BAT Bold Move: British American Tobacco (BAT) made headlines with a significant move, announcing a write-down of approximately $31.5 billion on the value of some U.S. cigarette brands. This strategic decision reflects the acknowledgment that the traditional tobacco market faces challenges and may not have a long-term future.
BAT’s shares experienced a notable dip, falling as much as 10.2% in London, reaching their lowest point since September 2010. This move comes as the tobacco industry grapples with stringent regulations, increasing awareness of health risks associated with smoking, and a shift in consumer preferences.
The tobacco giant, known for brands like Lucky Strike and Dunhill, pointed to economic challenges in the United States as a key factor in the decision. Inflation-weary consumers are reportedly downgrading to cheaper cigarette brands, and there is a rise in the use of illicit disposable vapes.
This write-down is unprecedented in the global tobacco industry, marking the first time a major player has acknowledged the diminishing value of its traditional cigarette business in a major market like the United States. BAT recognizes the need to focus on alternatives as cigarette volumes decline in various markets.
The affected brands include Newport, Camel, Pall Mall, and Natural American Spirit. BAT indicated that economic challenges, combined with the broader decline in smoking, led to the decision to adjust the treatment of these brands on its balance sheet. Their value will now be assigned a finite lifetime of 30 years, resulting in a non-cash adjusting impairment charge of around $31.5 billion.
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BAT’s CEO, Tadeu Marroco, characterized the move as “accounting catching up with reality.” While he doesn’t foresee cigarettes disappearing in 30 years, he emphasized the impossibility of justifying an indefinite value for these brands, previously listed at around $80 billion on BAT’s balance sheet.
Anti-tobacco groups welcomed the decline in cigarette sales but criticized the industry for continuing to spend billions on marketing these products. BAT’s decision to start amortizing the remaining value of its U.S. combustibles brands in 2024 is a significant acknowledgment that the value of these tobacco brands has an expiration date.
Like its competitors, BAT has been investing heavily in smoking alternatives such as vaping. The company aims to generate 50% of its revenues from non-combustibles by 2035, reflecting a broader industry shift. BAT expects its business from these “new categories” to break even in 2023, a year earlier than previously projected.
Analysts view this move as a bold response to the challenges facing the tobacco industry, signaling a strategic shift towards a smoke-free future. The $31.5 billion write-down underscores the industry’s uncertainties and sets the stage for a transformative period in the tobacco business.