Authors: Richard Kluger
To improve the company’s return on the non-tobacco side, Sticht made a major move in 1979 by paying $618 million for Del Monte, a grand old name in the food business. The big but unexciting grower and canner of fruits and
vegetables would add mass and, it was hoped, economies of scale to RJR’s packaged foods business. Although the West Coast canner’s earnings were, as Sticht recognized, “dead in the water,” the prime causes—an antiquated plant and lack of growth capital, by Sticht’s analysis—could be remedied. Early in 1981 he told a group of Wall Street analysts and portfolio managers visiting the premises of the giant food vendor, “Very little work has been done about how to sell a banana. We haven’t even scratched the surface of merchandising fresh fruit.” But as one of his listeners noted, fresh fruit has a troubling tendency—it rots if you don’t sell it soon, and Del Monte was in an intensely competitive business with historically low margins, and its version of marketing wizardry was to expand into the thronged frozen-food field. After four years of struggling to justify RJR’s big bet in food, prospects remained uncertain. Del Monte’s chief financial officer conceded to
Forbes
early in 1984, “I don’t think we can change the fundamentals of the processed food business, but we can use it as a building block to move into higher value-added food businesses.”
Sticht did better in 1982 by picking up the Heublein liquor business for a pricey $1.2 billion, which bought U.S. distribution rights to such top-selling brands as Smirnoff and Harveys Bristol Cream and the lately revamped and upgraded Kentucky Fried Chicken fast-food chain. Far less capital-intensive than Sea-Land or Del Monte, Heublein also posted better profit margins. What was not lost upon Sticht throughout these checkered efforts at diversification was that almost nothing could compare with the cigarette business for profitability. With a new team in place to try to reenergize RJR’s sluggish domestic performance in tobacco, the chairman pushed Tylee Wilson to expand overseas sales, which accounted for about 20 percent of total cigarette volume, most of it in the form of exports rather than through foreign manufacturing operations. The company remained skittish about foreign alliances and uncertain markets, like Iran, where RJR cigarettes had done very well until the shah was deposed. Hungry to score a coup in the international arena, Sticht donned his diplomat’s hat and went after an overseas property that would have put his company right in the global running with Philip Morris, whose brands were outselling RJR’s abroad by more than double.
Sticht’s prey was the closest twentieth-century throwback to the young Buck Duke. Anthony Edward Rupert, called Anton, was an Afrikaner who had bootstrapped himself over a third of a century to become one of the world’s leading cigarette merchants. A onetime lecturer in chemistry at the University of Pretoria, Rupert concluded that his best chance for business success lay in tobacco. And besides, he liked to smoke. A consumer of a pack and a half of cigarettes a day, he once told the press, “Smoking is a sign of drive. Most successful businessmen smoke frequently—it’s a sign of their energy.” And Rupert was nothing if not energetic.
Starting soon after World War II, when he was in his early thirties, Rupert opened a little cigarette plant in his native land with the dream of one day competing against mighty British-American Tobacco, whose lordly U.K. establishment rulers were of a type distinctly unbeloved among the Boers. Rupert’s enterprise barely subsisted until he traveled to London and persuaded Rothmans of Piccadilly to license him to sell its deluxe line in South Africa. He did so well with it that within a few years he was able to buy out the parent firm. Soon after, his own technical training helped him develop one of the first king-size filter cigarettes—Rembrandt—and bring it to market even before filter brands became the hottest U.S. seller. Rembrandt flourished in British Commonwealth markets, and Rupert used his gains to grab off Carreras, the British manufacturer of the successful Craven A brand, at a bargain price. Before long, Carreras was the third largest U.K. vendor of cigarettes, though it stood far behind Imperial and Gallaher. In the meantime, Rupert with German tobacco baron Philip Reemtsma had successfully developed Peter Stuyvesant, the first non-U.S. blended cigarette, combining the light Virginia leaf favored by British Commonwealth smokers and the dark, stronger-tasting leaf preferred in continental Europe. Within a dozen years of beginning operations, Rupert was selling his cigarettes around the globe in ventures with foreign nationals in which he rarely took or sought a majority holding, partly out of fear of being tagged a predator. Instead, he relied on native managers and his own skills as a fearsome negotiator, shrewd marketer, and driving sales director who also kept a close eye on operating costs.
