British American Tobacco, the cigarette giant whose portfolio includes Camel and Lucky Strike, said on Wednesday it would reduce the value of its brands by 25 billion pounds, or $31.5 billion, due to the slowing economy. and a shift toward vaping among smokers.
The company told investors which had reevaluated the “useful economic life over an estimated period of 30 years” for some brands, mainly in the United States. A company spokesperson said the affected brands were Camel, Natural American Spirit, Newport and Pall Mall.
In essence, the announcement reflects an overpayment to Reynolds American, which the group acquired in 2017 in a $49 billion deal, creating the world’s largest publicly traded tobacco company. The write-down, described as a “non-cash adjustment impairment charge,” is primarily an accounting matter with no effect on its daily operations, but investors reacted negatively to the message about its long-term prospects: British American Tobacco shares in London fell to its lowest level in more than 10 years.
British American Tobacco’s sales in the United States have fallen as high inflation and other economic pressures have pushed smokers to switch to cheaper brands and what the company describes as “illicit” vaporizers.
Tadeu Marroco, chief executive of British American Tobacco, said that by 2035 half of the company’s sales would come from vapes, e-cigarettes and other “non-combustibles” from its group of brands such as Vuse and Glo. About 10 percent of the world’s billion smokers currently use these products, offering “vast” room for growth, he added.
The US Food and Drug Administration is moving toward banning menthol cigarettes and has proposed reducing nicotine levels in cigarettes to make them less addictive. That has led tobacco companies to move away from cigarettes and toward other nicotine products, reflected in marketing slogans such as British American Tobacco’s “Build a Smoke-Free World” and Philip Morris International’s “Unsmoke Your World.”
In a call with investors, Marroco said the writedown reflected the shift “from an indefinite life to a finite life” of the economic value of its U.S. brands, which it will begin amortizing over the next 30 years. “In that period of time, surely, there is no way to justify the presence of the brands,” he said.
According to the Centers for Disease Control and Prevention, there are more than 28 million adult smokers in the United States, and smoking-related illnesses account for one in five deaths each year. About 10 percent of high school students reported using e-cigarettes, according to a recent CDC survey, compared with less than 2 percent who said they smoked cigarettes, an all-time low. About 40 percent of people who use e-cigarettes are under 25 years old, and most of them never smoked before vaping, the CDC said.
British American Tobacco said it expected revenue this year to grow by a low single-digit percentage, outpacing sales in the global tobacco industry, which it estimated would decline by 3 percent. But the amortization of more than $30 billion is what attracted the most attention.
“It’s not effective and it’s ‘one-off,'” wrote analysts at RBC Capital Markets, “but, my goodness, that’s a big number that exemplifies the dangers of this industry and sends some unreliable signals about the outlook for cigarettes.” .
