Alliance One Tobacco (Malawi) Ltd
Company Profile and History
Alliance One is one of only two global independent publicly held leaf tobacco merchants, serving the world's largest cigarette manufacturers. The company was formed on 13 May 2005, as a result of the merger of DIMON Incorporated and Standard Commercial Corporation, both world leaders in tobacco processing.
DIMON was initially formed in 1995 through a merger of Dibrell Brothers Incorporated (founded in 1873) and Monk-Austin Incorporated (founded in 1907). On 1 April 1997, DIMON acquired all of the outstanding capital stock and other rights of Intabex Holdings Worldwide, S.A. (Intabex), the world's fourth-largest leaf merchant. DIMON's acquisition of Intabex was the largest of its kind in the history of the leaf industry. Intabex owned and operated leaf tobacco buying, processing, and exporting operations in principal tobacco markets around the world, including the United States, Brazil, Argentina, Malawi, Italy, and Thailand. At this point in history, DIMON was the second-largest independent leaf tobacco merchant in the world.
Standard Commercial was founded in 1910 as a leaf tobacco merchant specializing in oriental tobacco products from the Mediterranean region. For decades, they were one of the world's largest merchants of leaf tobacco, purchasing, processing, storing, selling, and shipping tobacco grown in more than 30 countries. Their leaf tobacco sales spanned 85 countries. Prior to the merger with DIMON, Standard was the third-largest independent leaf tobacco merchant in the world.
Alliance One typically purchases most of its leaf tobacco according to customer orders, supply contracts, or customer indications of anticipated need. The tobacco is then shipped to customer factories, located in approximately 90 countries. Alliance purchases tobacco in 45 countries, primarily directly from growers in a process known as “direct contract buying” often buying a farmer’s entire crop. Alliance is responsible for matching quantities and grades required by its customers in advance of the crop. These estimates are used as the basis to contract tobacco directly from farmers. Tobacco is bought at auctions largely in Canada, India and Malawi after receiving customers’ orders as Alliance representatives attend major auctions around the world. It operates 23 processing facilities in 13 countries; most of them located near the major growing regions and then ships to customers in some 90 countries.
Alliance One holds a leading position in most tobacco growing regions in the world, including the principal export markets for flue-cured, burley and oriental tobacco: the United States, Brazil, Malawi, Turkey, Argentina, India and Thailand. In addition, it process tobacco in more than 50 owned and third party facilities around the world. The company sells its processed tobacco primarily to large multinational cigarette manufacturers, including Philip Morris International, Inc., Japan Tobacco, Inc., Imperial Tobacco Group, PLC, China National Tobacco Co., British American Tobacco, Philip Morris USA, Inc., Eastern Company S.A.E., R. J. Reynolds Tobacco Company, Lorillard Tobacco Company and others.
In Country Location
Plot No. 29/86, Kanengo Industrial Site, Lilongwe 4, Malawi; Phone: 265-710-044 / 710-056/710-059;265-1-710-062/710-069/710-086;265-1-710-255/710-269/710-443;265-1-710-446 / 710-463 / 710-634; Fax:265-1-710-312
Services and Products
Its primary business revolves around the selection, purchase, processing, storage, packing, shipping and sale of leaf tobacco in North and South America, Europe, Africa, and Asia. It primarily offers flue-cured, burley, and oriental tobaccos that are used internationally in branded cigarettes.
Number of Employees
Alliance One’s consolidated entities employed approximately 4 400 persons, excluding seasonal employees, in its worldwide operations at 31 March 2009. In the “Other Regions” operating segment (including Africa), Alliance One’s consolidated entities employed approximately 3 500 employees as of 31 March 2009, excluding approximately 7,000 seasonal employees.
For the quarter ended June 30, 2009, the Company reported net income of US$14,5 million, or US$0,16 per basic share, compared to net income of US$15,3 million, or US$0,17 per basic share, for the prior year quarter.
The following table summarizes the tobacco purchase percentages for each country of the dollar value of tobacco Alliance One purchased during the periods indicated
In Malawi there are only four buyers of tobacco on the Auction Floors compared to other countries like Zimbabwe which have about 16 buyers. The largest buyer is Limbe Leaf Tobacco Company Limited taking over 50 percent of the tobacco on the Auction Floors. Alliance One buys between 30 and 40 percent of the Tobacco. Africa Leaf buys about eight percent and RWJ Wallace buys less than one percent. Market share for Alliance One Tobacco was 35% in 2008.
“The Company’s objectives are to generate consistent total investment returns to pay anticipated plan benefits, while minimizing long-term costs.”
After combining the two companies Alliance One’s strategy focused on: improving the balance sheet; paying down debt; specialty products; asset sales as part of the company’s strategic focus to right-size its global footprint and recognize cost savings; reducing its scope by removing itself from other business lines depending almost entirely on tobacco for its revenue; delivering quality leaf to its customers in a timely manner at a competitive price; and re-financing its capital structure and extending the bulk of its long term fixed rate debt maturities out to 2016, enabling the company to focus further on growing the business and shareholder value enhancement.
