On October 23rd, tobacco giant Altria announced it was exploring options for Nat Sherman International, including the possibility of a sale. A part of the potential sale includes its wholesale premium cigar business as well as the lease of the company’s flagship Townhouse store in Manhattan. Today, we take a closer look at what this means and doesn’t mean going forward.
The Initial Acquisition Focused on the Cigarette Business, Not Premium Cigars
It’s no secret that Altria acquired Nat Sherman to add its cigarette division into the company’s portfolio of offerings. Altria bought the family-run Nat Sherman company lock, stock, and barrel. Along with that acquisition came the company’s premium handmade cigar business. When acquisitions like this happen, it’s not always about wanting the entire puzzle, but often just some of the key pieces. When acquisitions occur, subsequent activities include a transfer of trade, and organizational assimilation. During organizational assimilation, there sometimes are pieces of the puzzle that are dropped.
While Nat Sherman was assimilated into Altria’s organizational structure, by no means did they leave the premium cigar segment hanging. Yes, 2017 focused a lot on transfer of trade, but in 2018 the company invested in a major rebranding and restructuring of its cigar portfolio. 2019 has seen the release of three limited edition cigars (including one for the TAA) – the first releases done in three years.
At the time of the acquisition, it did not seem that Nat Sherman was concerned with coming out with new releases for the sake of coming out with new releases, and this didn’t really change much post-2017. In terms of product innovation, while there might not have been a huge amount of it, for the most part, Nat Sherman stayed the course pre-acquisition.
In a nutshell, while cigars were not a focus of this acquisition, the cigar business in the Nat Sherman portfolio has been fully operational under the Altria umbrella.
The Cigarette Business is Different Than The Premium Handmade Cigar Business
Altria is no stranger to cigars, but when it came to premium handmade cigars this was newer to this big corporation.
I have heard many people say that Altria’s move on Nat Sherman was the beginning of the cigarette industry wanting to control the premium cigar business. In fact, recently The Cigar Authority did an article positioning Altria as one of five companies who would control the cigar industry. While I’ve always thought TCA has posed some interesting scenarios, I disagreed with this one. I point back to British American Tobacco dumping Dunhill outright. More recently, another tobacco giant, Imperial Brands, has announced it is divesting itself of its premium cigar business. To me, it was a use case that cigarette companies do not want to play in the premium cigar space.
The handmade premium cigar business is tougher. Since many activities that go into making a cigar are done by hand, it resource-intensive process in terms of labor. Although Nat Sherman did not own its own production facilities, the idea of aging tobacco and aging cigars is not something that is attractive to corporate finance people.
Altria is Looking to Sell, not Dump
This is an important point that needs to be made. Altria made a conscious decision to look at selling this division as opposed to shutting it down. This is quite different than what British American Tobacco did with Dunhill.
When acquisitions occur, sometimes there are other parts that come along with the part that was the most desired. In this case, it was the premium cigar business that came along with the cigarette piece when Altria acquired them. Many times following the acquisition, the less desirable pieces are simply eliminated,
There may be questions down the road what happens if a planned sale does not happen the way Altria wants it to happen, but for now this is a glass-half-full scenario.
A Potential Buyer Could Benefit from Nat Sherman’s Core Competencies
Minutes after we published the story of Altria exploring a sale of Nat Sherman, came the questions of who buys it. Would it be another large corporation? Would it be a mid-size cigar company with cash looking to make an acquisition of a brand? Would it be someone from outside the industry? The guessing game is going to be something that moves into full swing over the rest of the year.
Nat Sherman International’s premium cigar business brings a set of excellent and consistent brands, an iconic retail establishment, and a turn-key sales and distribution team. A big cigar company may look at the brands themselves and see a fit for them. When you get into the mid-size companies, this is where some of the other things come into play. A company that might be in the cigar business, but is stronger on the production side could benefit from this. Jochy Blanco and Plasencia Cigars were two that came to mind. Both of these can benefit from Nat Sherman International’s sales and distribution and get an iconic retail establishment to go along with it. I have no evidence to say these two companies are players, but simply trying to give an example of companies that could significantly benefit from an acquisition.
I’ve heard a lot of people mention the benefit of getting an industry leader like Michael Herklots as a part of the acquisition. No doubt, any cigar company would benefit greatly from having Herklots as a part of their team. At the same time, he is not the reason why a cigar company would make a multi-million dollar purchase in the Nat Sherman premium cigar-related assets. If a company wants Herklots, they can always pursue him and not make an acquisition like this to do it.
There is one example though where Herklots becomes the wildcard, and that is if a group outside the industry buys the premium cigar-related assets. Under this scenario, I can see Herklots being a part of an ownership group that buys it and becomes its CEO. In a lot of ways, should this scenario emerge, I think it the best for the future of the brands and retail store. Again, I don’t have any evidence to say this is something that is happening, I’m just speculating on a possible scenario.
Will the Sale be Easy?
I don’t think so, but when it comes to divestitures and acquisitions, two things need to be kept in mind – never say never.
The plans to sell come at a point where the cigar industry is getting closer to a crossroad. Historically regulation leads to consolidation. Look at industries such as communications, pharmaceuticals, and the cigarette industry – they have all been subject to regulation and have seen massive consolidations. Now with premium cigars a regulated business, there is an argument that this could happen. The cigar industry has only been under FDA regulation for three years. More battles and more regulation is to come, however until that flushes out, I don’t see the dominos falling just yet. At the same time, I do think it doesn’t exclude any moves from being made.
What I do think is that because there are so many unknowns on what the next stages of regulation look like, that is going to play a role in terms of how the sale goes down the road. We don’t know how fast will Altria want to divest the premium cigar-related assets.
It’s quite possible the brands and retail piece could be split up and makes things easier. Personally, I do believe the Nat Sherman cigar-related assets are stronger as a sum of the parts. I’ve heard arguments that Nat Sherman doesn’t own a factory and that hurts them, but as we have seen in the cigar business, that is something that could easily be rectified.
In the end, Altria is going to make the move it feels is best for them, thus the next few months are going to be very interesting, to say the least.