Karyadibya Mahardika and Surya Mustika Nusantara are both subsidiaries of Gudang Garam, Indonesia's leading manufacturer of kretek cigarettes (the clove-type cigarettes that are a trademark of Indonesia). Besides the USD $677 million price tag, Japan Tobacco Inc will also take over both companies' debt (estimated at USD $323 million).

For Japan Tobacco Inc the acquisitions are a move to enter the kretek industry. Previously, it was already active in Indonesia, but only in the conventional cigarette industry.

Willem Petrus Riwu, Director of Drinks, Tobacco and Refreshing Ingredients at Indonesia's Industry Ministry, said the deal should have a positive impact on the national economy provided there will not be a reduction in the number of workers at both companies. The tobacco industry is one of the biggest industries in Indonesia and therefore the acquisitions can have a good effect on various stakeholders including tobacco farmers, factory workers and the government (revenue). After China, Indonesia is the world's biggest cigarette market.

Riwu added that Indonesia's cigarette industry remains under pressure. Through Finance Minister Regulation No. 174/PMK 03/2016, effective per 1 January 2017, the Indonesian government pushed the value-added tax on cigarettes up to 9.1 percent. This higher VAT followed an average 10.54 percent cigarette excise tax increase in the same month.

Since 2005 a total of 2,000 cigarette plants have closed their doors. Currently only 100 companies pay cigarette excise taxes, Riwu said.

So far this year stocks of Gudang Garam, publicly listed on the Indonesia Stock Exchange, have risen 4.69 percent to IDR 66,900 a piece.

Stock Quote Gudang Garam - GGRM: