Owner of British American Tobacco writes down $34 billion for brands including Camel and Newport

British American Tobacco (BAT), the owner of popular cigarette brands such as Camel and Newport, has announced a staggering $34.5 billion writedown on the value of its U.S. cigarette brands. This is the largest writedown by a U.S.-listed company since AOL’s $35.6 billion write-off in 2014.

The decision to take such a significant write-down comes as no surprise, as BAT had already hinted at it in December, estimating it to be around £25 billion. However, the final figure has surpassed expectations, with the company recording a writedown of £27.3 billion.

BAT plans to write down the value of its brands over several years, with Newport’s value being reduced over 20 years and Camel, Natural American Spirit, and Pall Mall over 30 years. The company also acknowledged an impairment of goodwill resulting from its acquisition of Reynolds American in 2017.

The decline in the cigarette market played a significant role in BAT’s decision. Prior to the COVID-19 pandemic, the industry was experiencing an annual drop of about 5% to 5.5%. Although the market remained steady during the worst of the pandemic, industry volumes plummeted by 10.6% in 2022. This decline has prompted BAT to shift its focus towards smokeless products, with the goal of generating 50% of its revenue from these alternatives by 2035.

Despite the significant writedown, BAT reported positive financial results. Its profit rose by 3.1% to £12.46 billion on a 1.6% increase in revenue to £27.28 billion last year. The company also highlighted the profitability of its new categories portfolio, which turned profitable two years ahead of target and contributed £398 million to its profits.

Investors initially responded positively to the news, as BAT stock rallied by 5% in early trade. However, the stock has experienced a decline of 19% over the past 52 weeks. While the company did not commit to a stock buyback, it expressed its intention to evaluate opportunities to return cash once leverage reaches the middle of its desired range. Additionally, BAT mentioned the possibility of disposals and “non-strategic market exits.”

The mention of disposals and market exits raised speculations that BAT may sell some of its stake in Indian conglomerate ITC. As a result, shares in ITC fell when analysts at JPMorgan made this observation.

BAT’s decision to write down the value of its U.S. cigarette brands reflects the challenging market conditions faced by the tobacco industry. With declining cigarette sales and increasing demand for smokeless alternatives, the company is taking steps to adapt and secure its future. The significant writedown may be a bitter pill to swallow, but BAT’s focus on new categories and potential strategic moves demonstrate its commitment to navigating this changing landscape.