When Philip Reemtsma died, Rupert made a power play for control of the top German cigarette manufacturer, only to be swatted down by its directors and forced to settle for a lucrative price for selling the rights to the Stuyvesant brand in six nations starting with Germany. These funds helped Rupert to solidify his position in 1972 as the prime challenger in the world market to BAT. Using his Rothmans-Rembrandt-Carreras operations as a base, he put together a financial holding company known as Rothmans International, to which he added a controlling interest in the 159-year-old German firm of Martin Brinkmann—snatched away from eager bidder Philip Morris, which then began manufacturing on its own in Germany—and the leading Lowlands cigarette maker, Tabacafina. All together, Rothmans International operated forty-four factories in seventeen countries and employed 25,000 workers, overseen from Rupert’s lair in Stellenbosch, a two-church, one-cinema village thirty miles east of Cape Town.
Sensitive to the world’s growing censure of his country’s apartheid racial policies and its possible negative impact on the popularity of the brands his companies sold, the publicity-shy Rupert considered taking on a safe minority partner with high public exposure. The two American cigarette giants, running neck and neck in their home market, were the obvious candidates. Rupert had
clashed several times with Philip Morris, the first time at the end of the ’Sixties in a bidding war for control of Canada’s Carling beer business; Rupert won, but the fight cost him more hard-earned cash than he liked. A few years later, he bested the New York-based outfit in its bid for Brinkmann in Germany, and in the late ’Seventies, he had once again skewered the American company, whose front-running position in the Australian market he successfully attacked by turning his Winfield brand into a twenty-five-to-the-pack discount entry and enlisting for his chief pitchman celebrity Paul Hogan, cast as a kind of cheeky outback version of the Marlboro cowboy. Still, Rupert recognized that Philip Morris had momentum and marketing smarts that RJR lacked, and he was hardly averse to trying to play the two big U.S. cigarette makers off against each other.
For both Reynolds and Philip Morris, Rothmans represented a juicy plum. RJR was the more needy of the pair in view of its shallow international penetration, and PM, still suffering from its corporate memory of how the British financial establishment had foiled its effort a dozen years earlier to take over Gallaher, was wary of intimate dealings with the redoubtable Rupert. But if Reynolds got in bed with him, so to speak, Philip Morris stood to lose a lot more than pride over the consummated affair. It would at once vault RJR into close competition globally with PM and make the battle to improve margins from its burgeoning overseas operations that much more difficult. Accordingly, Philip Morris International’s chief, Hamish Maxwell, urged Chairman George Weissman to open talks with Rupert; Rothmans was doing well and could prove extremely useful to PM in areas where it lagged, such as Canada and especially Britain, where ever more stringent restrictions on cigarette advertising offered bleak prospects for the Philip Morris image-meisters. Rothmans, moreover, while very much an autocracy at the moment, would likely seek a buyer somewhere down the road, Maxwell supposed; Philip Morris ought to position itself for that day and meanwhile settle for a buy-in.
At a daylong exploratory meeting Weissman and Maxwell held with Rupert in London in the spring of 1980, the Philip Morris pair indicated that they had in mind an eventual controlling interest in Rothmans, but Rupert was receptive to nothing beyond the possibility of acquiring a junior partner. That fall, though, Rupert telephoned Weissman and proposed a dinner date at a quiet Manhattan hotel to renew their earlier exchange. Weissman begged off because he had to chair a meeting of his board of directors in Madrid the next morning. In his best poker-playing manner, Rupert said there was nothing urgent on his mind, and Weissman elected not to pursue the matter. But on that same day, Rupert saw Sticht, who made clear that Reynolds would be keenly interested in collaborating in some fashion with Rothmans. Their talks ran into 1981 and produced an understanding, at least in Sticht’s mind, that Rothmans would remain a separate, freestanding entity for some years after a Reynolds
buy-in but that a full takeover and integration into RJR would eventuate. “At no time was I told that the control question was a dealbreaker,” Sticht recounted.
After a number of meetings elsewhere with Rupert, Sticht flew to South Africa for what he expected to be the clinching session. At the end of their deliberations, Sticht recalled, “I clearly thought we had a handshake on the deal,” and then he headed home. But while the talks had been in progress, word was put out, partly due to SEC regulations to prevent rampant speculation in RJR stock, that a marriage of some sort between Reynolds and Rothmans was pending. The published reports, however, alluded to a takeover rather than a partnership, and Rupert’s son, Johann, later recounted how he got an urgent call from a friend with whom he had become acquainted during a Wall Street apprenticeship. The friend, now at Lehman Brothers, Philip Morris’s New York investment advisors, asked if the Reynolds situation was still fluid. The younger Rupert said he replied that “we’re not sellers—we’re looking to discuss a partnership,” implying that the door was still open.
