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An Interview with General Cigar

An interview with The Cullmans of General Cigar holdings Inc. and Lennart Sunden, president and CEO of Swedish match
From the Print Edition:
Gene Hackman, Sep/Oct 00

The cigar market in the United States has seen an unusual flurry of merger and acquisition activity. Within the past year, the two largest premium cigar companies, Consolidated Cigar Corp. and General Cigar Holdings Inc., have become part of major foreign companies. In the case of General Cigar, the transaction was in the form of an acquisition by Sweden's tobacco giant, Swedish Match. The existing management of chairman Edgar M. Cullman and president and chief executive officer Edgar M. Cullman Jr. are continuing to operate the company day to day.

Swedish Match, based in Stockholm, is one of the largest tobacco firms in the world. Although the company sold its cigarette manufacturing concern last year, it has built up its presence in machine-made and premium cigars, and established a strong position in other tobacco products, such as chewing tobacco. Lennart Sunden, Swedish Match's president and chief executive officer, engineered the purchase of General Cigar's machine-made cigar business in April 1999, which included brands such as Garcia y Vega, White Owl and Tiparillo.

This past May, Sunden oversaw the completion of Swedish Match's investment in General Cigar, which amounted to purchasing 64 percent of General Cigar's publicly held stock. The Cullmans retain about a 36 percent ownership stake. The transaction effectively returned General Cigar to the status of a private company. In a recent interview with Cigar Aficionado executive editor Gordon Mott in New York City, the Cullmans and Sunden discussed the reasoning behind the new partnership and what it means for American cigar smokers.

Cigar Aficionado: Lennart, in the past 18 months, Swedish Match has bought General Cigar's machine-made cigar business as well as [El Credito, makers of] La Gloria Cubana and a controlling interest in General Cigar's premium cigar business. If my calculations are right, it's a minimum of $400 million in cash and a total investment of more than $500 million. Why? Sunden: We have been in the cigar business for a long time in other parts of the world. We are the largest player in Europe and we have a substantial presence elsewhere. We felt that we should have a strong presence in the U.S. We are here in other tobacco businesses such as chewing tobacco and moist snuff, where we also are growing our position. Our interest is to build a position for tobacco niche products, what we call "the other tobacco products"--noncigarette products, which include cigars and pipe tobacco. We are going to build that position globally. We have to be present in the United States with these product categories. General Cigar is, in our view, the strongest company in premium cigars and has a very, very strong set of brands, some of which can be used internationally, including the largest premium cigar brand in the world, Macanudo. We see strong interest from other parts of the world in that brand. In those places, we can add market presence and market strength to the existing General Cigar business.

CA: You were rumored to be seeking other big cigar companies in the United States prior to this deal. Were you surprised when it became clear that the Cullmans were interested in letting you acquire control of the premium cigar business? Sunden: This relationship has developed over time. We came to a mutual understanding that this was good for both businesses to join forces. The mass-market machine-made cigars that we bought from General Cigar was the start of the relationship. Gradually, we came to the understanding that it would be good to combine [our companies] and for us to participate here in the United States and be able, with General Cigar's brand platform, to develop our position in other parts of the world.
Edgar M. Cullman Jr.:
If I might just quickly add that one of the things, from our point of view, that made this an easier decision, apart from the business strategy, is that our relationship really has been extraordinary. My father talks about it a lot, but sometimes there is an intangible element that goes into making these kinds of decisions and goes well beyond the dollars. This is a group of people represented by Swedish Match who really are extraordinary, good business people who also are people of the highest integrity; and this was very important for us.

CA: Apart from the personal links, isn't this a good business deal, too?
I think it's a strong position that we can further develop and, looking at it from a financial point of view, I think the numbers make sense. We try to generate value for ourselves and our shareholders, meaning that we should also have earnings enhancement after financial costs and amortization. I think we will be able to do that.

CA: What structure are you planning for Swedish Match's premium cigar holdings in the United States? You have La Gloria Cubana and General Cigar. Do you see them continuing to function entirely separately in the future?
We are at the stage now where we are investigating the opportunities to further develop our position here and we will not exclude any alternatives at this point in time. The mass-market business goes very well together with our chewing tobacco and moist snuff and the [Djeep and Cricket brand cigarette] lighter sales that we have. It goes through the same channels, and on the premium side we are in the process of looking at that right now. I cannot really comment any further on that at this point in time.
Cullman Jr.: It's a little sensitive because we're on the cusp of some decisions. We're looking at the structure very seriously. There are a lot of issues, not the least of which is [El Credito founder] Ernesto Perez-Carrillo's position. We also have to look at it from the consumer's point of view. There are a lot of benefits to working together on this but there are also the unique qualities of La Gloria Cubana as a brand and La Hoja Selecta. The big brand is La Gloria. What we don't want to do is in any way have the consumer feel that somehow something's changed. This is a very sensitive industry. It's full of family businesses and personal involvement in these businesses. So, we're going to go slow on this. We'll do what is best for the brands and best for the business.

CA: Apart from issues of production, aren't the sales and marketing areas likely to be combined so they can be more efficient?
At this point, we are looking at those possible advantages. That's what we can say today. [Laughter]

CA: You also still have the Montague brand in the U.S. marketplace. Is that still part of the Swedish Match strategy in the United States?
Sunden: It is still part of it. It's a unique cigar, as you know, with the origin in Indonesia and with the high ratings that it has achieved. But it is a very rare bird in the American cigar world. Much less so in Europe, where the tradition with Indonesian tobacco is much stronger. But we will continue to have that. It's just a different kind of cigar.

CA: As a result of this acquisition, Swedish Match has positioned itself globally against Altadis [the tobacco behemoth that was created when Spain's Tabacalera S.A. merged with France's Seita]. In terms of the U.S. market, you have ownership rights to former Cuban brands at least as important as those of Altadis. On the other hand, Altadis has apparent future control overseas for some of these brands, if not outright ownership. You do not at this point. Are there any discussion or strategy sessions under way about how you're going to deal with this situation when the Cuban embargo ends?
Yes. We are looking at several scenarios here and we have a plan for that, but we cannot disclose that here. We are working quite hard on it.

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