British American Tobacco (BAT) announced on Wednesday that it would write down the value of some of its U.S. cigarette brands, resulting in a hit of around $31.5 billion. This move acknowledges that the traditional cigarette market has no long-term future. In response to the news, BAT shares plummeted by as much as 10.2% in London to their lowest level since September 2010. U.S.-listed tobacco stocks, including Altria and Philip Morris, were also impacted, experiencing declines.
The decision to write down the value of its cigarette brands marks a significant move for BAT, as it is the first major global tobacco company to do so in a major market like the United States. The company recognizes the need to shift its focus towards alternatives as stricter regulations and increased awareness of health risks continue to squeeze traditional tobacco businesses, resulting in declining cigarette volumes in certain markets.
BAT cited economic challenges in the United States, where inflation-weary consumers are opting for cheaper brands, as well as the rise of illicit disposable vapes as factors contributing to the decline of its U.S. brands. To adjust for these factors and the broader shift away from smoking, BAT will adjust the way some of its U.S. brands are accounted for on its balance sheet. The value will be shifted to a finite lifetime of 30 years, resulting in a non-cash impairment charge of approximately $31.5 billion. Affected brands include Newport, Camel, Pall Mall, and Natural American Spirit.
BAT’s Chief Executive, Tadeu Marroco, described the move as accounting catching up with reality. He acknowledged that while cigarettes may not disappear entirely within 30 years, the indefinite value previously attributed to these brands, which amounted to around $80 billion on BAT’s balance sheet, is no longer justifiable.
Anti-tobacco lobby groups welcomed the news of declining cigarette sales in the United States but emphasized that the industry continues to spend billions of dollars on marketing tobacco products. Erika Sward, National Assistant Vice President of Advocacy for the American Lung Association, stated, No one should profit from death and disease.
In response to these developments, BAT has been investing heavily in smoking alternatives such as vapes. The company recently set a new ambition to generate 50% of its revenues from non-combustibles by 2035. BAT expects its business in these new categories to break even in 2023, a year ahead of its previous projection.
Analysts, such as James Edwardes Jones from RBC Capital Markets, welcomed BAT’s ambition given the grim outlook for the company. However, he remarked that the $31.5 billion impairment charge is a significant number, highlighting the challenges faced by the tobacco industry and sending less confident signals about the future of cigarettes.
BAT anticipates that its full-year revenue growth will likely be at the lower end of the 3-5% range. In addition, the company expects low single-digit growth in revenue and adjusted profit from operations in 2024.
In conclusion, British American Tobacco’s decision to write down the value of its U.S. cigarette brands reflects the inherent challenges facing the traditional tobacco industry. As stricter regulations and health concerns continue to impact cigarette volumes, BAT is redirecting its focus towards alternative products. This significant move by BAT has sent shockwaves through the industry and has implications for other tobacco companies globally.
