Target Information

The Group has demonstrated resilient performance in the first quarter of the year, with revenue growth of 1.7% at constant exchange rates, despite a reported decline of 5.8% at current rates of exchange. Cigarette volumes from subsidiaries saw a decrease of 3.6%, totaling 152 billion units, while the Group achieved a strong market share growth of 40 basis points, primarily through its Global Drive Brands that collectively witnessed a volume increase of 5.7%. This positioning reflects the Group's effective management strategy, enabling it to navigate challenges in the current trading environment.

Nicandro Durante, the Chief Executive, noted that continuous progress in next-generation products remains a focus for the Group. The ongoing strategic pricing efforts have allowed the Group to counterbalance lower cigarette volumes, thereby maintaining confidence in delivering robust earnings growth as the year progresses.

Industry Overview

The international tobacco industry is currently facing significant challenges, particularly due to rising consumer inflation and fluctuating exchange rates impacting trading performance. The decline in cigarette volumes across major markets, including Brazil, Russia, and Vietnam, has influenced overall demand, but the Group's diverse market presence helps mitigate these adverse effects. Notably, strong performances in regions such as South/Central Asia and Mexico have provided some relief from the global trend of declining cigarette consumption.

Specifically, market conditions within Asia-Pacific saw a reduction in total volume, yet the Group's strategic focus in South Korea, Mexico, Bangladesh, Japan, France, and Poland contributed to an increased market share. The continued growth of Global Drive Brands emphasizes the Group's ability to adapt to market demands, despite overall industry volume downsizing.

The competitive landscape requires tobacco companies to innovate continually, especially with next-generation products like e-cigarettes and nicotine delivery systems. The Group's commitment to developing its Vype e-cigarette and tobacco heating products illustrates an alignment with evolving consumer preferences, signaling a proactive approach to maintaining market relevance.

The domestic regulatory environment surrounding tobacco in Brazil, where Souza Cruz operates, poses additional complexities. The ongoing consumer scrutiny and government regulations necessitate adaptive business strategies to ensure compliance and sustainability in operations.

Rationale Behind the Deal

The public tender offer to acquire the remaining 24.7% of Souza Cruz shares represents a strategic move to consolidate ownership and facilitate greater operational efficiency. The offer, priced at R$26.75 per share, includes a significant premium to the company's average closing price, reinforcing the Group's commitment to its investment in Brazil. This acquisition aligns with the Group's objectives to enhance market presence and streamline operations while potentially realizing synergies from full ownership.

As the Group progresses toward a potential full acquisition, it seeks to navigate the regulatory landscape effectively, ensuring compliance with Brazilian governance while driving long-term value creation through increased market share in the South American region.

Investor Information

The investor, the Group, has a solid financial foundation, bolstered by recent financing activities that include the issuance of four bonds totaling €3 billion. These bonds, earmarked for various corporate purposes, reflect a commitment to maintaining adequate liquidity and financing flexibility in the evolving market landscape.

With the appointment of KPMG LLP as external auditors, the Group demonstrates a commitment to transparency and adherence to best practices in corporate governance, as evidenced by the departure of PricewaterhouseCoopers LLP after many years. This strategic decision aligns with a broader objective of fostering trust and integrity amongst stakeholders, ensuring continued investor confidence.

View of Dealert

Given the current market conditions and the Group's strategic advancements, acquiring the remaining shares of Souza Cruz could present a beneficial investment opportunity. Full ownership would enable the Group to leverage operational efficiencies and synergies, potentially enhancing profitability in the Brazilian market. Furthermore, considering the prominent share price premium offered, the Group appears to value Souza Cruz substantially, reflecting confidence in its future performance.

Moreover, the steady growth of Global Drive Brands and the Group's ongoing development in next-generation products underscore a positive trajectory in earnings potential. As such, even amidst challenging market dynamics, the focus on innovation in e-cigarettes and nicotine delivery carries the potential for substantial returns in an increasingly digital consumer landscape.

However, investors must remain vigilant regarding the regulatory challenges within Brazil, as compliance will be key in ensuring the successful realization of expected synergies from the acquisition. The Group’s adaptability in navigating regulatory environments will be a critical determinant in achieving sustainable growth moving forward.

In conclusion, while there are inherent risks in pursuing the acquisition, the expected advantages of consolidated market control and enhanced operational efficiencies suggest that this could prove to be a worthwhile investment in the long term.

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