British American Tobacco (BAT) has announced a substantial write-down of approximately $31.5 billion in the value of certain U.S. cigarette brands, signaling a stark acknowledgment that the traditional tobacco market is facing an uncertain future.
The company made this announcement in response to mounting regulatory restrictions and increased awareness of health risks, which have led to declining cigarette volumes in various markets.
BAT, renowned for its cigarette brands such as Lucky Strike and Dunhill, highlighted several factors contributing to this decision.
Firstly, the U.S. market is grappling with economic challenges, as some consumers, burdened by inflation, are opting for lower-cost cigarette brands.
Additionally, the emergence of illicit disposable vapes has intensified competition in BAT’s U.S. cigarette division.
These challenges, coupled with the broader trend of decreasing smoking rates, have compelled BAT to reevaluate the treatment of some of its U.S. brands on its balance sheet.
Consequently, it intends to cap the value of these brands with a finite lifetime of 30 years.
This shift will result in a non-cash adjusting impairment charge of approximately $31.5 billion, affecting brands like Newport, Camel, Pall Mall, and Natural American Spirit.
Tadeu Marroco, BAT’s Chief Executive, characterized this move as “accounting catching up with reality.”
He expressed the belief that cigarettes would not vanish entirely within 30 years but acknowledged that it was no longer justifiable to assign an indefinite value of around $80 billion to these brands on BAT’s balance sheet.
Furthermore, BAT will begin amortizing the remaining value of its U.S. combustibles brands in 2024, becoming the first major tobacco player to acknowledge that the value of its tobacco brands has an expiry date.
In response to this announcement, BAT’s shares experienced an initial drop of over 8%, reaching four-and-a-half-year lows, resulting in a loss of approximately £4 billion in the company’s market value.
Imperial Brands, a rival in the tobacco industry, also saw its shares decline by more than 2%.
Like its competitors, BAT has been actively investing in smoking alternatives such as vaping.
On this front, BAT unveiled a new target to generate 50% of its revenues from non-combustible products by 2025, with expectations of breaking even in this “new categories” business by 2023, one year ahead of the initial projection.
Analysts, including James Edwardes Jones of RBC Capital Markets, expressed their support for BAT’s ambition in light of the significant charge.
This move highlights the industry’s challenges and raises questions about the future prospects of traditional cigarettes.
BAT anticipates its full-year revenue growth to fall toward the lower end of its 3-5% range and foresees low single-digit growth in revenue and adjusted profit from operations in 2024.