BAT: Betting on alternatives to cigarettes. Pictures: Bloomberg/Kiyoshi Ota
BAT: Betting on alternatives to cigarettes. Pictures: Bloomberg/Kiyoshi Ota

As pressure mounts thanks to new tobacco laws and the illicit tobacco trade, the acquisition of e-cigarette seller Twisp gives British American Tobacco (BAT) a timely grip on the growing e-cigarette and vape market in SA.

The vaping market in SA has grown exponentially. It is estimated that 1.5-million SA adults have already interacted with "potentially reduced-risk products", mainly in vaping, says BAT head of external affairs Johnny Moloto.

They supposedly present less risk of harm to smokers than traditional cigarettes, which, besides their nicotine high, come with a multitude of harmful substances including tar, carbon monoxide, arsenic, formaldehyde and cadmium.

Moloto says the acquisition of Twisp is in line with BAT’s "multicategory" strategy. "Traditionally we are known as a cigarette company, but over the years we have evolved into developing into other categories, especially reduced-risk products."

Amelia Morgenrood of PSG Wealth says she expected BAT to buy Twisp, given the company’s strategy to establish itself in the reduced-risk market. "There is a worldwide shift towards that. We all know tobacco is a very difficult business at the moment."

She’s wary of buying BAT shares these days.

"On paper, the share looks attractive. But unfortunately, there are many unknowns about the future of the tobacco industry. That makes buying the share difficult to justify. A few years ago, it was one of those shares I used to buy without blinking. Not any more," she says.

BAT’s bet on alternatives to cigarettes is one of the reasons it merged with US group Reynolds in 2017 in a $49.4bn deal.

Having more technological firepower, wrote the FT recently, is also why US cigarette maker Philip Morris has proposed reuniting with rival Altria, which spun it off in 2008.

All three cigarette makers have seen their shares tumble in the past year, BAT in particular, which has almost halved in value since peaking at R963 in 2016.

The Twisp acquisition is BAT’s first in Africa and opens the way for 70-million adult African smokers to switch to potentially reduced-risk products.

It says that while old-fashioned cigarettes will remain at the core of its business, the switch to reduced-risk products is what will drive its long-term sustainability.

"Our potentially reduced-risk product business has seen outstanding growth," says BAT in its 2018 annual report.

It says 6-million consumers use its new-generation products. But it adds that "this is just the beginning, and with a growing consumer base of over 1-billion smokers and nicotine users in the world, the opportunities presented by these new categories are huge".

SA’s Competition Tribunal has conditionally approved BAT’s acquisition of Twisp, but has prohibited the two companies from entering into arrangements with landlords incentivising them not to rent space for the sale of reduced-risk products to competitors.

It is easy to see why the tribunal and the Competition Commission – which makes recommendations to the tribunal on large mergers – attached the conditions.

BAT is SA’s second-largest company listed on the JSE by market capitalisation and Twisp is the country’s largest e-cigarette retailer.

The deal also comes as local tobacco firms, including BAT, grapple with the illicit tobacco trade. BAT blames this trade for its decision to cull 300 jobs earlier this year.

Moloto says BAT’s focus at the moment is to ensure compliance with the conditions set by the competition authorities.

"Our [priority] has been to demonstrate that this deal is not uncompetitive. Now the real work starts. We are in intense negotiations with Twisp about complying with the conditions."

Twisp chief innovation officer Philip Bartholomew says the transaction with BAT is in line with the company’s growth aspirations. "Our new journey with BAT gives us access to unmatched resources."