Tobacco Documents Online

Tobacco A meeting was held on 20Oh Hay 1992 to review progress on preparing proposals and progressing investment projects for counCriae Vnere there are good opportunities for profitable investment or re-lnvest~ent in tobacco markets where the Group does.not currently have an active associate or subsidiary company. Present: Sir Patrick She,by, Mr. U.G.V. Hatter, Mr. B.D. Bramley, Hr, R.3. Pritcherd, Mr. A. Honte£ro de Castro, Mr. D.$. ~atterton, Mr. H-A. Tomat, Dr. G. Ottersann, Dr. R. Salter (Secretary). The minutes of the previous meeting held on lOth/llCh December 1991 were a~reed. General Issues Brand Registration : The Chairman emphaelsed the ~mportaoce of ensuring that the Group's major brands are reglscered in as many countries as possible worldwide:- (h) Mr. Brealey reported that the Soviet Trades Mark Registration office had closed on let February. Foil.wing the closure~ it appeared chat the relevant registrations were valid only for l~ussia. The positi~ in the other Republics yes unclear and representatives ~ere belug appointed ~n each~ to monitor the situation on behalf of the Grip. Xr. Hatter thought chat the Russian registration might also apply to the three ~a~tic republics. Mr. de Castro reported that Hollywood had been registered in all Central and Eastern European countries. Else~ere, problems had been experienced in the ~iddle East where the Tndoueeiau monopoly o~ued the rights in Indonesia had been sellin~ {uto ocher markets. However, action yes ~n hand Co .Cop this. The Chairaan empheslsed the Importance of worldwide reglstreciou for Hollywood. vhlch ~,st be pursued actively, everywhere. Free : It v~s noted ChaC the programme to reg~ster Free~ ~orldwide, was proceedlnS but difficulties had been experienced in some markets whetsPhilip ~orris owned similar marks such as Freeport. Brazil had been one of these markets but fortunately. Philip ~orrle had alloyed the registration there to lapse. The Chaix~aan reiterated the importance of brand registration which each company should review rich Chelr lawyers on a monthly basis. It yes also ~portanC for the Group to have local representatives in each market to monitor changes i~ the situation and to act on the Group's behalf. ~ere it was possible to do so, the pract£ce of covering the use of brands on ot~er, non-tobacco, products should also be continued.

-2- Lessons groa Hungary : ]hr. Br~aley reviewed various aspects of the Group's experience in t~e takeover of Petal Dohanygyar. It was noted that Iessons from the takeover which should be taken into account in future acquisitions were as fOllOWS:- Since the upgrsdlng of local brands offers the best i~nedlate prospecc~ for si~nific~ increases in market share and proflts~ priority should be given to this ahead of programmes co introduce internaCioual brands. The need for management strengthening and training had been underestlmaced. Also, the difficulty and cost of simplifying grade structures and adjusting salaries. The business was under-capltalised and needed more capital, especially to build up leaf stocks. (d) Si~nlficant expenditure was also required on safety and health measures but these could he brought in progressively and were not such an immediate drain o~ the cash-flow which, because volume had been higher and profits lover than expected was not adequate to supply the addlCional ~unds required. (e) Leaf supply and quality was a critical issue and needed to be g~ven a high priority. (f) 1C was important to keep open as many options as possible for developing future distribution arrangements. Negotiations on the excise regime should start as early as possible and the Group should be pro-actlve in suggesting t0 Governments how an ideal system should be structured. Excise Advisory Tes~ : It was agreed that in view of the ].mportance of excise, ~r. HerCer would set up a small team independent of New Bus~nees Development DeparCmeut, who would offer a service co Governments, indicsC~n~ the revenue earning possibilities of tobacco and other products and advising on the optimum structure for excise regimes. Discussions which the ~ha[rmau had ~h ~. Attal~ and ~. Free~u at. EB~ sus~esCed ~hac funds could be available Co cover Che cosc o~ specific projects undertaken ~ the ~ea~. I~ was also suggested ~hac ~lo~CCes~ who are thought Co o~ger a similar ser~ce already, m~ghc be called on got advice and help. Priorit~ Countries Ukraine : It was agreed Chat the next stage in progressing the proposal to invest in the Ukraine should be a meeting with Mr. Paliychuk Co establish:- The l£kely procedure for prlvatisatiou and the process for taking the B.A.T Industries' proposal to the next stage. (b) The formula for converting any investment by B.A.T Industries iuto an equlCy stake. (c) Whether the authorities would be amenable to an approach to discuss and advise on excise structures. (d) How to provide sufficient information to establish B.A.T Industries as the preferred partner while avoidin~ the danger that the B.A.T Industries' proposal would become the bas£a for inviting tenders from ocher companies.

