Bat Industries Plc

Windsor House
50 Victoria Street
London SW1H ONL
England
(01) 222–7979

Public Company
Incorporated: September 29, 1902 as British American
Tobacco Company Ltd.
Employees: 197,000 worldwide
Sales: £4.010 billion (US$5.895 billion)
Market value: £4.571 billion (US$6.720 billion)
Stock Index: London Montreal Amsterdam Frankfurt
Hamburg Antwerp Düsseldorf Basle Zurich Paris
Brussels Geneva

BAT Industries, a tobacco-based conglomerate, began as a compromise between two rival tobacco manufacturers: one American, and one British. James Buchanan (”Buck”) Duke, head of the highly successful American Tobacco Company, decided in 1901 to make a bid for the UK market. In response, several smaller independent British tobacco companies banded together to form the Imperial Tobacco Company Ltd. It was from these two tobacco companies that BAT, which today deals all over the world not only in tobacco products, but also in paper, retailing, and financial services, was born.

Imperial Tobacco was able to resist American Tobacco’s attempt to capture its native market but only after a prolonged trade war that proved very expensive for both participants. American Tobacco having withdrawn from the English marketplace, Imperial was in a stronger position and decided to press its advantage.

It was when Imperial started to make moves toward the American market that chairman Duke saw the need for a compromise. A truce was called, and the two rival merchants agreed not to conduct business in each other’s domestic markets. Each company also assigned brand rights to the other so that consumers who had grown used to a given brand would not be lost. This deal also initiated the creation of a new company, British American Tobacco, of which American owned a two-thirds share and Duke was the first chairman.

This new company, registered in London in 1902, acquired the recipes and trademarks of both originating companies. It also acquired all the export business and overseas production operations of each company. The new company’s sales and growth potential seemed limited compared to the successes of Imperial and American. In time, however, British American Tobacco would grow, not only to outsell its parent companies, but to become the world’s largest private-sector tobacco concern.

Steady but slow growth occurred during the first decade of this century. Then in 1911 the United States Supreme Court ruled that American Tobacco was a monopoly and therefore illegal. The court, though requiring that Duke break up his successful American operation, did not want to deprive the American public of its tobacco or the American economy of a healthy business. Unable to come up with a viable solution, the court turned to Duke for help. The chairman of BAT and of American Tobacco then devised his own, less damaging dismantling strategy, which the court accepted fully. American Tobacco cancelled most of its covenants with BAT and Imperial and sold all of its shares in BAT. Most of the shares sold went to British investors, and BAT became listed on the London Stock Exchange.

This left British American Tobacco, still chaired by Duke, able to sell its product independently all over the world, except in the United Kingdom where it was still bound by its covenant with Imperial. Imperial at this time also retained a one-third share of BAT, but this did little to impair BAT’s success. Duke’s operation began rapid expansion of British exports and overseas operations. Many new subsidiaries were established around the world during the brief period between the disentanglement from American Tobacco and the first World War. Local sources of raw materials were discovered and developed, and international sales grew steadily.

The war brought large numbers of women into the company for the first time. They were primarily employed in the distribution of cigarettes to the troops abroad, most of whom had switched to cigarettes from the less convenient pipe. Although brought on by the war, the switch to cigarettes caught on and became permanent. Many people never returned to the pipe, and BAT began selling cigarettes in increasing numbers.

The end of the war brought even greater fortunes for BAT. Until Duke did so, no commercial enterprise was able to penetrate the Chinese market farther than the government coastal trading stations. BAT, now able to exploit the untapped interior market, achieved record growth in the years immediately following and maintained impressive sales levels throughout the rest of Duke’s chairmanship. While chairman, Duke was BAT’s pioneer in growth; the company’s next chairman, Sir Hugo Cunliffe-Owen, was a pioneer of decentralization.

Sir Hugo had been involved with BAT since its inception. Early involvement in the negotiations between American Tobacco and Imperial endeared him to Duke, who appointed him director and secretary. He held those positions until Duke retired in 1923 (he died two years later) and then succeeded the founder as chairman. When Sir Hugo inherited the chair, BAT’s capitalization had quadrupled since 1902 and its sales had grown by nearly a factor of forty. In 1923 BAT’s world sales had grown to 50 billion cigarettes per year.

