The decision by American Brands to float off Gallaher on the UK stock exchange could not come at a better time, as the FTSE 100 coasts confidently past a record 4,000.
But, as we know, that is fortuitous: the real reason for the flotation comes from fear, not greed. American Brands is haunted by the spectre of multibillion dollar litigation from the anti-tobacco fraternity. Offloading its US tobacco arm two years ago was not enough to ring-fence an increasingly battered share price. The only remedy has been to expunge any remaining link with the tobacco business, not only by selling Gallaher, but through a corporate metamorphosis into Fortune Brands.
For a long time now, multinational conglomerates like Philip Morris, BAT and RJR Nabisco have accepted that tobacco is an industry in decline – at least in the West. But high margins and its slow rate of decline, offset by expanding markets in the East, made the business an attractive cash cow with which to fund diversification.
The move by American Brands, however, is a turning point which cannot fail to have repercussions on all the other players in the market. Immediately, those repercussions will be focused on tobacco brands in the US, but it would be naive to assume that the ripples will not reach these shores pretty quickly. Or that tobacco will be the only sector affected in the longer run.
What will the immediate impact be on Gallaher? None, probably. The flotation is likely to get off to a cracking 2bn-plus start. But the overwhelming majority of Gallaher’s business is still in the UK, where sentiment is becoming increasingly hostile to smoking – and that may come to mean stock market sentiment as well. In particular, there is a strong likelihood of a total advertising ban if Labour comes to power at the next election. So it will be a race to further expand foreign markets.
Turning to non-tobacco sectors, the most obvious candidate for a savaging by lobbyists is alcohol. Superficially, the case for ‘passive-drinking’ damages appears at least as persuasive as that for passive smoking. Successful litigation seems a far cry, but in small things brewers are looking more vulnerable. They will not have helped themselves with their flamboyant, if not inflammatory, packaging of alcopop products. One brewer, at least, has been so badly bruised by the public furore they created that it is unlikely to come back into the market.
And then there are the oil companies (diesel fumes appear particularly fertile ground for investigation these days); the processed food products which may contain carcinogens; the breakthrough drug that turns out to have unfortunate side-effects… It’s a precarious world out there.
George Pitcher, page 29; alcopops story page 7