-3- 9. ~t wa~ ,~oted chat:- 10. 11. 12. 13. (a) The initial proposal must be based on a plan to upgrade local brands, leaving the introduction of American blends to a later s~age. (b) The plan must include upgrades for both Chekassy and Priluky, sho~ng thac both factories have an important parr to play in Che ~uCv2"e. (c) Ic is essential thaC chert are excise systems within which we can work, and it is strongly preferable ChaC they should provide a framework v~thin which we can make a profit. (d) The possibility of entering into a joint venture or of taking a minority stake should only be considered if BAT is the larger shareholder and would have the option to buy a majority if it were to be sold. The strong preference is to acquire a majority position. (e) The prellminary draft proposal Co be discussed vrlCh Mr. Pallychuk will envlsase a major upgrading of the primaries in both factories and a partial upgrading of the secondaries in a first stage, to be followed by a further upgrading of secondaries in a subsequen~ stage. The re-equipment will be based on reconditioned equipment ex-Browu & Williamson, which will be valued at market price. ~. Prltchard has permission to recondition the equipment. A schedule of equlpmen~ available from Brown & ~illiamsou for this and other projects is attached as an appendix. (g) It is hoped chat the initial investment will be sufficient to secure a majority in the equity of the U~ralulan factories which are currently thought to be produclu~ ~4 billion out of to~al domestic production of ~0 b~llion, serving an 80 billion marke~. Russia : l/r. Tom~C reported Chat negotiations are continuing ~o finalist major contracts for ~he supply of 12.5 billion cigarettes ~o the Russian sta~e ~mporcing agency. The major problem, which is being experienced by sll importers, is arranging f~nance. Priority is being g~ven ~o arranging pa~en~ ~ f~ds ~a~lable ~ a~d progra~es, including a special sale of Jockey Club £rom~geu~na, f~nanced by f~ds ~ an ~genuinian aid ~ogr~e. The Chalrm~n stressed the need to build-up the Russian busiuess by supplying from quality sources (US, Brazil, Oermany and selected BATCo, companies) and by ensuring chat finance is secure. All business should be channelled through the Group's offices in. P.use~a and F~r. Brmaley should identify sud approve sources of supply from BATCo. which have regular, high quality supplies. Business must be done in accordance v~.th th~s strategy and opportunistic sales must noC be made outside iC. In addition co doing business w~ch the official ~porC agency, contacts were being established with ocher possible customers operating within the newly-established counuodicy exchanges. Mr. Tomae reported thee BAT's own ~nport company, selling in ~oubles and then converclng the proceeds, would be established as a pilot opeFation. Re. de CasCro also reported an enquiry through a Swiss trader for the supply of 5 billion Hollywood. This would be progressed at a meeting arranged for 29th .~y.