Sir Hugo visited China in 1923 to decentralize one of BAT’s biggest operations. Chinese cigarette consumption had grown from 0.3 trillion in 1902 to 25 trillion in 1920, and to nearly 40 trillion by the time of his visit. Sir Hugo’s plan was to restructure BAT China Ltd. into independent regional units which could operate when local conditions deteriorated. As China was a major concern, Sir Hugo also spent a great deal of time and energy over the next two decades lobbying the Chinese government to minimize the taxation of tobacco.

Sir Hugo’s decentralizing efforts spread from China to many of BAT’s other international operations. The Chairman felt that increased local autonomy would lead to better decisions and improved group performance. This proved true despite skepticism that too much decentralization could produce an unwieldy corporate structure. In 1927 BAT had the resources to enter the US market, monopolized at one time by American Tobacco. Sir Hugo acquired Brown and Williamson, a small tobacco producer in North Carolina. With BAT’s help, this modest company has grown to become the third largest cigarette manufacturer in the United States. This pattern of rapid growth from modest beginnings was maintained through the Depression era and steadily through the Second World War. At the end of the war, in 1945, Sir Hugo stepped down from the chairmanship and became simply titular president of BAT.

Without Sir Hugo’s active participation, the management of BAT did little other than maintain the company’s steady growth through the late 1940’s and 1950’s. Profitability remained undiminished and the company was able successfully to weather the storm of communist revolution in China, at which time all of BAT China Ltd’s assets were nationalized. By 1962, BAT’s capitalization was such that it was able to begin major moves toward diversification.

During that year, BAT acquired minority interest in two companies, neither of which was involved in tobacco production or sales. Mardon Packaging International does handle cigarette packaging and was thus a logical choice for BAT. Wiggins Teape Ltd, on the other hand, is a large specialty paper manufacturer. Mardon was not highly successful at first. It was formed from five smaller packaging companies in cooperation with Imperial Tobacco and its first-year turnover was modest. It grew steadily, however, as most of BAT’s investments have, and by the end of the 1970’s was advancing turnover at a rate of 15% per annum.

The success of these two enterprises, which later became wholly owned subsidiaries of BAT, paved the way for further and greater BAT acquisitions. The groundwork was now laid for BAT’s transformation from a large tobacco company to an even larger conglomerate. While other major tobacco companies were attempting to diversify into other packaged goods, BAT wasted little time in moving into unrelated but profitable fields. During the 1960’s and early 1970’s several major international fragrance and perfume houses were brought in to create a third leg in BAT’s group. These included such internationally known concerns as Lentheric, Yardley, and Germaine Monteil.

Once these companies were thoroughly absorbed into BAT’s operations, BAT turned its eye toward a West German department store chain called Horten. At first a minority share was held and then, as before, the company was acquired as a whole. This led almost immediately to further department store chain acquisitions. Gimbels and Saks Fifth Avenue were acquired in the U.S., Kohl’s and Department Stores International in the U.K., and Argos, the British catalogue store, joined in 1979. Patrick Sheehy, before becoming BAT’s present chairman, was involved in one more such acquisition. Marshall Field department stores were the unwilling subject of a takeover bid conducted by the controversial team of Carl Icahn and Alan Clone. Sheehy was able to convince BAT to make a friendly bid for the chain and managed to prevent Icahn from succeeding.

Many of these investments gave BAT a good deal of trouble at first, just as Mardon had before. While Saks Fifth Avenue, which appealed to the upper middle-class consumer, maintained high profitability, Gimbels, despite efforts to bring in wealthier clientele, has had a consistently poor showing. With the exception of Gimbels, BAT has been able to absorb and make a real success of its retailing leg as well as its earlier extension into paper.

In 1972 the treaty of Rome brought the United Kingdom into the EEC and with it an end to the agreements between BAT and Imperial Tobacco. New restraint of trade laws prohibited their arrangement. The companies exchanged brand rights once again, each retaining full ownership of its original brands in the U.K. and Western Europe only. BAT was able to keep its brand and trademark ownership in the rest of the world and in the duty free trade outside Western Europe. Ties with Imperial Tobacco were finally severed in 1980 when that company sold its remaining few shares in BAT after having made major reductions over the preceding decade.

