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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

(continued from page 2)

Cullman Jr.: It really is under your management, your administration at Swedish Match, that this emphasis on other tobacco products has come about. So, I think it's got your signature on it.
Cigarettes were an important part of our business before. It was about one-third of our profit. But we sold that and we started to grow in the other areas.

CA: And that's just within the past two years?

CA: Are you still acquiring businesses in this country?
Sunden: Well, you should never say no. We are looking at opportunities in our core areas all around the world. Of course, there is a time for a business to consolidate and take good care of what has been brought in and make a good unit. But, we are always looking for good opportunities and also for organic growth to support that.

CA: What were Swedish Match's total revenues before the sale of the cigarette business and what are they today?
Two years ago it was about 8 billion Swedish kroner, which was around U.S. $1 billion at that time. And now, it's probably heading for nearly 11 billion [Swedish kroner, roughly $1.243 billion] this year.

CA: So revenues have gone up since you shed your cigarette business?
Yes. [Editor's note: At this point, Sunden had to leave the interview to take a flight back to Europe. The interview continued with the Cullmans.]

CA: Why did you sell 64 percent of your company to Swedish Match?
Edgar M. Cullman:
I've got to explain, we didn't give up 64 percent. That's the most important thing for you to understand. They came to Edgar and me. We had several conversations. Originally they were interested in the whole business. We said we wouldn't sell it. Then they asked about the mass-market business and they bought the mass-market business. They turned out to be people of such high integrity, and whatever problems we had, we resolved. That is very unusual. We felt very good about them. Then they said, "What if we were to buy your premium business?" We said, "No." They came back about two months later and said, "Well, what if we bought all your public shares [held by other shareholders]?" We were really not interested in having one person [or company control all those shares]. But they kept discussing it with us. They really wanted to have an interest in the premium business. So we said, "Look, we'll do this as long as we can manage the business, because we know the business." They came back and said that they didn't know the premium cigar business in the United States, but that they believed in the future here and they'd like to support that. So we thought maybe we could work a deal.

They helped us buy out the public shareholders, gave the family some liquidity, and we thereby reduced our interest in General Cigar from 40 percent to 36 percent. That's what we finally worked out. They felt so comfortable with us and we felt so comfortable with them, we made an arrangement that as long as the Cullman family had at least 15 percent of the total company [General Cigar Holdings Inc.]--of which we have 36 percent now--we'd run the business. We have four directors of seven on the board. On all operating issues we are the deciding factor, except if we're going to sell the business or something like that. Then [Swedish Match] would have a say. In other words, they have the veto power on the important issues such as buying another company or issuing stock or borrowing money. That's what we have agreed to.

CA: What are the advantages to your business of this partnership?
Cullman Jr.:
We alluded to it before in terms of the international focus. That's the No. 1 benefit, without question. And that's the challenge we have. Certainly, the opportunity is in front of us. We don't want to oversell it, but I think that is our No. 1 opportunity. I think also we were looking at how are we going to help our shareholders. At the time that [the deal with Swedish Match] was occurring, our stock was selling at $6 to $7 a share. The prospect of seeing that change in any dramatic fashion, despite whatever earnings we might be able to put forward, just seemed slim. We needed to find a partner that would help us reward our shareholders and that would be a strategic partner for us internationally. Quite frankly, I think that the whole cigar industry is clearly much more global and the globalization of the cigar industry has been there, so we felt we needed to find a partner that was very interested in supporting the cigar industry. We needed a partner with real means and that shared our vision for cigars.
They are in it for profits, so are we. But they also understood how to build a business. And that was an important consideration. We felt our shareholders had been patient with us and that we believed in [the company's] future, but we couldn't justify the price where our stock was and what they were willing to pay for it. And, therefore, we made the decision. But we're staying in the business. Both Edgar and I and David [Danziger, executive vice-president of General Cigar Holdings] are devoted to this business.

CA: That's one of the questions of your loyal consumers out there. What does your committment mean for them?
Cullman Jr.:
I think the most important thing is that we've always felt that the premium cigar business is a personal business. It's a business of people who are dedicated to their craft, to the quality of the product. And we're very concerned that this change doesn't alter that. It's very important that we stay and make it very clear that this business is of paramount importance to us in the future. The future of our business, whether we get together with El Credito in any form, Ernesto is going to be part of that concept. He is as much associated with his brand as my father and I are with our brands. I think the consumer enjoys that. From a consumer point of view, and certainly our customers' point of view, we want to make sure that we maintain that personal relationship.
Cullman: We have a personal relationship with not only our sales group, but also at our factory and our tobacco people. That's really what makes us maybe different from some of the other cigar companies. I think that people recognize that I care very much about quality and very much about how the cigar is made--the tobaccos that go into it, the look of the cigar and the look of the packaging. All of that is something that Edgar and I pay a lot of attention to. It's in us to do that. We want to spend more time doing that.

CA: Where is the business today? Do you feel like the toughest times are over? Are we entering a period of a little more tranquility with some stable growth?
I don't see it as tranquil. The tumultuous days of the renaissance are certainly over in terms of high demand and scarce resources and scarce supply. I think it's much more competitive now. It's much more of a share game than it's ever been. It's going back to what it was before the renaissance. There are many more closeouts and discontinued items all over the place. So I think the numbers of cigars that are being consumed are pretty much the same as they have been in the last couple of years, but they're at different price levels. The challenge for us, because we're in the brand business, is to maintain the integrity and importance of those brands to the consumer. And it's incumbent upon us to reinforce that there's a benefit to our brands and, therefore, you've got to continue to provide the best products and good marketing, good packaging, and great support to the trade. So, it's changed, but I do not see it relaxing; in fact, I see it as being more competitive.

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