-4- 15. 16. 17. 18. 19. 20. 2l. ~epresenta~on in Rusa~a had been strengthened by E~rther recruitment and a strategy paper will be produced iu July covering plane for further strengthening both in Russia and in the other Republics, Investment possibilities in Russia were still uncIear. A proposal for a greenfields investment had been prepared and Hr. Herter assisted by Mr. Allford will continue to probe the RinisCry of Agriculture and Food, the Ministry of Trade, the City Councils in ~oscov and St. Petersburg, the Privatisatiou Fund and Vice-Presldent Rushkov to show the Grouprs willingness to invest and to try to obtain a positive response. The investigation may also be extended further to the authorities in the oil producing district of Per~. Acquisition possibilities are being investigated by Hr. gattertou assisted by Goldman Sachs. Mr. To~at is also arranging for, visits to all the factories in the former Soviet Union du~ing the autumn, concentrating on talking So local factory m~nagers rather than central authorities. Yugoslavia : It was noted that the ~olitieal Situation in Yugoslavia shoved uo si~us of stabillsing and it must be assumed that the current anarchic situation viii continue for many years. However, despite the problems, consumption and output were up ou last year with the only significant sufferer being Philip Horrls whose primary ~n Sarajevo had been bombed. Macedonia : Mr. gatterton is dlscussiug a letter of intent with Hakedouia Tabak but further progress may be delayed until the privatisation law for ~aced~nla is finalised. ~hls is not expected to emerge until the end of the year. It was noted that because of the political situation, ~acedonia Tabak ~uld be valued as a supplier to the do.stir cigarette ~rket ~ly. H~ever, it wo~ld still be an important e~orter of Leaf. Serbia : It was noted that Serbia is still communist and is not expected to move towards privatisatlon. Hr. Fritchard visited the Kent liceucees ~IS and learnt that Philip Morris had offered $115 million for the company. However, this had been refused ~y the N~S m~n~gement. It ~s agreed that the possibilities for investment in NIS were not ~rth pursuing at present and Nr. gaCterCon ~vill cancel his proposed v~sit in ~une. Hr. l~i~chard will continue to manage the licence and will attempt to prevent NIS from exporting Kent to Czechoslovakia, in breach of their a~reement. Czechoslovakia : Hr. Watterton reported that the progress of the Reemstma acquisition of CTS? and the Philip ~orris acquisition of Tabak would be monitored. ~AT will continue to press for the abolition of the • ouopoly la~s and if these appear likely to be repealed the project to set up a secondary on a greenfields site will be reactivaced. I~ was noted ChaC Czechoslovakia was likely Co join the European Free Trade Zone but that Cobacco goods ~ill not be covered by this. Full entry to the EC is not expected for 10 years. The Chairman said that it us~st be made clear that the reason ~AT did not bid for the Czechoslovak companies was that the rendering process was not transparent. It should also be ~ade clear publicly that BAT believed that this was not in the best interests of the Czechoslovak people. He ~ould be speaking to the Central European News along these lines and other opportunities should be sought to keep this issue in the public eye.

-5- 22. 23. 25. 26. 27. 28. Follov~ng the list of countries for priority consideraC£on, .' Vietnam : It was agreed Chat because the market yes not a monopoly and because of the contlnu£ng restrictions on US co.peal.s, who were not yeC allo~ed Co do business in Vietns~, this yes a parClcularly good opportunity for a BAT investment. However, it was t~clear ho~ enthusiastic Viecaba were to enter into an agreement, as coufllcCing vlevs e~erged at dlggerenC rimes. TC ~as ~mpoc~anc, therefore, Chat a permanent resident representative was appointed co ~nfCor the a~CuaCi~ a~d Co promote BAT's inter.sea. of the ~outh to put forward proposals agreed by the CPC. On the assumption that the Vietnamese ~ould not allow development to be based on the old BAT factory site in Saigon, a first priority would be to ensure that others would also be excluded from this line of approach. BAT's o~ proposal would be based on an initial investment to set up a secondary on a greenfields site. This would be a joint ~enture ~r~Ch Vietaba, achieved through cross abet.holdings. TwoVietaba brands would be ceded to the 5V which would then register additional International Brands co broaden the portfolio. The second stage of the proposal would be to set up a primary in a disused warehouse, thereby creating a complete production line. Cambodia : It ~as noted that Cambodia has a population of 8 m~llion, and a cigarette market of 6 billion, of which 2.6 billion is locally produced. Tay C~loon Rye, BAT's distribution in Singapore has a lease the three factories owned by the national monopoly. Tay Choo~ Rye wishes to assign the lease co a new joint company 40Z-owned by the monopoly 40% by BAT and 20% by Tay ~o~ Hye who ~s also prepared to enter fnCo au a~reemen~ Chat BAT can vote h~s shares. There are several restrictive clauses in the lease (including price control) which, ideally, BAT ~ould l~ke to have cancelled. However. was agreed that because of the potential effect ou the price of the business el].mlnacion of.all these clauses should not be a sine quo non for reaching agreement. Hr. ~acterton ~r~ll vlsic Cambodia in June to progress these negotiations. Hyanm~r : ~C yes noted thee although ~yaumar has a population of ~2 million most o~ the smoking materials market is for cheroots and the consumption of manufactured cigarettes is only 3 billion of which 1.5 billion are produced locally. The CPC had agreed the par=meters ~or negotiation ou a similar basis to that for Cambodia, leading ~o another ~0:~0:20 company in which Tay Choou Hye will again cede his vocin~ r~ghts Co ~AT. In addit£on to the opportunity for cigarette sales Hyanmar offers good opportunities ~or Leaf gro~ing and ~he potential for this line of development ~r~ll also be invesClgaced during }tr. WaCterCon's forthconc~ng v~slt in ~uue.