Due to the increasingly diversified nature of British American’s interests, the name of the company was officially changed to BAT Industries in 1976 and management was restructured for tighter control. BAT Industries became a holding company for several smaller operating companies organized according to industry. These operating companies in turn controlled the individual manufacturing and retailing enterprises.

Appleton Papers was added to the BAT operation in 1978. This American company established BAT as the world leader in the manufacture of carbonless paper. That year BAT also acquired Pegulan, a large home-improvements company in West Germany, as well as two fruit juice companies in Brazil. Other purchases followed in pulp production in Brazil and Portugal.

Within two years of his 1982 accession to BAT’s chairmanship, Patrick Sheehy decided to add a fourth leg to BAT’s existing three supports. Eagle Star, a British insurance group, was involved in an unfriendly takeover struggle with the West German firm Allianz when Sheehy contacted its chairman, Sir Denis Mountain, with a friendly proposal. Eagle Star, which had rejected a low bid from Allianz as “grossly inadequate”, accepted a similar bid from BAT as Sir Denis felt the two companies could work together well. In fact BAT Industries saw a 26% rise in pre-tax profit during the first half of 1987, 45% of which was due to Eagle Star. Hambro Life Assurance, another large British firm, rounded out BAT’s new fourth leg in financial services and became Allied Dunbar when it was acquired by BAT in 1985.

Since the addition of financial services to BAT’s portfolio, Sheehy has implemented a policy of “focusing and reshaping the business” rather than continuing to move into new areas. Sheehy feels that BAT should only be involved in companies able to maintain a leadership position in their markets. This has meant some significant divestitures for BAT. In 1984 British American Cosmetics, International Stores, and Kohl’s Food Stores were all sold. Mardon Packaging was sold to its own management in 1985 and in 1986 Gimbels and Kohl’s (U.S.) department stores were put up for sale. That year 88 Batus retail stores were also divested in the U.S. along with the West German Pegulan. Despite the recent trimming, or perhaps because of it, BAT’s sales have continued to rise; 1986 sales were up 12% over 1985.

With the increasing uncertainty of a long-term market in tobacco, Sheehy has also taken steps to decrease BAT’s dependence on that industry. In 1986 only 50% of BAT’s pre-tax profit came from its tobacco group. This is down from 57% in 1985 and 71% in 1982. This change is not due to a decrease in tobacco sales, however, but to overall growth in the other groups, most notably Eagle Star, which increased its contribution to BAT’s profits from 11% in 1985 to 19% in 1986.

Despite increased profitability, BAT’s shares are still low rated world wide. This is due more to investor wariness about tobacco and recent fluctuations in the dollar, however, than to weakness in the marketplace. Michael Dunbar, former deputy chairman of Sedgwick Group insurance brokers, has just taken over as chief executive officer of Eagle Star, which will hopefully lead to further expansion of BAT’s financial services operation.

With Sheehy’s reorganization a success, the chairman indicates that his next move will be to acquire an American financial services company to further consolidate that area. BAT Industries, under the leadership of Patrick Sheehy, seems bound for a profitable future of indefinite length.

Principal Subsidiaries

Ardath Tobacco Co. Ltd.; BAT Ltd.; BAT Services Ltd.; Argos Distribution Ltd.; Jewellers Guild Ltd.; Marshall Field & Co.; Frederick & Nelson, Inc.; Gimbel Bros, Inc.; J.B. Ivey & Co.; John Breuner Co.; Kohl’s Dept. Stores Inc.; Saks & Co.; Crescent Stores, Inc.; Thimbles Speciality Stores; The Wiggins Teape Group Ltd.; Jointline Products Co. Ltd.; Samuel Jones & Co. Ltd.; Spicer-Cowan Ltd.; Eagle Star Holdings pic; Allied Dunbar and Company pic; City of London Insurance Co. Ltd.; Gresham Investment Trust pic; Midland Assurance Ltd.; Shield Insurance Co. Ltd.; Grove wood Securities Ltd. The company also lists subsidiaries in the following countries: Argentina, Australia, Austria, Bangladesh, Belgium, Brazil, Canada, Chile, Costa Rica, Cyprus, El Salvador, Finland, France, Guyana, Honduras, Indonesia, Italy, Japan, Malaysia, The Netherlands, Nicaragua, Panama, Puerto Rico, South Africa, Suriname, Switzerland, United States, Venezuela, West Germany, and Zambia.