The word was flashed to Philip Morris, whose top brass, belatedly grasping the urgent need to stave off a major Reynolds initiative in the global cigarette market, winged into Cape Town, where Johann met them at the airport. The PM team was closeted with Rothmans’s top financial people until three in the morning and then were taken the next afternoon to Stellenbosch, where Weissman asked Rupert if Rothmans was then actively negotiating with a third party. Weissman later said he was told there were no other negotiations going on—“and technically it was true—there was no one else there at the time.” The PM chairman said in that case his company was interested and asked what the South African had in mind. Rupert replied that his price was $350 million for a 25 percent interest in Rothmans. Weissman gulped, said he thought that was a steep price based on the operating figures he and his colleagues had seen, but asked to ponder the matter overnight. On reflection, the Philip Morris team still concluded that the price was high, but in view of the importance of the Rothmans trademarks and prospects and the potential synergy of an amalgamated operation, what Rupert was asking was not all that outrageous. When the parties reassembled the next day, there was talk about how the partnership might actually operate, and after Weissman was satisfied that an entente cordiale would prevail, he made his offer: $275 million. Rupert’s response was indelibly engraved in Weissman’s memory: “Anton looked me in the eye, and I knew it was the end. So I said, ‘Okay, let’s not quibble.’ And then Anton looked like he was in shock.” For the $75 million concession in the blink of an eye, Weissman won right of first refusal on the purchase of any additional stock or trademarks that Rothmans elected to sell.
Philip Morris executives attributed their “Perils of Pauline” victory to a simple change of heart by Rupert, who negotiated better terms with the more
adroit and enterprising of the two American giants. For Paul Sticht, the loss of a major stake in Rothmans was a heartbreaking setback. “I feel he reneged,” he said a decade later. “The buy-in would have given us substantially more leverage internationally in terms of markets and brands.”
Thus, on both the domestic and international tobacco fronts, Philip Morris dealt punishing blows to RJR under Sticht’s stewardship. And some on Wall Street faulted him for ineptness on the non-tobacco side as well—for getting into lackluster Del Monte, for overpaying to get Heublein, for hanging on too long to Sea-Land. Insiders, too, grumbled that Sticht had failed to develop an integrated management, that the company was hopelessly compartmentalized, and that he thrived on a certain divisive mood that grew up around the question of who would shortly succeed him as CEO. A fairer appraisal would be that Sticht was too trusting—of the likes of Anton Rupert, for example, and of his own tobacco executives who had not leveled with him about their trade-loading strategy—and deserved more time for his diversification program to prove itself. But after he had rescued R. J. Reynolds from terminal provincialism during his eleven years as its sometimes diffident helmsman, his time ran out at the end of 1983. With some reluctance he submitted the name of Tylee Wilson to the board of directors to succeed him—there was nobody else inside the company who qualified as chief executive timber, and to have gone outside again for fresh talent would have been demoralizing. Sticht, though, stayed on as chairman of the board while handing over the CEO title to Wilson—“but that was always Sticht’s board,” one top Reynolds hand remarked, “and Ty never grasped that.”
The year Sticht stepped aside, RJR’s net income was $881 million, twice what it had been five years earlier—no shabby performance. Philip Morris, though, made $903 million that same year, the first time it had outearned its big Southern rival.
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outgoing and personable, less overtly intense than his predecessor, new Philip Morris chairman George Weissman enjoyed the luxury of retaining virtually intact a veteran team of managers who over the preceding twenty-five years had turned the company into the rising star of the tobacco industry. Most of the company’s top executives were in the process of becoming multimillionaires as Philip Morris stock kept steadily gaining ground along with earnings. Miller Brewing had begun to pay off after a decade of tender loving care by management, thanks to vast infusions of capital and John Murphy’s charismatic leadership. Earnings ratios were about one-third of those posted by tobacco sales, of course, and skimpy when measured by the size of
the investment, but the Milwaukee-based operation was now solidly in the black. The big concern as the 1980s unfolded was the gamble on Seven-Up, which Weissman had pushed for en route to the CEO’s desk.