--6--" 29. Poland : It was noted that BAT nov has an office and a small sales scarf established ~n Poland. ~e ~roup has a~so been a~loca~ed a quota og 0.8 b~ll~on ou~ og ~he 6 bf~on o~ ~por~s perfumed ~n 1992. 30. ~e chaotic ~l~ica~ s~ua~ ~n Poland has resul~ed ~n a v~rtual acands~il1 ~n 1eE~slae~ and although ~ has been aEreed~n prlnc~ple tha~ ~he original proposal ~o keep ~he monopoly in,act ~s uo~ the bes~ solution. ~he recen~ agreemen~ to offer 3 factories for sales (~ncl=din~ AuEustow) has no~ ye~ been implemented. However, BATCF is ready ~o progress ~he proposal ~o ~nves~ ~n AuEus~ow as soon as i~ is possible do SO. 31. 32. 33. tC was noted that STK have a Iicencee making and selling Prince in Poland and that they would be interested to participate with BAT on the AugusCow project if there is an opportunity Co do so. It was a~ceed that Poland should be added tO the list of countries for priority consideration. Moldova : Mr. ~atCerton reported thac leaf experiments were continuing in Holdova and that a letter of intent to broaden this co-operatlon had been signed. BAT also has a first option if the Moldovans decide to sell their cigarette factory. 34. Estonia : Hr. Br=mley reported that although STK have negotiated with the Estonian tobacco industry they were not impressed with the people they mac and have not signed a letter of intent Co continue the negotiations. 35. Latvia : ITX have, however, signed a letter of intent ~th the LaCvlau indue~r~ and are discussing the form of future co-operation. Lithuania : ~ro Hatter reported that by agreemen~ ~r~th the other Operating Groups, BATTY had represented BAT in Lithuania, a market of billion served by 2 factories. Cood contacts had been established and plan will be dream up vhlch will include proposals to close one of the gactorles. 37. Beloru~aia : }fro lierter repo~ted that a vls~t had been made to Belorussia to establish contact. The consumption in the country is 20 billion cigarettes p.a. and this is served by out factory. Although the ecouo~c prospects of the country are poor, ice strategic is such that it could attract conaiderabIe aid, especially ~rvm the It was agTeed that co~cact should be maintained. 38. Bulgaria : It was noted that a privat~aatiou 1~ had been passed in Bulgaria but this has not yet been gazetCed. Contacts remain good through Hr. RulleSs relationship ~th the head of Bu.llartabac~ Mr. Dichev. Theindustry re.sins in problems due to the collapse of exports to ~ussia and prospects ~re uncertain. However, the situation ~ill be monitored and contact maintained. 39. Romania : Mr. Frltcherd reported thac he had visited Romania in February. Although the country is in a poor state economically, the tobacco monopoly ~th ~dlom BAT maintains good relaClons, appears Co be relatively efflclenc with a very clean factory. There is no sign of any movement towards privatiaation and the .~=£n focus of the Croup*$ efforts will continue to be on imports, including Hollywood from Cyprus.

