Philip Morris Buying 20% Stake in Russian Distributor Megapolis

Today, Philip Morris International (NYSE: PM  )  announced it would be acquiring a 20% stake in Megapolis Distribution BV, for $750 million. Megapolis is Philip Morris International's distributor in Russia, which is the second-largest cigarette market in the world behind China, according to Philip Morris, with more than 370 billion units sold in 2012.

Philip Morris International has agreed to a potential additional payment of $100 million if Megapolis meets certain operational performance metrics within four years of the close of the transaction. Following regulatory approvals, the transaction is anticipated to close by the end of the year, and Philip Morris noted that it anticipates it will provide an increase to its earnings per share as early as the first quarter of 2014.

Megapolis has more than 15,000 employees and it has more than 150,000 points of sale through its direct delivery systems. In addition to its agreement with Philip Morris, it distributes cigarettes for Japan Tobacco International and Imperial Tobacco Group. In conjunction with Philip Morris International announcing its acquisition of a 20% stake in Megapolis, Japan Tobacco International also agreed to take a 20% position in the company. Japan Tobacco will also pay $750 million for its 20% stake with an additional $100 million possible.

Megapolis handles approximately 70% of the cigarettes sold in Russia, according to Philip Morris. Japan Tobacco said Megapolis delivered more than 260 billion sticks of cigarettes in 2012.

"We are delighted to reach this agreement with Megapolis, our proven distribution partner, which will support our business expansion in this profitable market," said Miroslaw Zielinski, PMI's president, Eastern Europe, Middle East & Africa region and PMI duty free, in a press release. "In addition to enhanced earnings and cash flow for PMI, this investment paves the way for infrastructure expansion and improved operating efficiencies in the strategic area of distribution in Russia, and will therefore benefit our wide portfolio of leading brands."

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