of children’s images. All attempts by the factory to challenge the fines in court (and the fines have lately reached significant amounts) have failed.
Much of the factory’s sales in recent years have been to supply the army, and the awarding of such contracts in Russia, even if they are put out to tender, suggests far-reaching influence at the government level. However, in the just-held parliamentary election Savvidi has lost his seat in the Duma and with it his considerable lobbying capabilities.
Besides, other businesses of the former Duma member develop quite successfully and carry no political or reputational risks, unlike tobacco products. One may therefore conclude that the Savvidi is ready to compromise with the new buyer and reach agreement on the price as quickly as possible.
Finally, taking a closer look at Donskoy Tabak’s exports, reveals that most products are supplied to three unrecognised republics: Transnistria, Abkhazia, and South Ossetia. The Russian law exempts exported products from excise. In the stated countries, no excise or other taxes are levied on products imported from Russia so that this line of business generates windfall profits even from the least expensive cigarettes: hence the overall excellent financial performance of the company. Let us not dwell on where these products go later, for instance from Transnistria, let’s just say that the new owner, especially if it is a multinational corporation, will probably not use dubious export schemes; and if it wishes to, it is by no means certain that it will gain the necessary informal connections in those countries.
Domestic tobacco market specialists are cautious
An opinion survey , which was undertaken on RusTabak portal in October 2011, showed that tobacco market specialists see the following main reasons for the success of Donskoy Tabak: aggressive advertising targeting young people (40.35%), export to unrecognised republics (26.68%), and credit terms for trade partners (24.95%). Another 2.39% of respondents saw the reason in “dumping”, while 3.04% chose “all the above”. Only 2.59% attributed the company’s success to “other business practices”. These disheartening results from a survey of specialists gives evidence that the picture portrayed by the factory for investors is very much different from what experts see.
The real situation at the factory is such that its future is more than uncertain, regardless of whether it is sold now. It remains to be seen whether a decline will begin under its present owner or whether growth will continue, but it is quite obvious, that the new owners of Donskoy Tabak, whoever they are, will inherit a number of unsolved problems and questionable business practices and thus may eventually see the return on their investment being different from what they expected.
By Maxim Korolev, Rustabak
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