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Tabacalera's American Gambit

A Madrid-based cigar giant buys a foothold in the U.S. market.
Michael Kaplan
From the Print Edition:
Sylvester Stallone, Mar/Apr 98

Tradition says that big business deals transpire in smoke-filled conference rooms. You know the drill: attorneys and businessmen sit nose to nose, spending caffeine-fueled days hammering out details, negotiating profit points, splitting the fine hairs of ownership percentages. If this fabled scenario held even remotely true when a landmark deal was recently hammered out amid the historic tobacco houses and cigar-rolling factories of Tampa, Florida, then whatever tension that existed was surely cut by the air's richly alluring scent.

On one side of the table sat Madrid-based Tabacalera, the world's largest importer of tobacco and cigars from Cuba, which aimed to enter America's premium cigar market; on the other side was Havatampa, America's second largest manufacturer of machine-made cigars, such as Phillies and Havatampa Jewels. Surely, when both parties convened, the air turned blue with the fragrant aromas of Tabacalera's fresh-from-the-farm Cohibas, Punches and Montecristos. While Antonio Vázquez, director of cigar operations for Tabacalera S.A. and one of the key players in the series of meetings driving this particular deal, diplomatically insists that Havatampa's smokes were consumed as well--he alludes to the need to be polite in business dealings--it is hard to imagine primo Cubans remained unflamed while Philly Blunt curls filled the air. Whatever the case, when the smoke cleared in early December, Tabacalera--for a price of $275 million--bought a 25 percent share of America's $1.6-billion machine-made and hand-rolled cigar market. "Of course cigars are being smoked," Vázquez said at the time. "Is there any other way to negotiate?" Considering the results, there may not be another that is more effective.

Combining the refined leaf sensibility of Tabacalera with the business savvy that is already built into the infrastructure of Havatampa, the freshly muscled company has the potential to pump itself up into a cigar powerhouse. "When we come out with our brands, they will be very high-class, premium cigars," vows Benjamin Menendez, Tabacalera's director of Central American and Caribbean operations. Hired away from General Cigar for the express purpose of overseeing Tabacalera's burgeoning premium-cigar business for the American market, Menendez has a lifetime of industry experience. He began his tobacco education with an adolescence spent in his family's factory, where cigars were hand-rolled for Montecristo and H. Upmann in pre-Castro Cuba.

One of the world's authorities on cigar blending, Menendez is now creating blends of Dominican, Costa Rican, Nicaraguan and Mexican tobaccos, among others. The cigars are slated for release later this year and will retail in the $5 to $7 range. "We are looking to make an excellent cigar with a darkish wrapper," says Menendez. "It will be a strong but smooth cigar, very round."

Another key personality in Tabacalera's American invasion is Peter Strauss, the recently appointed director of U.S. operations and a fourth-generation cigar professional who served as the matchmaker between Spain's tobacco giant and Havatampa. In his 50 years in the cigar business, Strauss has heard a lot of industry rumors, and one of the things he heard was that the owners of Havatampa, Thomas D. Arthur and W. Tommy Morgan III, were toying with the idea of selling their company to the right suitor. "They did not want to sell to a purely financial buyer or to somebody who would use their company as another factory and take over their brands," recounts Strauss, sitting in the study of his Westchester County, New York, home, which doubles as his office. "They wanted to see the organization remain intact; they wanted to sell to a buyer who would keep the company running as it was running."

Tabacalera was amenable to the request. As Spain's largest tobacco company--and until 1996 its only one--it had been looking to expand its cigar-producing capacity; until now, 90 percent of its business has been in cigarettes and a good chunk of the rest has been in the production of machine-made cigars. The acquisition of Havatampa, as well as two cigar companies in Honduras and Nicaragua, Tabacalera hopes, will allow it to establish a base for building up a premium cigar presence in the States. Since Havatampa's mass-produced business is so good, Tabacalera expresses no interest in tinkering with that end of the operation. This came as welcome news to Havatampa's Arthur and Morgan. Early last year, Strauss arranged for the companies' representatives to become acquainted. Significant degrees of chemistry and dovetailing goals became immediately apparent.

For Tabacalera, the strategic appeal of purchasing Havatampa was instantly clear. "It will give us critical mass in this country," says Strauss, a serious, gray-haired man. "Already it's gotten everyone's attention; it's put us in the game. Plus, Havatampa has an impressive top and middle management, so we want to maintain those people in terms of their place and what they are doing." Does it conflict with Tabacalera's game plan for the premium cigar market? "Distributing premium cigars is the primary focus, but we are in the cigar business. Period. We want to be involved with everything from the little cigars on up to the superpremiums."

While in Tampa shepherding the deal, Strauss learned from the investment banking firm Goldman Sachs that Max Rohr Importers Inc. was up for sale. Not a huge company, but a prestigious niche marketer that specializes in premium cigars and also provides smokers' supplies and gifts ranging from humidors to walking sticks, Rohr was especially alluring for a reason that went beyond the ancillary market.

"They own [the American rights to] some significantly well-known [Cuban] brand names like Romeo y Julieta, Saint Louis Rey and Gispert," says Strauss. Though Rohr's non-Cuban Romeo y Julietas have been in short supply (only one million were released in 1997), Strauss adds, "They have a sales force that is well regarded in the tobacco industry. That gives us entrée to the retailers of high-end cigars. The accessories and gift business is less interesting to us, but when you are servicing the high-grade tobacco industry, you have to be in that end of things in order to be important to the retailer."

Strauss and his colleagues at Tabacalera began negotiating with Max Rohr in May 1997, after outbidding Lew Rothman, the chief executive of 800-JR-CIGAR Inc., and other cigarmakers for the company with a bid of $53 million. The final negotiation "is still not closed yet," says Strauss. "We have some problems with tax issues that need to be resolved." The deal was scheduled to be closed in January.

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