British American Tobacco said it would take a hit of around $31.5 billion as it wrote down the value of some U.S. cigarette brands, acknowledging on Wednesday that its traditional market has no long-term future. The move comes as ever-stricter regulation and growing awareness of health risks squeeze tobacco companies’ traditional business, driving declines in cigarette volumes in some markets. The company’s share price fell almost 6% as investors digested the news.
The write-down is part of a larger plan to shrink its debt by about $41 billion by 2024, cutting its interest costs and freeing up funds to invest in new products. The company also plans to reduce the number of employees by more than 3,000 by the end of next year.
BAT, the world’s largest tobacco company, is struggling to shift its focus away from cigarettes and into new nicotine-based products — such as vaping devices and flavored capsules. But its new products have yet to prove they can replace revenue streams from conventional Tobacco.
Fitch believes the company’s ability to deliver a successful transformation is critical to its rating. Despite challenges, the ratings agency expects BAT to remain one of the world’s leading tobacco companies with a diverse and global portfolio that includes industry-leading heath-friendly NGPs (new generation products), complemented by a mature and profitable U.S. tobacco market. The company is working to achieve a positive margin at category level for NGPs by 2024 and reach profitability in key markets, including the U.S.
NGPs also support BAT’s overall credit profile, with revenues and profits rising despite declining sales of traditional tobacco products. These revenues and profit growth come from a range of NGP categories, with BAT holding a solid market position in some regions — such as Vuse and Vype in the U.S. and France — while continuing to expand in other regions.
However, the company faces challenges in its biggest market, the United States, where it suffers from a steeper decline than its peers. Revenues and profit from operations in the country have slumped as a result of a government ban on sales of flavored vapor, with e-cigarettes increasingly being sold illicitly through social media accounts.
BAT’s results for H1 2023 were mixed, with the company’s two non-U.S. regions seeing high-single-digit revenue and PfO growth excluding currency. This reflects continued momentum in European Vapour and the Nordic Nicotine Pouches market, as well as solid contributions from the New Categories. In contrast, U.S. combustibles revenues and volume declined by double-digits, and the impact of the California flavors ban weighed heavily on Heated Tobacco. The company is also battling competition from entrants with a lower cost base, particularly in the low-end disposables segment. Regulatory challenges, and a lack of consumer acceptance for higher-end NGP products have hampered its efforts to combat the rise of these cheaper alternatives. A further loss of consumer confidence could pressure NGP revenues and lead some consumers to trade down to conventional products.