-7- 43. 44. 45. &1bahia ." There has been a small order, from Albania, ~ich ~11 be. visited in the near future. Tadzhikiatan/K£righizia : ~r. WatterCou is arranging visits to these two Republics which could be useful suppliers of Leaf end which are also interested in setting up cigarette factories. Uzbechlstan : ]~r. Tomat has met a delegation ~rom Uzbechistan who have said they are interested in the possibility of co-operaclou with B.A.T Industries. It ~as agreed that the team visiting TadzhikisCau and K~righ~zia shoutd also visit Uzbechlscan, which v~ll additionally be visited ~Moscow. Ar~neoia, Georgia, Other Former Soviet. Republlcs : It was noted thac chert had been insufficient resource to assess the potential in the ocher former Soviet Republics. It was agreed that to overcome this limitation, Mr. Watterton w~ll ccmmissio~ consultants to carry out a basic fact finding investigation in each, coverlng, inter alia, the current status of the industry, the prospects for privatisation and the identity of potential representatives for the Group. Mexico : ]h:. Frltcha~d reported that Brown & William,on had been successful in keeping cigarettes ou the agenda for the couClnuing NAFTA talks. Progress in these talks (in ~hich the Hexicaus are asking for 20 years continuing protection for their tobacco industry) are slow and no agreement is expected until ~ell after the US presidential election. ~n the meantime, the situation ~r~ll continue to be monitored. Colo~b£a : Mr, Pritchard reported that follov~.ng changes in the duties applied to cigarettes, imports were nov more competitive. of Kent, Kool, Hollywood and Belmouc ~ere all expanding. Sales 46. }hercosur/Uru~uay : Mr. de Castro reported that a. meeting b-~th ~r. Mailhos had established thaC he was interested in selling his business to B.A.T Industries. However, inltla~ figures supplied by him suggested that the price he ~as askin~ may be too high. ~7. The Chairman asked ~c. de Castro to prepare au early ~aruing note for the CPC indicating what might be proposed. He should then seek to put the negotiations on a more formal basis by involving a merchant bank or independent auditors co establish BAT~S o~ value for the business, 48. 49. Paraguay : Discussions ~ere proceeding with the licencee who holds the rights to several of the Croup*s brands with a v~e~ to recovering these. The next meeCing on this ~s scheduled for ~une. Argentina : It vas acted that the import duty on Brazilian cigareCtes ~as nov only ll~. The Hollywood trademark had been registered and /mports ~ould be increased. The second Brazilian brand on sale in Argentina was Rit~ but this was entering illegally and re~ular imports would not be established until the trade mark had been registered. If this proved difficult, an, Chefs slmilarly priced brand would be chosen to replace Ritz.