Ownership of Business
Alliance One Tobacco (Malawi) Limited operates as a subsidiary of Alliance One International.
Benefits Offered and Relations with Government
In 2009 Malawi threatened to boot out Western "tobacco colonialists" who exploit small farmers by failing to buy the crop at the government's new minimum price. The government expelled tobacco merchants Kelvin Stainton, Bertie van der Merwe, Collins Armstrong (Alliance One) and Alex Mackay for committing "economic sabotage."
The government of Malawi has declared tobacco to be a crop of national importance to the economy. Therefore anyone sabotaging the economy is “an enemy of the people of Malawi and does not deserve to be in this country," according to the government.
[Note: Tobacco is Malawi's most important crop as it fetches about 70 percent of Malawi's total foreign exchange every year. It contributes 30 percent of the country's gross domestic product (GDP), 25 percent of the country's tax earnings and over 70 percent of Malawians are directly or indirectly employed by the tobacco industry.]
The 30,000 smallholder farmers who produce Malawi's tobacco spend at least 70p to produce one kilogram, but buyers were offering less than 60p per kilo. Since winning the May 2009 elections, President Mutharika has decreed that the minimum price for burley tobacco should be £1,28 per kilogram. However, some buyers have ignored the decree, paying between 42p and £1,14, according to the government.
A 2007 study of the Malawian tobacco industry alleged that Universal Corporation and Alliance One International, through their subsidiary companies Limbe Leaf and Alliance One, respectively, in Malawi, control policy-making advisory groups and operate a tobacco cartel to influence Malawi’s economic and trade sectors.
The World Bank and Malawi’s Anti-corruption Bureau report allegations of collusion between Limbe Leaf and Alliance One over prices at tobacco markets. Limbe Leaf and Alliance One privately agree on percentages of tobacco that each company is supposed to buy each day at auction, cautioning each other when either of them purchased more than the percentage allotted to them.
This situation prompted the government to widely criticise Limbe Leaf and Alliance One for the first time in March 2006, when President Bingu Mutharika directed Limbe Leaf and Alliance One to pay a minimum price of USUS$1,10/kg (£0,56, J0,82) for low-quality tobacco at the opening of the tobacco auction. Between March and October 2006, President Mutharika repeatedly called Limbe Leaf and Alliance One ‘‘exploiters’’ and ‘‘thieves’’, owing to their monopolistic practices and refusal to pay fair tobacco prices at auctions.
The government responded to Limbe Leaf and Alliance One’s non-competitive practices by creating a leaf processing company - Malawi Leaf Company Limited - as a subsidiary of Malawi’s government-run Auction Holdings Limited, to increase the number of companies competing for tobacco and break the Limbe Leaf and Alliance One cartel. When Universal Corporation and Alliance One International refused to purchase tobacco and there were no alternative purchasers, on 24 July 2006, the government relaxed marketing conditions, and the companies were again able to buy tobacco at the prices they offered.
In addition to Limbe Leaf and Alliance One’s licenses to purchase tobacco in Malawi and export the tobacco to other countries, Limbe Leaf and Alliance One in Malawi hold licenses from the government of Malawi to import tobacco from Zambia and Mozambique. Universal and Alliance One, through their subsidiaries Zambia Leaf Tobacco and Alliance One in Zambia and Mozambique, openly buy smuggled tobacco from Malawi. The companies process the tobacco in Zambia and Mozambique or transport the tobacco to Malawi for processing in Limbe Leaf and Alliance One’s factories there. By purchasing smuggled tobacco, Universal and Alliance One access low-cost tobacco and enjoy the savings from avoiding taxes collected at auction by the Malawi government.
On October 16, 2007, the Supreme Court of Malawi issued a ruling that changed the legal interpretation of compensation to be considered in determining severance payments. Total compensation in determining severance payments is to include not only paid compensation but also benefits. During the review of the effects of this change on the Company’s liability to exiting employees, the Company discovered that it could have to pay qualified departing employees both pension and severance payments. The accepted practice within Malawi and followed by the Company has been to pay the higher of the pension liability or the severance liability to qualified departing employees. This liability arose from the passage of the Malawi Employment Act of 19th May 2000 that legislated severance pay. The Company believes it is reasonably possible that it may be exposed to paying both the pension liability and the severance liability, based on total compensation to qualified employees. The Company estimates exposure to qualified employees will not exceed US$2 000 and believes that payment of this liability is not probable.
Alliance One International Inc. announced in 2008 that its wholly owned subsidiary, Alliance One Tobacco (Malawi) Limited (AOI Malawi) had completed the previously announced sale of its Lilongwe North Factory facility, including one threshing line and other related assets, to Africaleaf Processors Limited. The gross proceeds to AOI Malawi totaled approximately US$14,8 million, of which US$9,5 million was recorded as a gain on the sale of assets. At the same time, the company said that AOI Malawi had made an “additional investment” to enhance the capacity of its Lilongwe South Factory, reflecting its continued commitment to and confidence in the Malawi tobacco industry.