Tobacco processors: #2 to buy #3
The tobacco industry is basically organized into five tiers.
1. The farmers that grow the tobacco
2. The companies that buy and preprocess the tobacco
3. The companies that manufacture and market cigarettes
4. The retailers
5. The consumers
We've already seen how level 3 is a tight oligopoly, one that got even tighter in the US through the merger of R. J. Reynolds and Brown & Williamson. We've also shown some concentration in the retail market: grocery stores, convenience stores, etc.
But a recent announcement made layer two, the tobacco processors ever more concentrated. Dimon, the world's #2 company in that category, announced plans to buy a majority share in the world's #3, Standard Commercial. It's actually more of a merger than most such deals, with Standard Commercial's shareholder having a 48% share in the newly enlarged company, DimonStandard. The deal is reported to be worth $670 million, and the combined company will have nearly $2 billion in revenues.
Dimon currently buys leaf tobacco from tobacco farmers in 40 countries around the world. It has a market share of one third, with customers like Altria (Philip Morris) and Japan Tobacco. Dimon is itself the product of the 1995 merger of US companies, Dibrell Bros. and Moritz-Austin. It was further enlarged in 1997 by its acquisition of the #4 tobacco processor, Intebex Holdings Worldwide, a British-based company.
Standard Commercial makes its purchase in about 30 countries. Its big plus is a growing operation in the biggest opportunity market, China. The company also some wool-trading operations that it had already decided to sell off.
#1 in the tobacco processing business is Universal Corporation, which similarly makes purchases in some 40 countries. The company also trades in lumber and agricultural products. Even with the merger, Universal will still have tobacco operations slightly larger than those of DimonStandard.
In any case, the number of major companies in this area will drop from three to two, if regulators allow it. The merger means one less buyer in a tobacco oligopsony that tobacco farmers already think is stacked against them.
Furthermore, in line with the arguments of Ross Hammon for an anti-smoking group TC Online ("Consolidation in the tobacco industry", 1998), these even bigger multinationals will have more power to impose their will on governments the world over. He notes, even before the current mergers:
As in the rest of the corporate world, the imperatives of globalisation have led to increasing consolidation within the cigarette and tobacco-leaf processing industries. As the size and power of the multinational tobacco companies grow, governments, responding to powerful commercial interests that advocate for completely open markets and unfettered trade, have become more reluctant to interfere in the workings of the market. Thus it remains to be seen whether arguments for either public health concerns or a longer-term cost-benefit analysis can be brought to bear in the debate over whether and how to regulate the activities of the multinational tobacco companies.