-8- 50. 52. 53, 54. 55. 56. 57. 58. 59. It yes noted that the ~ercosur agreement raised f~ndmaental quesClous about the viability of the ArsenCinlan tobacco industry. BAT needed escabl£ah the full extent of this problem, the implications for the Group and the action which might be taken to meeC the resultant opportunities and challenges. It was agreed chat Nr, de Castro should sec up chls invescigaClon using KeiCh Dent from Hillbank and any ocher outside advice which he thought co be appropriate. ~r. Grant should also be kept informed of progress buc because of possible conflicts of interest due co the effect on Nobleza, he should noc be directly ~nvolved in the Cemn. It yes agreed Chat, in ~uCure, Hercosur and the iudivldual country deve!opmenCs arising from iC should be dealt u~ch as prloriCy projects. Cuba : Mr. Prltchard reported that although there was a shortage of cigarettes in Cuba, US trade resCricCious meant Chat this was noC realistic opportunity for Brown & Wi111amson. 1c yes agreed chat Mr. de Castro should evaluate Cuba as an opportunlCy market for Souza Cruz, Thailand : ~tc. Pritchard reported that condicious in the Thai market remained difficult. The tobacco monopoly was run by a retired gent:el who was close to the ruling parCyo Heuce, any coucessious freeing trade ~ere difficult Co obtain and even more dlfflculC to sustain over time. Despite this, however, progress continued Co be umde iu establishing the Group in the market. Philippines : Mr. PTitchard reported ChaC a Brown & Williamsou visitor Co the Philippines, sent to locaCe the source of illegal imports coming ouc of the country, reported chac Rochmans was seeking another equity parcuer with when to co-operate on US braadso The Cna£raan asked Mr. Pritchard co prepare au early warning note for the CPC after which a decision would be taken ho~ Co follow-up with the Philippines company and Rothmans. Taiwan : Mr, gsCterton reported thee privatisaciou of the Tai~anese tobacco industry was expected wlChln three years. Although no dramatic developments were expected, iC was agreed Chat the sltuaCiou should be mouicored through BATU~ and BAT's agent iu Taiwan. Portugal : It was agreed ChaC moves Cowards pr£vatlsatlou in Portugal should also be monitored. Scandinavia : It was noted that the proposal by STX and Volvo to focua joint company covering all of Scandinavia now appeared to have been dropped. The main problems in the region were thaC Lucky Strike and Barclay were not progressive in Norway and Sweden, that STK promoted Lucky Strike ineffecClvely and that this could leave them very vulnerable when the ~mpositlou of the EC 15mglimit ou 1st January 1993 .ill lead to s need ~o reformulate Prince. These issues will be dealt with ac the Tobacco Strategy ~evlew Teem meeting on 29th ~ay ~hen Mr. Prltchard will also report on progress with Barclay in Scandinavia. lran : Ic was noted chac Iran has a population of 70-80 million and a marker of 35-40 bill£ou cigarettes of which 20 b£11~ou are produced locally, 10 billion are legal heporCs (80% BATCF and 20% ~eemsCma) an~ I0 billion illegal imports.

• "9-- request Co submit s proposal Co upgrade ~ existing local factory ~om ~5 b~lI~on co 20 b~l~ capacity. ~ addition, they ace consldec~uS a l~nk-up ~Ch the ~abel fo~dac~ who act as im~rc agents. 62. 63. 64. 65. 66. Ic vas agreed thac the strategy to establish closer relations and a good level of exports to Iran and in allo~n8 the Cro~p Co have an option oxx any investment opporttmltieao ~ro Frttchard confirmed chaca link v~Ch the Shabel foundac~ could affect Chelr re,aCids v~ch c~e~r agent buC he d~d noc see Ch~s as a probl~. B~TCY ~11 keep & V~ll~son informed o~ develo~euCs so ChaC appro~iaCe acc~ c~ be taken. Eepresentation : Concluding, the Chairman re£terated the ~nportance o~ having an accredited representative o~ the Group on the ground in territories in which the Group ha~ a ei~nlficant interest, to monitor and report on significant political, legal and market develo~ents and to represent the Group's interests ~here it is appropriate to do so. Outside Advisors : He also stressed the need to make full use of outside advisors and consultants in order to supplement the necessarily limited in-house management resources. Priorities : IC vas noted that follo~ug the changes in priorities agreed ac the meeting, the current llst of countries for priority consideration is:- The ~kra~ne; Russia; Poland; Macedonia; V£eCnam; Cambodia; ~anmar; ~cgenCiua; Paraguay; Uruguay (Hercoaur); The Philippines; and Trau. ~n addition, priority ~u~d also be g~ven to evaluating the potential in the other ex-Sovfec Repub~£cs and got $ou~a Cruz in Cuba. Ocher countries vhere contact ~11 be malnt~ined and the situation monitored buc vhich are uoc expected to of£er ~nmedlaCe prospects for investment are:- Czechoslovakia; ~omauia; Bulgaria; Serbia; Albania; Thailand; Talvan; P~xi¢o; Colo~bla; and Portugal° Exports co these countries v~ll also contluue to be expanded, especially to Thailand and Colchis. RS/HBIDJS 3rd June 1992